“The US stock market has been this high only three times before since 1881.”
– Yale University’s Dr. Robert Shiller, referring to the price/earnings (P/E) ratio that bears his name.

Present market conditions join the second most extreme valuations in U.S. history (on measures most reliably correlated with actual subsequent 10-year S&P 500 total returns) with increasing divergences and dispersion in market internals. Despite current extremes, valuations say very little about near term market direction. Valuations are enormously informative about likely market returns over horizons of 7-15 years. In contrast, market internals convey a great deal of information about the prevailing risk preferences of investors, and that’s what amplifies our concerns here. Uniformly favorable internals across a wide variety of sectors and security types typically convey a signal that investors have a robust willingness to seek and accept risk, and it’s that feature that can allow overvalued markets to become persistently more overvalued. But remove that feature, and overvalued markets have often become vulnerable to vertical air pockets, panics, and crashes. 

I’ll say this again – valuations alone are not the concern. It’s the additional feature of deteriorating market internals that introduces a critical element of risk here. That feature helped us to correctly warn of the 2000-2002 and 2007-2009 collapses, and shift to a constructive outlook in-between. The recent half-cycle since 2009 has been more challenging as the inadvertent result of my 2009 insistence on stress-testing our methods of classifying market return/risk profiles against Depression-era data. The resulting ensemble methods outperformed every approach we had ever tested against post-war data, Depression-era data, and holdout validation data, but they also encouraged an immediate defensive stance when overvalued, overbought, overbullish syndromes emerged. Throughout history, those syndromes had regularly been accompanied or closely followed by breakdowns in market internals. The one truly “different” aspect of the half-cycle since 2009 is that quantitative easing disrupted that regularity. Nearly a year ago, we imposedoverlays on our methods that require hard-defensive investment stances to be accompanied directly by deterioration in market internals or other risk-sensitive measures (e.g. credit spreads). 

It’s worth emphasizing that until mid-2014, the strongly defensive outlook we took in recent years would have been rejected by those overlays more than two-thirds of the time. Without those bubble-tolerant overlays, our actual experience was largely a mirror image (though muted) of the escalating valuation extremes. As I observed then, we don’t get to re-live the recent cycle in a way that demonstrates the effectiveness of those adaptations, but we can certainly do so over time. On that front, market conditions presently (and in recent quarters) support a hard-defensive outlook that’s largely identical to those we took in 2000 and 2007. The same return/risk profile has been associated with vertical market losses in market cycles across history. The chart below shows the cumulative total return of the S&P 500, restricted to the 8% of historical periods with an estimated return/risk profile matching what we presently observe. The overall returns are also partitioned between periods of Fed easing and Fed tightening. The notion that Federal Reserve easing prevents market losses is simply historically uninformed. Even a cursory review of the last two market collapses should suffice as a reminder. 

What creates a temptation to ignore risk here is that the S&P 500 has recently advanced despite these…continue reading HERE

Brent Woyat of Canaccord Genuity shares with us some of his favourite finance writers. This is from Ben Carlson at “A Wealth of Common Sense”. – Ed.

Here are some better questions to ask yourself:

Have scary news headlines, market valuation techniques, pundit predictions, geopolitical events or your gut instincts ever worked as legitimate market indicators in the past?

Should picking tops in the market even have a place in your investment process?

Do you have a reliable signal, based upon the weight of historical evidence, that will tell you when to get out of the market?

Do you also have….

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Brad Hoppman on a recent Merrill Lynch report on retirement – MT/Ed –

Retirement once meant a nice going-away party, a gold watch and a long stretch of spare time ahead.

For some, it was a time to pursue the travel, hobbies and family time that weren’t always so easy to prioritize during the previous 40 or so years.

However, as many of our readers have told me, retirement can more-accurately be described as the next stage of their career.

A new Merrill Lynch report agrees, at least in part. They think most people who work past age 65 do it for fun, not out of necessity.

This is the same Merrill Lynch that 20 to 30 years ago sold Baby Boomers dreams of leisurely retirement under the guidance of a well-paid financial consultant.

Now, with dreamtime getting closer, Merrill is changing its tune.

Since I always like to show you my sources, here is a link to the report on Merrill Lynch’s website:

Work in Retirement: Myths and Motivations (PDF file)

Let me say up front that I think Merrill Lynch has done a valuable service by conducting this study. I agree that our concept of “retirement” has changed … but I think they paint an unrealistically rosy picture.

Here is what today’s retirement looks like, according to Merrill Lynch.

Merrill says the new retirement has four phases.

•  Phase 1 is “Pre-Retirement,” you start preparing yourself to launch a new career.

•  Phase 2 is the “Career Intermission,” a time to relax, recharge and retool.

•  Phase 3 is “Re-engagement,” or more of what we used to call “work.”

•  Phase 4 is “Leisure,” which most resembles what we used to call “retirement.” It starts in your mid-70s and ends when you die.

This idea of a “career intermission” is curious to me. I get plenty of e-mail from recently retired people, and very few use words like relax or recharge.

More often, they are unprepared and frightened for their future, for various reasons and circumstances. Many are already looking for a job or some other way to generate income.

According to Merrill, however, about half of working retirees say they don’t really need the extra money. Does this surprise anyone else?

Plenty of other studies show most Americans who turn 65 have nowhere near the amount of money they would need to stop working. Social Security benefits provide only minimal comfort.

I’m not at all surprised to learn that many 65+ people are still working; I’m just surprised how many say they do it by choice.

It makes me wonder if there is some denial in Merrill’s survey group. Pride is a powerful emotion. I can imagine that many respondents do need the money, but didn’t want to admit it — even in an anonymous survey.

If that describes you, then let me take you off the hook. You’re not the only American whose golden years are not what you imagined. We live in tough times. Many other older folks are struggling, too.

The Merrill Lynch study says that working in the midst of retirement doesn’t have to be disappointing, but I think for many it is. My job as a publisher is to provide information that will help you reach your financial and personal goals.

Good luck and happy investing,

Brad Hoppmann

Publisher

Uncommon Wisdom Daily

P.S. Retirement expert Nilus Mattive recently helped his own parents use little known Social Security strategies to greatly increase their future income. Now, in a special video, he shows you how to do the same thing for your own family. Click here to watch it now.

Faber’s analysis of the last week and a half’s fnancial events and which markets the oceans of money being created are going to flow to. He thinks we are going to have a systemic crisis where it is going to be very difficult to hide, even in Gold. He states that one day soon Governments will take away 20 to 30 percent of individuals wealth. A thorough easy to understand analysis in this 5 minute clip.

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The day of reckoning is rapidly approaching. You better wake up before the coffin is nailed shut.” Martin Armstrong

“Financial or economic collapse occurs if credit collapses and businesses aren’t paid for products and services, the distribution system could temporarily shut down. Contemplate empty grocery shelves, empty gasoline stations, electricity and water outages, empty ATM’s, and EBT cards that don’t work.” This is exactly what to expect when our present financial system burns down to the ground.” – Gary Christenson

….read Gary Christenson’s latest article below. Be sure to click on the link Financial Insanity Grips the World for  his advice on how to survive

An Insane Financial World 

 “It certainly appears that we are complacent as a society and as such, we never act until it is too late. Then everything falls apart. Indeed, government interest rates have moved into negative interest rates on about 30% of Eurozone total debt. This has become an effective tax on money itself, with respect to whatever you have left in your account after paying taxes. We are heading for economic Armageddon and the day of reckoning is rapidly approaching. You better wake up before the coffin is nailed shut.” Martin Armstrong

…read Martin’s latest article: 

Why Europe Will Lead the Charge to Eliminate Cash – The Next Step in Global Meltdown