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Top 2042. Aug 7, 2004 12:22 PM

» Normxxx - Re: Re: Re: Re: Re: Re: Re: Re: Efficient Market Theory

In response to message posted by bob90245:

That's why Wall Street & company absolutely hate EMT! It makes 90% of the jobs and posturing in the market industry wholly irrelevant! And while I do not subscribe to EMT, I will admit that the market results are largely as EMT predicts, except around the edges. That is, I allow for lots of short term inefficiencies that eventually are self cancelling (except for a few psychological affects). Modern EMT (neo-EMT?) would also allow for very short term, eventually self-cancelling inefficiencies-- they almost have to, the evidence on a suitably short time scale is overwhelming (that is how they would now explain crashes). However, EMT's argument would be that, in the event, these inefficiencies cannot be recognized (at the time) without some risk or, therefore, exploited above break even (in the long run). I don't know what they say about 'riskless' arbitrage (where two markets have slightly different prices for the same instrument and arbitrage brokers sell in one market and buy in the other to close the gap, making a 'riskless' profit).

-- posted by Normxxx

Top 2043. Aug 7, 2004 1:48 PM

» Normxxx - Re: Re: Re: Re: Re: Re: Re: Re: Efficient Market Theory

In response to message posted by bob90245:

The major premis of EMT is that there does not exist any exploitable inefficiencies in the stock market. If you think about that for a while, and accept it, then the market really becomes terminally boring! After all, don't we all, secretly, in our heart of hearts, hope to find an exploitable inefficiency? Who wants to believe that all of the brainpower in the world cannot ouperform chance? Or that we won't luck out and find that secret formula which exploits some heretofore hidden inefficiency?

-- posted by Normxxx

Top 2044. Aug 7, 2004 6:19 PM

» Happy_2 - Re: Re: Re: Re: Re: Re: Re: Efficient Market Theory

In response to message posted by Normxxx:
Value Line does have a fund called the Centurion fund which uses the VL rating system. But, for some reason the public doesn't seem to have access to their record with that fund?

Small companies have a greater propensity to go out of business than large companies. They have more risk, so therefore they should provide a higher return over time.

This has little to do with EMT. EMT would say that any group of a couple of hundred stocks,"randomly picked", should perform the same as the broad market averages.

-- posted by Happy_2

Top 2045. Aug 7, 2004 7:09 PM

» Jas_Jain - The Last Words on EMT -- Re: Efficient Market Theory

In response to message posted by Happy_2:

--
In the short-term, the Scam Market is highly efficient AND in the long-term it is highly inefficient! In-between, it is in-between!!

The only way that the Scam Market is very efficient, long-term, is in scamming people who become Scam Lovers during the possible worst period and Stock Haters at the worst possible period. The whole T of the EMT is a Scam!!! The message of buy-and-hold is not to think about what price you pay.

Timing the Market is stupid and Pricing the Market is smart.

Jas

-- posted by Jas_Jain

Top 2046. Aug 7, 2004 8:14 PM

» Normxxx - Re: Re: Re: Re: Re: Re: Re: Re: Efficient Market Theory

In response to message posted by Happy_2:

But then how do you explain the relatively huge premium return advantage of small cap value companies (best perorming asset group) over small cap growth companies (worst performing asset group)?

EMT says the total expected return, adjusted for risk, of all stocks are equal.

or, phrased alternatively,

the total return, adjusted for risk, of all stocks are equal, except for chance differences.

-- posted by Normxxx

http://biz.yahoo.com/funds/cs31.html

Top 2047. Aug 7, 2004 8:48 PM

» Happy_2 - Re: Re: Re: Re: Re: Re: Re: Re: Re: Efficient Market Theory

message posted by Normxxx:
Referring to Bob's post above:

"..When looking at the complete sweep of 60-year historical returns, growth and value come out even:

Same thing with large versus small:

http://biz.yahoo.com/funds/cs32.html

-- posted by Happy_2

Top 2048. Aug 7, 2004 10:15 PM

» Normxxx - THE DAY AFTER TOMORROW

THE DAY AFTER TOMORROW

By Alan M. Newman, editor, CROSSCURRENTS | August 6, 2004

Look at the chart and remember, we're all told to buy for the long term. What is the long term? Twenty years? Thirty years? Suppose you took all the money you would need to live on for a year, including something set aside for a new car and dishwasher, and put it into stocks in 1950. In July of 1982, you could have sold your stocks and lived for a year on the proceeds, including the purchase of the new car and dishwasher. But you wouldn't have had an extra dime to show for the 32 years! Suppose you did the same thing in January of 1966. By 1995, your predicament would have been the same. After 29-2/3 years, you'd have a whole lot more money, but everything would have cost a whole lot more. Fast forward to 2000. Stocks hit another inflation adjusted high. Could it be another 30 years until the buying power of the mania is surpassed?

Scares the heck out of us. And that's why we wrote the following article a couple of months ago. "The Day After Tomorrow" is in our view, probably the best article we have presented in at least a year. It deserves your attention...

Reprinted from the June 7th issue of Crosscurrents:

A May 28th John Hechinger Wall Street Journal article claimed "Magellan Manager Feels The Heat." In our view, this is one of the most important stories of the year, but is a story likely to be little regarded in the light of the election, Iraq, terrorism, and the economy. Robert Stansky took over the reins at the gigantic Fidelity fund in 1996 and has since under performed the S&P 500, pushing Magellan 71% higher versus an 85% rise in the S&P.

Why? First of all, for huge funds like Magellan, there is just far too much money under management to be able to invest in smaller companies with great promise and make the investment worthwhile. For instance, if Stansky went bonkers over a $500 million company with phenomenal prospects, a 5% position in the outstanding capitalization would amount to $25 million, or a mere 1/27th of 1% of Magellan's assets. Just how many companies of this size could the fund ever hope to keep track of on an ongoing basis? Thus, the fund's very size of $68 billion limits its potential.

Secondly, as index funds and ETFs have proliferated, stock prices have become more and more inefficient. The Efficient Market Hypothesis has been obliterated by years of indexing. Perhaps there once was a time where one could postulate that all relevant information was factored into share price but no longer. In the "index" world, shares are bought because of their relative size and for no other reason. If the fundamentals do not matter, neither can price!

Thus, ALL indexed shares are to some degree, inefficiently priced.

John Bogle, the father of indexing and the founder of the Vanguard Index funds recently went on record to replace the religion of EMH with a new religion, CMH, or "Cost Matters Hypothesis." Bogle claims, 'We don’t need the EMH to explain the dire odds that investors face in their quest to beat the stock market. We need only the CMH. Whether markets are efficient or inefficient, investors as a group must fall short of the market return by the amount of the costs they incur.' In other words, cut your costs to the quick and simply forget about everything else, like buying value or timing. Buy high if you like. Of course, the presumption must be you will either never sell or by the time you have to sell, the “long term” will have kicked in and have assured one's money's worth. The trouble with this extremely simplistic line of reasoning is that it does not work!

In the same manner that one takes risks by attempting to buy value or to buy when prices are low and sell when they are high, one must necessarily take GREATER risks by using NO intelligence at all to buy ALL stocks at ANY time. In the one case, since intelligence is used, mistakes can certainly be made. In the other case, since intelligence is NOT used, MORE mistakes MUST certainly be made! And as for the long term kicking in, no guarantees can be made or implied. Our case in point; from the time the Dow peaked in January of 1966, the Dow took 29-2/3 years to surpass that peak adjusted for inflation - a whopper of a mistake. And despite Wall Street's proclivity to focus on absolute gains, in relative terms, they can underwhelm significantly. Adjusted for inflation and ex-dividends, the Industrials actually lost ground from where our chart commences in January 1950 through July 1982, a whopping 32-1/2 years! Stocks are not an investment for all times.

Ironically, it was actually CMH, not EMH, that gave indexing the edge to begin with. As in all competitive arenas, only a few can stand out and the vast majority of fund managers are incapable of providing above average performance. After fees, there was never any doubt that an index providing an average return had to outperform under average performance, thus money had to gravitate towards passive management. And the more money that gravitated towards passive management, the more inefficiently stocks were priced and the better EMH seemed to work. An illusion and a paradox. It was a CMH "edge" all along. And now, after a decade-and-a-half of indexing, the market is sufficiently indexed to presume gross inefficiencies proliferate. Excellent evidence of inefficiencies is visible via Price/Earnings ratios, Price/Sales ratios, and Price/Book ratios, which have ranged well above historic highs for all of the last several years.

We now believe that these inefficiencies, along with the advent of pervasive mechanical factors, may have set the stage for vastly increased odds of a veritable stock market crash. For months, we have railed out against Program Trading as one factor that may yet weigh far more heavily upon prices than in the past. Programs have exceeded more than 50% of all volume on the New York Stock Exchange for three consecutive weeks and it appears certain that all categories of "mechanical" trading will continue to increase vis-a-vis ordinary investment until they completely overtake the human interface. How this can be good for the capital formation system in the long run is beyond our ability to comprehend. After a more in-depth examination of Exchange Traded Funds and how they impact the market, it is becoming patently clear that the odds for a worst case scenario are growing as rapidly as the growth in trading of ETFs. The principle problem is that unlike individual common stocks, ETFs can be sold short even in a declining market because they are exempt from the SEC rule that requires stocks to be sold short only on an uptick.

The exemption to the uptick rule was granted for ETFs because - supposedly - it is impossible for traders to force share prices down through shorting. In theory, if the ETF price is too far out of whack with the price of the constituents, arbitrageurs will take advantage by creating or redeeming the ETF shares. However, there is another possibility and that is that arbitrageurs will find it easier to just sell the underlying constituents via programs while finally buying the ETFs if enough pressure is brought to bear. But that is the second step in the equation. The first step? Given the extremely low cash-to-assets ratio of mutual funds and presumably pension funds as well, we can infer that the most facile way of dealing with a substantial decline in prices will be for institutions to short ETFs, such as the SPY or QQQ, exacerbating the situation and creating a self-fulfilling and continuing cascade in price.

The faster and further the ETFs fall in price, the faster and further programs may take the constituents down in price. Index Arbitrage did not work in 1987. There is no reason to assume it must work the next time. As program trading/index arbitrage forcefully proved in concert with "portfolio insurance" in 1987, the potential for a waterfall decline could soon be in place. In the words of Donald L. Luskin (Index Options & Futures, the Complete Guide, John Wiley & Sons, 1987), "....[index arbitrage could drive] the market lower and lower until it finally hits zero." Mr. Luskin was not the only one who feared a worst case scenario. U.S. Congressman Edward Markey commented shortly after the Crash of 1987, "The burden is on the financial community to demonstrate that the benefits of program trading outweigh the enormous potential for disaster." Most importantly, Martin Mayer claimed in the November 9, 1987 BARRON'S that, "...the rules against short selling to drive the market down [have] in effect, been subverted."

According to indexuniverse.com, "In some instances, the number of shares sold short in an ETF has exceeded its number of shares outstanding," citing the iShares Lehman 20+ Year Treasury (TLT) as an example with "nearly seven times as many shorted shares as it did shares outstanding." Heaven forfend that statement is correct and the same is possible of the SPY and QQQ! We are not of the opinion that a stock market crash is actually imminent but we are extremely concerned that as mechanical factors overtake the human element, the probabilities are rising for a downside move to get out of hand.

Emotions have been dulled to the point where it can be forcefully argued that fear no longer exists. Wall Street strategists and analysts are always bullish. Since the fall of 1998, the Investor's Intelligence measure of investment advisors has shown only a few weeks in 2001 and 2002 where bears proliferated over bulls. Clearly, with cash levels near record lows, fund managers are bullish. Given how quickly and to what extent emotions have reversed in the past, there is no reason to doubt that the tremendous buildup in complacency over the last two years could unwind as rapidly as it did in 1998 or perhaps even 1987.

Maybe not tomorrow, but possibly the day after tomorrow.

As if the chart above were not enough, the chart presented below foretells an equally chilling future. Despite the common Wall Street wisdom that you cannot miss out on big profits if you buy and hold for the long term, you certainly can. As with everything else in life, buying stocks comes with no guarantee other than the obvious - as long as you hold, time will pass. Your investment and any profits are not a sure thing.

The years 1917 to 2004 are about as long as it gets, actually more than an average lifetime in the U.S. Over that period, stocks as measured by the Dow Industrials have only gained 4.85% ex-dividends. Tack on another 4% for dividends and we're talking about a fairly respectable return, but nothing like the 15%-20% expected by investors after all the touting in the recent decade by most of Wall Street's mutual funds nowadays. But at any rate, no one invests for an 87 year period - life is simply too short. Thus, below, we present every rolling twenty-year timeframe since 1917.

Twenty years is more like an investing lifetime. And, as we see below, 53.7% of the time the twenty-year timeframe returns less than 5% annualized. In fact, twenty-year returns have been below zero often enough that the threat should be recognized as real. Currently, twenty-year annualized returns run to 11.09%, an absolutely phenomenal level of returns. Since 1917, twenty-year annualized returns above 11% have occurred less than 7% of the time. In fact, before June 1997, there was only one week in which twenty-year annualized returns achieved 11%!!!

It would appear that long term returns will eventually wend their way back to what has passed for normal since 1917. How long will it take if the Dow simply trades at 10,000 every week? At that rate, twenty-year annualized returns will reach the 5% level in January of 2013, more than 9-1/2 years from now!

The charts and commentary above are telling factors, evidence of the environment for stocks and their likely course from here.

Does apathy or complacency rule at this time?

In our view, there is no question; the answer is complacency. Bullish investment advisors have outpaced bears for 91 straight weeks, testament to huge complacency about the future course of prices. Wall Street strategists continue to maintain stock allocations that scream "complacency."

Margin debt for the combined NYSE and Nasdaq, albeit far from the manic level of March 2000, now stands at $194 billion, a level that was first touched on October 1999, only a few brief months before the manic peak of March 2000.

Apathy does not generate these kinds of activity. Complacency certainly does.....

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

Top 2049. Aug 8, 2004 9:08 AM

» smile_1 - Re: THE DAY AFTER TOMORROW

In response to message posted by Normxxx:

Norm, what would the Dow be if you adjust for the following using a start point of 1950:

1) inflation
2) avg GDP growth
3) avg dividend yield

-- posted by smile_1

Top 2050. Aug 17, 2004 9:36 AM

» Kirk - Forum is FULL

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-- posted by Kirk