Archive for October, 2008

This and That # 116: Thank goodness October is over

October 31, 2008

  1. The S&P 500 was down 18% in October and the TSX Composite fell 16% in October. Other equity markets are down sharply as well. The bulls and the bears debate if stocks are the bargain we think.
  2. Bottom watching is a favourite sport on Wall Street these days. Jason Zweig writes in Wall Street Journal that it is impossible to get a positive ID on capitulation.
  3. Principal-protected notes have been roundly criticized and deservedly so. Now, not only are some of these products are going to return the principal back and nothing else but, to add insult to injury, they may also be subject to an adverse tax ruling by the CRA.
  4. One silver lining in falling stock prices is rising dividend yields, writes Dividend Growth Investor. The yield on the S&P 500 is now just over 3.2% (though the full effect of many dividend cuts will be felt over the next year). The yield on the TSX Composite is also over 3%.
  5. Ellen Roseman provides a guide to CDIC protection — which accounts are eligible and what is covered.
  6. Gail Vaz-Oxlade says that everyone really, really, needs a budget.
  7. Million Dollar Journey on how a lower loonie will affect Canadians.
  8. Preet presents a collection of famous quotes on investing.
  9. Michael James notes that seniors in Ontario can look forward to break on their property taxes next year.
  10. Dividend Guy shares his main investment objective: to generate a reliable, growing stream of income from stocks.

Bogle expects stocks to return 10%

October 30, 2008


There is nothing like a bear market to boost the expected return from stocks. In The Little Book of Common Sense Investing (review), published last year, John Bogle projected an average annual return of 7 percent over the next ten years: 2 percent from dividends, 5 to 6 percent from earnings growth and a 1 percent loss due to the easing of P/E ratio from 18 to 16.

According to a column on the Fortune website, Mr. Bogle is a lot more optimistic today:

The upside of the painful bear market, of course, is that stocks are much cheaper – as cheap, in fact, as they have been in many, many years. Based on the price/earnings ratio (using earnings from the past 12 months), the U.S. market is as inexpensive today as it has been since 1990. From today’s levels, says Bogle, it’s reasonable to think that the S&P 500’s profits could grow by 7% a year. Throw in the current dividend yield of over 3%, and Bogle believes stocks could return 10% a year for the next decade. “I don’t think that’s a pipe dream,” he says – and this from a man who at the turn of the century was warning of years of subpar returns.

It’s a bit surprising that Mr. Bogle has increased the forecast for earnings growth to 7% from his previous estimate of 5% to 6% but such rates have been observed in the past: 7.4% in the 1990s and 9.9% in the 1940s and 1970s.

Thrift making a comeback?

October 28, 2008


The latest edition of Maclean’s magazine features a cover story on The Joy of Frugality. The story talks about a new mood of thrift sweeping the globe in the wake of the credit crisis:

There’s a growing sense that our lifestyles are about to be dramatically transformed. For the first time in as much as half a century, a new, “frugal future,” as some economists have come to call it, seems all but inevitable. “Frugality is now replacing frivolity,” declared Merrill Lynch economist David Rosenberg. Households are about to be put on a radical diet; debt is a dirty word again, and living within one’s means could soon be a fact of life.

The story says that the signs of transformation are everywhere — a Hummer dealership in Las Vegas is being replaced with one selling Smart cars, $50 “credit-crunch suits” are flying off the shelves of discount stores in the UK and many people in L.A. and New York are foregoing $1,600 Botox treatments — and notes the environmental (less Hummers means less pollution), social (lower divorce rates in lean economic times) and even health benefits of a pared-down lifestyle.

Call me a skeptic, but we’ve seen this movie before. The “voluntary simplicity” movement seemed to gain popularity in times of economic stress in the past only to fade away when the good times returned. Why should it be any different this time around? Grasshoppers do not turn into ants overnight.