One of the best recent books I have read on investing in equities is Ken Fisher’s “The Only Three Questions That Count”. In my opinion he is too bullish on equities but if you understand where he is coming from it is a good read. (He thinks most people should be 100% in equities most all of the time). He stresses diversification within equities but not among asset classes which I think is a mistake, but his insights on investing in equities are quite good. The chapter on bear markets is especially good. The book was written before the 2008 crash and this time around he didn’t take his own advice. He didn’t see it coming and his clients are the poorer for it.

I find it strange that so few people saw it coming when it was so obvious the housing market would turn into a disaster. The problem is getting the timing right and anticipating how the government and the Fed will disrupt the markets.

The next crisis which no one is really paying much attention to is the effect of high levels of long term unemployment on the economy, company sales and pricing power. Unemployment is still only 9.8% and U6 at 17% and the average length of unemployment is only about 27 weeks. Both are headed higher. I bet this time next year the effects of high long-term unemployment will be front and center with home foreclosures setting new highs and sales of big ticket items setting new lows.

YOU should be more responsible!!!!

Question for you though, do you think that companies will be able to regain their pricing power? I don’t cause of the deleveraging process and saving for retirement that needs to take place…and because of that, companies aren’t gonna invest in capital equipement if they already have such huge capacity overhangs.

We should take “Q” with a grain of salt however, since many of the “assets” represent outdated inefficient technology, or worn-out physical plant that is over-appraised.

In the real world, equity prices should be based on REPORTED earnings, not estimated earnings, not sales volume, or replacement cost. Knowing the difference is what separates a financier from a speculator.

The S&P500 went from 90 in January 1970 to 181 to January 1985. However, $90 in 1970 was equivalent to $250 in 1985 (per the BLS CPI). So investors saw the real value of their stock (excluding dividends) decline 27% over those 15 years even though their stock doubled in nominal terms. Even 5 years later in July 1990 investors had only broken even in real terms. The entire real return for 20 years was from dividends alone. No real capital appreciation.

It still appears that deflation is the biggest worry today, but I hope that the Fed isn’t setting us up for another two lost decades were we should be happy just to get a 1% or 2% real return.

The stock market is probably undervalued today if neither deflation nor inflation set in. If prices are stable and interest rates remain historically low for the foreseeable future and companies regain pricing power with a recovery in economic activity. i.e. the Goldilocks scenario.