Summary Box: 100 Years of “Think” at IBM
By The Associated Press
June 16, 2011 (AP)
THE MILESTONE: International Business Machines Corp. turns 100 on Thursday.
THE CONTRIBUTIONS: Everyday tasks of technology, such as computer storage drives, bar codes used in supermarkets and the magnetic stripes on the back of credit cards.
THE FUTURE: While IBM’s Watson attracted buzz by beating two human “Jeopardy!” champions, the company wants to put it to real-world use as a medical diagnostic tool and work on other big data projects.
June 16, 2011
The stock market is vastly overvalued. While much has been made over the last few weeks about the current market correction, it’s merely a scratch on the surface when put into perspective. Sure we’re down 8%, but we’re still above the levels from just a few months ago in mid March. And we’re still positive for the year and 4% above the market peak at the end of QE1. From a historical view, the market is well above where it should be at this stage of the current secular cycle. And things could get very unpleasant for stocks if the underlying forces supporting the market were to suddenly fall away.
Stocks are currently overvalued by 34%. This is according to the 10-year price-to-earnings ratio data provided by Robert Shiller from Yale University. The 10-year moving average methodology is used in order to smooth out any short-term volatility in the earnings data. While it certainly has its limitations when viewing the market in a cyclical (short-term) context, it has great application when considering the market from a secular (long-term) perspective. What the Shiller data tells us is that there is a lot of air under the market right now.
Sometimes it makes sense for stocks to be overvalued. For example, if the economy is experiencing strong sustainable growth, investors are likely to be willing to pay more for a dollar of earnings in such an environment. Strong and sustainable growth has certainly not been the economy we’ve had over the last decade, however. Instead, we’ve seen various fits and starts including the bursting of a technology bubble, the collapse of the housing market and the financial crisis.
So what accounts for the overvaluation we’ve seen over the last decade? Put simply – leverage. Once the tech bubble burst in 2000, the financial system received the support of exceptionally low interest rates and the relaxation of the net capital rule that allowed investment banks to dramatically increase leverage. And when this excess leverage nearly collapsed the financial system in 2008, unprecedented fiscal spending and monetary stimulus from the U.S. government replaced it. So for the last decade, financial markets have been hopped up on one form of leverage or another all along the way.
So what happens if this support were to finally go away? Or, what if the mechanisms to provide this continued support are no longer able to do so? History provides us with a good idea. Markets have historically moved in secular cycles lasting roughly 16 years on average. For example, the stock market enjoyed secular bull markets from 1920-1929, 1946-1966 and 1982-2000. And the stock market has endured secular bear markets from 1900-1920, 1929-1946 and 1966-1982. Since 2000, we have been in a secular bear market.
During secular bull markets, we have seen stocks move to valuation levels well above their historical average as would be expected. And during secular bear markets, we have seen stock valuations fall well below their historical average. This has been due to a variety of factors over these time periods, but can be boiled down to two factors – economic weakness and price instability (inflation and/or deflation) – both of which cause investors to be willing to pay far less for each dollar of earnings due to the associated uncertainty.
During the past three secular bear markets, stock valuations fell to levels well below their historical average. The typical range is anywhere between 6x to 12x historical 10-year earnings for an extended period lasting many years. During the current secular bear market, we briefly touched the 13x earnings level at the March 2009 lows for just a moment before quickly returning to the stratosphere. Thus, we have yet to see any true and sustained correction in financial markets during this current secular bear phase, which may be problematic.
A valuation wash out has always occurred during past secular bear markets. When the economy and markets finally cleanse the excesses that are at the root of the imbalances driving the secular bear period, it is only at this point that the market can finally bottom and a new secular bull market can begin.
Eleven years into the current secular bear market, we are long overdue to allow the system to cleanse itself. We are in the current economic situation because of too much leverage. The system must be allowed to go through a deleveraging process to properly heal. By piling more debt onto the system, first from the private sector and now from the public sector, it has served to not only prolong the cleansing process but is also leading to imbalances that have created new problems down the road. I fear we may be at such a crossroads in the current market.
Frankly, the stock market has no business trading at 22x trailing 10-year earnings with all of its underlying problems. The almost exclusive reason it is where it is today is because of QE2. And if QE2 is not replaced by QE3 in the next few months, or if an unwinding in the eurozone overwhelms even the best efforts from global policy makers, the market may finally lose its artificial support and finally deflate lower to valuation levels consistent with past secular bear episodes.
So what would these lower valuation levels imply for the stock market?
A move back to fair value at the 10-year historical average price-to-earnings ratio of 16.4 would imply the S&P 500 trading at around the 950 range. This is -25% below current levels.
A move to the high end of the valuation range during secular bear markets at 12x earnings would have the S&P 500 currently trading at roughly 700, which is -45% below where it is right now.
Lastly, a move to the low end (gasp) of the secular bear market valuation range at 6x earnings would imply the S&P 500 falling toward 350 (gasp again), which is over -70% below today’s close.
One last point. Every major bear market over the last century has not ended without a retest of its lows. Sometimes the retest occurred right away within a few months (2002). In other instances it took several years (1938 bottom retested in 1942). Many retests occurred on a nominal basis. Some retests occurred on a real basis (1982).
In today’s market, the March 2009 lows have yet to be retested. The market simply moving to valuations consistent with the advanced stages of a secular bear phase may be all that is needed to complete the retest and the final cleansing of the market necessary to then work toward the beginning of the next bull phase.
With all of this being said, the market may prove that it’s different this time. Perhaps stocks will continue to trade at current levels or even higher. And perhaps a new round of stimulus will extend the party for a few more years. But what this valuation analysis shows is the risks associated with the market at current levels. And if it turns out that it’s not different this time, it could be a sharp and unexpected move lower that brings the market to where history says it ought to be.
Stay tuned. The probability for QE3 and the ongoing situation in the eurozone will be the two keys to watch in helping to determine how it all plays out.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
This article was published in November of 2007
With the current volatility in the market, it causes people to begin questioning their investments and wondering where we’re headed. In my profession, I have to work with uneasy clients daily, and it can be difficult to remind them that the stock market is constantly moving and generally goes through cycles. The market can’t go up indefinitely, nor will it go down indefinitely. More often than not, we’ll see periods of growth followed by periods of volatility or sideways movement, and then have a period of falling stocks that is followed by more volatility before the cycle repeats itself.
A Glimpse of Our Future by Looking at the Past?
Some claim that there is a four year cycle that the market follows, and there is some evidence to that. Of course, nothing is certain and the time periods of the cycle can vary, but there is some truth to it all. For this example, I’m going to take a look at the Dow Jones Industrials Average from January 1st of 1996 through today (November 26th, 2007). I’m using the DJIA simply because it is one of the more widely tracked indicies and it doesn’t have a heavy concentration of technology stocks that saw the most exaggerated data during this time period.
1996 – 1999
Ahh, yes. The roaring 90s. It was during the mid-to-late 90s that everyone was a stock trader. With the Internet becoming popular and the easy access to buying and selling stocks for the Average Joe, people were flooding into the market looking for the next company that was going to double or triple in the next three months. Think back to this time–how many people did you know that were afraid of the market or selling everything and moving to cash? Nobody.
Even though in 1996 the upward trend was just a continuation of previous years, the market seemed unstoppable. From 1996 to 1999 the DJIA nearly doubled in value. So, the money continued to pour in during 1999 as well…
1999 – 2002
1999 came and the market was still headed up. People who were naysayers a few years ago are now coming around and finally looking to get in on some of the action. Well, it sucks when you’re late to the party. As the new millennium came, the stock market reached record highs, but suddenly stalled and became very volatile. For the next year there was little direction.
This volatility soon gave way to a sell-off in 2001 as panic began to set in. Those who have been in the market for a few years quickly took their gains, and the selling quickly forced prices lower, which scared many of the people who just recently got into the market. As the media began to talk about how overvalued many stocks have become, especially the internet companies, people continued to unload their shares…
2002 – 2005
This continued throughout 2002 and the DJIA gave back most of the gains it saw during the late 90s. The NASDAQ fared much worse. When the selling subsided, the markets again became very volatile from late 2002 through early 2003. The markets began to pick up steam again in late 2003, but remained almost flat through 2004 as there was little direction…
2005 – Today
Most of 2005 was nothing to write home about as the markets were basically drifting sideways. Once 2006 rolled around, the market again started to rally. For the next two years, the DJIA tacked on over 30% and set new record highs. Again, if you asked most people early this year or last year about their investments, they probably responded very positively. Who wouldn’t? If you look at what has happened since April of 2003 to just a few months ago (almost 4 years), the DJIA has returned over 75%.
The Big Picture
As investors, most of us tend to forget about all of the good years and only focus on the bad. The broad markets have been heading up for about four years, so the thoughts of what happened in 1999-2002 are well behind us. But now that the markets are volatile, there is a lot of talk about the subprime mortgage industry, a weak dollar, and everyone begins to completely forget about how well the past four years have been and only focus on the last few months or weeks complaining how bad it is. Things can certainly continue to get worse, but you have to look at things in context.
Remember, what goes up, must come down. Not only does the stock market cycle, but there is a business cycle as well. We will always have various times that are great, and those that aren’t as great, but you can’t lose sight of the big picture.
Take a look at the following 12 years in a colorized format. Green identifies periods of strong growth. Yellow indicates a period of volatility or no real direction, and red shows a period of a downward trend. Based on this, is it any surprise that markets are becoming volatile and possibly trending downward?
For even more similarities, scroll back up and look at the first chart from 1996-1999. Now, scroll down and look at the 2005-Present image. Notice how similar they are? The markets went up for completely different reasons, yet are behaving almost the same. All you have to do is look at the following few years to see what might be in store for us over the coming year or two. Will history repeat itself? There is no way to tell, and anything could happen to make all of this information worthless, but you do have to at least consider the past trends and understand that there is a chance the market will behave similarly and we’ll enter a period of significant decline.
Keep Doing What You’re Doing
Sure, the market may be a bit unstable right now, and we may certainly be headed for a time where the market falls further, but that shouldn’t be of much concern to you if you’re investing for the next 10, 20, 30 or more years. If you want to try and time the market or predict what the next hot sector is, that’s fine, but the best thing most people can do is to just continuously invest in a diversified portfolio. If you keep buying even as the market falls, you’re just adding more shares at a lower price.
Could you make more money if you only invested at the low points and sold at the high points compared to dollar cost averaging? Sure, but the likelihood of succeeding on a regular basis is low. For most people, the best thing to do is to just continue investing bi-weekly, monthly, or quarterly into the same diversified portfolio regardless of market conditions. When markets are choppy or headed down, you’re just buying stocks or funds on sale. All you have to do is look back a few years to see that even though the market might go down, it will eventually come back up again.
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and About.com. Jeremy is also a community editor at Bundle and a regular contributor for other publications such asInterest.com, Intuit, and American Express. Be sure to follow Jeremy on Twitter.
By Sean Gardiner and Alison Fox
JUNE 15, 2011, 1:36 PM ET
A 15-year-old Manhattan boy who had survived a shooting just seven months ago was shot and killed on a the sidewalk outside the Peaceful Valley community garden in East Harlem late Tuesday night.
Family members said that Juan Otero was heading to a bodega across the street from their 117th Street home when he was shot three times in his right arm around 9:36 p.m. Tuesday night. A law enforcement official said that one of the bullets traveled through his right arm and into his stomach. He was pronounced dead at Metropolitan Hospital Center.
A security camera on a building across the street from the teen’s home shows three men converging on a spot out of the camera’s view where Otero was shot. Footage from the camera shows one person approach Otero on the sidewalk, followed a few seconds later by two others walking down East 117th Street who then duck between parked cars. Less than five seconds later, all three are seen running away.
One witness told police he heard arguing followed by gunshots. Two spent shell casings fired from a semi-automatic weapon were recovered on the sidewalk, the official said.
The law enforcement official said that Otero was a “known associate” of a gang called Air It Out, or AIO for short. Relatives told detectives that he had been involved in several recent gang-related altercations near the same spot where he was killed. Detectives are also investigating if there is a link between the non-fatal shooting of one of the young man’s friends on June 5 at 103rd Street and Tuesday night’s murder.
The official said Otero had been arrested in the past for resisting arrest and robbery in separate incidents but that the cases were sealed because he was a juvenile. The young man had been shot in the right hand on November 21 at the Carver Houses at 1330 Park Avenue, the official said.
Racquel Monserrate, Otero’s 53-year-old grandmother, said she never saw Juan wearing gang colors and knew nothing about his alleged gang involvement. “Sometimes kids are into things and you don’t know what they’re into,” she said.
To her, Juan was a typical teenager — a 10th grader at the Manhattan School for Career Development who loved to bowl, ride his bicycle and go to the movies. He was also devoted to his little sister, who everyone calls Ya Ya.
“It’s sad that you can’t even step out of your home to go to a store,” Monserrate said. “A life was taken too early.”
Otero’s mother, Jessica Montilla, was weeping Wednesday as she scrambled to make arrangements to bury her son, whom she described as “beautiful, unselfish, funny and smart.” She said the reality of having her son murdered hadn’t fully set in yet.
“I’m thinking he’s going to come walking up the block,” Montilla said.
By the CNN Wire Staff June 16, 2011 7:56 a.m. EDT
(CNN) — U.S. Rep. Gabrielle Giffords has been released from the hospital in Houston, Texas, and expects to begin outpatient treatment soon, according to a statement released Wednesday by TIRR Memorial Hermann.
Giffords was shot in the head January 8 during a mass shooting incident in Arizona. She is expected to move into her home in League City, Texas, where she will continue rehabilitation therapy.
“We are very excited that she has reached the next phase of her rehabilitation and can begin outpatient treatment,” said Dr. Gerard Francisco, the hospital’s chief medical officer. Francisco will continue to supervise Giffords’ case.
Giffords will still get intensive therapy as an outpatient and will work with the same rehab team that has been with her from the beginning, the statement said. She has been at TIRR Memorial Hermann since late January.
“Gabby gives her all to everything she does, and that’s exactly what she’s been doing at TIRR since January 26,” said Navy Capt. Mark Kelly, Giffords’ husband. “The remarkable progress she has made since then is a testament to both her single-minded determination to get better and the team of medical professionals overseeing her care.”
Jared Lee Loughner, 22, is charged in the mass shooting in which six people were killed and 13 others, including Giffords, were wounded in front of a Safeway grocery story in Tucson, Arizona. A federal judge ruled last month that Loughner is not competent to stand trial. His next court date is scheduled for September 21.
Giffords’ road to recovery has been marked by a number of public milestones, including a trip to see the space shuttle launch that carried her husband on a 16-day mission in May and the recent release of new photos showing a smiling, relaxed Giffords. When the photos were posted on Giffords’ Facebook page, she received an outpouring of well wishes.
“You are so special,” Facebook poster, John Evanchik, wrote. “And you have so much courage and fortitude that I am so proud to say that you are a real role model for so many people who, in their circumstance, they probably give up, but not you, Congresswoman. Yes, God has blessed you.”
The photos were taken prior to Giffords’ May 18 surgery to replace a portion of her skull removed earlier to relieve pressure on her brain.
Francisco said Wednesday that doctors are enthusiastic about Giffords’ recovery and expect it to continue to go well.
“Living and working in a rehab facility for five months straight has been especially challenging for her,” Kelly said in the hospital statement. “She will still go to TIRR each day but from now on, when she finishes rehab, she will be with her family.”
By Pia Catton
The opening of the Museum for African Art’s new building has been delayed again. The museum, which will be located at Fifth Ave and 110th Street, will now open in late 2012 instead of the previously announced late 2011.
The Museum for African Art decided to delay the final stage of construction in order to meet its fund-raising goal, according to a statement by museum president Elsie McCabe Thompson. Though the museum had raised $86.3 million, it has had to raise its fund-raising goal from $90 million to $95 million due to increased construction costs.
Devoted to the art of Africa and the African Diaspora, the museum was founded in 1984 and had been located in an Upper East Side townhouse until 1992. It then moved to SoHo and to temporary facilities in Long Island City. Ground was broken for the new building in 2007.
The opening of the new museum facility had already been delayed from April 2011 to fall 2011. Designed by Robert A.M. Stern Architects, the new building will be a mixed-use development with the museum occupying 90,000 square feet.