-Ayn Rand
Welcome to The Golden Sense! There has been a tremendous amount of talk about the stock market. After all, the Dow Jones Industrial Average has hit new highs and has finally surpassed its 2007 peak. The S&P 500 has done the same. The question that is on every one's mind is whether stocks are the best place to put your money or not.
The Dow Jones Industrial Average is often looked at as the leader of the market because it is made up of the 30 largest U.S. corporations. The S&P 500 is considered by professionals as the best representation of the U.S. stock market because of the wide range of companies that comprise it.
The market has been on a fantastic run and has been uncorrected during its long rise from the 2009 low. Keeping that in mind, there are risks in buying an uncorrected advance that is becoming uncomfortably long. The Dow has advanced for over 520 sessions without so much as a 10% correction -- it is overbought and owes much of its upward momentum to the Federal Reserve's money printing scheme, a seemingly unending program to buy $85 billion of bonds every month. The market is in uncharted waters, and we are watching a market rise through a veritable ocean of Federal Reserve notes (dollars) created out of thin air.
"In another century, Charles H. Dow concentrated on dividend yield as the best gauge of stock values. After all, earnings are what your accountant says they are, but dividends are a test of a company's ability to reward its shareholders. Historically it has been noted that stocks were expensive when the dividend yield on the Dow was 3.5% or less. Today Dow's test of values would be considered far too conservative. Earlier this month, the dividend yield on the Dow was 2.46%, while the dividend yield on the much broader S&P Composite was 2.17%. With these statistics we can see that the Dow is not cheap. However, with endless money creation on the horizon, the market will most likely move upwards." Russell
In the economic turmoil of the last five years, a lot has transpired. World markets lost nearly half their value in the panic, but have since recovered - albeit only in nominal value, with inflation taxing the real worth of those gains.
The problem with the stock market is that it isn't moving upward because of improving conditions in the economy, it is moving upward due to the vast amount of freshly printed money entering the economy. The amount of money the Federal Reserve is printing is unprecedented and it is causing stock prices to rise.
The chart shows that the upward movement in the S&P 500. The market moves up every time the Federal Reserve introduces a new round of "quantitative easing" otherwise known as currency debasement (money printing).
The problem with currency debasement is that it deceptively shows increasing profits, rising prices, and expanded spending but in the meantime the value of everything is decreasing.
The upward surge in the stock market of the last few years has produced profits (unless, of course, you benchmark them against a non-printable asset like gold, in which case stocks and corporate earnings are far below their 2007 peaks).
It is important to gauge the stock market in relation to gold and silver because it allows you to see the price compared to something that consistently holds value. Gold holds its value better than any other asset. Stocks are priced everyday in U.S. dollars. Earnings per share are quoted in U.S. dollars. It stands to reason that if there are more dollars in the system, the price of the S&P 500 will go higher in terms of U.S. dollars.
The table below shows the average earnings per share and year end price of the S&P 500 in 2007 and 2012. It also shows the price of gold and silver in 2007 and 2012.
It is important to gauge the stock market in relation to gold and silver because it allows you to see the price compared to something that consistently holds value. Gold holds its value better than any other asset. Stocks are priced everyday in U.S. dollars. Earnings per share are quoted in U.S. dollars. It stands to reason that if there are more dollars in the system, the price of the S&P 500 will go higher in terms of U.S. dollars.
The table below shows the average earnings per share and year end price of the S&P 500 in 2007 and 2012. It also shows the price of gold and silver in 2007 and 2012.
Average | 2007 | 2012 | |
Average S&P Earning Per Share | 83 | 102 | |
Average Price of Gold | $695 per ounce | $1668 per ounce | |
S&P EPS in Gold | 0.12 ounces per share | 0.06 ounces per share | |
Average Price of Silver | $13 per ounce | $31 per ounce | |
S&P EPS in Silver | 6 ounces per share | 3 ounces per share | |
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End of Year | 2007 | Present Day | |
S&P Price | 1468 | 1550 | |
Price of Gold | $834 per ounce | $1600 per ounce | |
S&P price in Gold | 1.76 ounces | 0.97 ounces | |
Price of Silver | $15 per ounce | $30 per ounce | |
S&P Price in Silver | 98 ounces | 52 ounces |
As you can see the table shows that the S&P 500 earnings per share when priced in gold or silver has declined since 2007. It also shows that the price of the S&P 500 has declined when priced in gold or silver.
This indicates that despite the fact the stock market has been rising for the past five years, it is actually losing value in "real" terms. Basically, this is a deceptive and stealth bear market. Prices are rising but value is eroding under the surface.
I know we do our daily transactions in U.S. dollars, so it is okay to make profits in U.S dollars. It is great if you can make profits in the stock market. The market appears to be firmly in the control of the bulls. This market is intent on going higher. However, if you are a long term investor the market might not be the best place to be. This is tough, especially for retirees who are in search of income. With the bond market yielding negative rates in "real" terms, the stock market is the only place to go. There is no easy answer. However, it is important to understand that even money in the stock market is deceptively eroding in value over the long term.
The tough times are a direct result of the policies that the Federal Reserve and the U.S. Government have undertaken. There is no example in history where debasing a currency doesn't drive the purchasing power down over time. And certainly none where debasing a currency causes it to appreciate over time.
Ben Bernanke, President Obama, and the mindless talking heads in the media might champion this rising market, claiming the United States is back on track and improving.
But it is quite obvious that once you pull back the curtain and look at the numbers, the emperor isn't wearing any pants.
Signing off,
T. Norman
For those with bank accounts in the Mediterranean island of Cyprus, this past week has been a disastrous one. In what is an unprecedented move in the Eurozone, Cyprus imposed a tax on bank accounts as part of an agreement to be bailed out by the European Union.
Technically, the depositors do not lose the money, but would gain shares in banks guaranteed by future natural-gas revenues - not a very good guarantee at all, given how incompetent the Cyprus government has been to date.
For the second time in its history, the U.S. men's national team secured a golden point in a World Cup qualifier at the Estadio Azteca, battling Mexico to a 0-0 tie. This was a good result for the United States. They now have four points from three games and can take confidence from winning against Costa Rica during a snow blizzard in Colorado and then taking a point down in Mexico playing at a dizzying altitude of over 7,000 feet.
Did you hear about the lotto winner that now lives paycheck to paycheck? Before you buy that next Power ball ticket, you might want to talk to Sharon Tirabassi. Nine years ago, the Canadian woman won a $10.5 million lottery jackpot. Today she has zero dollars, a part-time job and struggles to support her nine kids. Tirabassi blew her money in all the predictable ways: gifts for family members, a massive house, extravagant vacations and lining four luxury cars in the driveway. Those cars are all gone. So are her new "friends." Now she takes the bus to work and tries to teach her kids the value of a dollar. "All of that other stuff was fun in the beginning, now it’s like … back to life," she sighed.
References:
Russell, Richard. 2013 The Dow Theory Letters. La Jolla, Ca.
http://now.msn.com/sharon-tirabassi-broke-after-spending-all-lottery-winnings