What an awful day overall.
And, IMHO, on no real news.
No event occurred that has not already been with us.
Just, lack of data. And this ubiquitous (if unfounded) fear that the market is over-heated...that a drawdown is past due.
As if it's been too good for the past 5 or so years, so...time to retract.
The fact that returns in SP500 over past 10-15 years have been abysmal appears to be forgotten fact in the current clamor that the market is over-extended.
Be it the CAPE crusaders. The prognosticates of D3...deficits, debt and demographics. Or, those convinced another 50% drop is right around the corner...just because.
Is it that we must pay for sins of our fathers...excessive returns of the 1980-90s?
Again, apologies...just my humble opinion.
Honestly, earnings season can't come fast enough for me.
Perhaps then, the market will get back to movements based on data.
c

Quick follow-up...
Morningstar Introduces Industry’s First Strategic Beta Classification System; Publishes Global Landscape Report to Help Investors Identify, Compare, and Analyze Strategies.
Here's link:
http://corporate.morningstar.com/US/asp/subject.aspx?xmlfile=374.xml&filter=3093

Ben Johnson, Director of Manager Research at Morningstar, hosted an excellent overview this afternoon on Exchange Traded Fund trends, during a beautiful pre-autumnal day here in Chicago. It's the 5th such conference M* has held.
The overall briefings included Strategic Beta, Active ETFs (like BOND and MINT), and Exchange Traded Fund Managed Portfolios.
We got clearance to share some charts from the Strategic Beta portion, which I also found most interesting and perhaps some of you on the board will too.
Points made by Mr. Johnson:
1. Active vs Passive is a false premise. Many of today's ETFs represent a cross-section of both approaches.
2. "More assets are flowing into passive investment vehicles that are increasingly active in their nature and implementation."
3. Smart beta is a loaded term. "They will not look smart all the time..." and investors need to set expectations accordingly.
4. M* assigns the term "Strategic Beta" to a growing category of indexes and exchange traded products (ETPs) that track them. "These indexes seek to enhance returns or minimize risk relative to traditional market cap weighted benchmarks." They often have tilts, like low volatility value. And are consistently rules-based, transparent, and relatively low-cost.

5. Strategic Beta subset of ETPs has been explosive in recent years with 374 listed in US as of 2Q14 or 1/4 of all ETPs, while amassing $360M, or 1/5th of ETP AUM. Perhaps more telling is that 31% of new cash flows for ETPs in 2013 went into Strategic Beta products.

6. Reasons for the growth summarized here:

These quasi active funds charge a fraction of traditional fees. And, a general disillusionment with active managers is based on recent surveys made by Northern Trust and PowerShares.
M* is attempting to bring more neutral attention to these ETFs, which up to now has been driven by product providers. In doing so, M* hopes to help set expectation management, or ground rules if you will, to better compare these investment alternatives. With ground rules set, they seek to highlight winners and call out losers. And, at the end of the day, help investors "navigate this increasingly complex landscape."
They've started to develop the following taxonomy that is complementary to (but not in place of) existing M* categories.

Honestly, think this is M* at its best.

Chevron needs partner, contracts before moving on Kitimat LNG, CEO says
Sep 12 2014, 12:34 ET Seeking Alpha
“We have an advantaged resource in the Horn River basin, but the costs are very high. You have to have good alignment with partners," Watson says, so the company is working with aboriginal groups in the area and performing initial work on the site.British Columbia is closer to Asian markets than some competing parts of the world including the U.S. Gulf Coast, but the latter area's projects that are moving ahead because existing infrastructure makes them easier to develop, the CEO says.
http://seekingalpha.com/news/1980685-chevron-needs-partner-contracts-before-moving-on-kitimat-lng-ceo-says
Oil and gas company debt soars to danger levels to cover shortfall in cash
Energy businesses are selling assets and took on $106bn in net debt in the year to March
By Ambrose Evans-Pritchard The Telegraph
6:10AM BST 11 Aug 2014
The net debt of 127 oil companies from around the world rose by $106bn in the year to March
The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly. Companies have exhausted the low-hanging fruit and are being forced to explore fields in ever more difficult regions.
The EIA said the shortfall between cash earnings from operations and expenditure -- mostly CAPEX and dividends -- has widened from $18bn in 2010 to $110bn during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011.
The agency, a branch of the US Energy Department, said the increase in debt is “not necessarily a negative indicator” and may make sense for some if interest rates are low. Cheap capital has been a key reason why US companies have been able to boost output of shale gas and oil at an explosive rate, helping to lift the US economy out of the Great Recession.
Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said.
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

I think I believe in gross market timing (CAPE says the next 10 years will be low return if one buys the broad market at current levels), so it looks like I should let my monthly additions molder in cash.

In my IRA at TDA, EVBAX was relatively costly, as mentioned above, but there were no additional charges. This was a minimum investment to keep me attentive.
I think (hope) there is too much money waiting for an entry point for stocks to drop 30 -60%, and Gaffney's comment about the portion of Treasury debt that the Fed is buying suggests there is a high floor for the short term. I think I'll start adding money at the 10% drop and take the additional hit, if it occurs, and reassess if there is a 10 - 15% gain above the 10% drop. I don't think 2008 was a once in a lifetime event, but I don't think it was a once in a decade event.

Hi STB65: I've listened to several interviews of Robert Shiller, 'co-inventor' of the CAPE, this year. He says it doesn't work for market timing. Also, he says it has been above 20 for the past 20 years. Shiller's website has the CAPE for every month from current to the distant past. I'm looking at the bear market from 2000-2002. At no time did the CAPE get below 20, never came close to its long term historical average. Even in the Oct 2007-March 2009 mega bear, the CAPE was above 20 until October 2008, and was back above 20 by the end of 2009. Waiting for the CAPE to tell you when to buy could be a very tough wait.
What did you mean by: "In my IRA at TDA, EVBAX was relatively costly"?
I'm seeing it as a No Transaction Fee fund.

After listening to the interview, I considered reducing my FAGIX and SPHIX holdings since they represented the majority of my high yield bond funds (my 403b is in Fido); but I checked the graph at M*, where they regained their return slope in about a year after 2008, so I am really conflicted. Therefore, I agree with AndyJ as to from what?
I think I believe in gross market timing (CAPE says the next 10 years will be low return if one buys the broad market at current levels), so it looks like I should let my monthly additions molder in cash.
RSIVX, RPHYX seemed to have flattened out or declined, but FSAHX may have shown a gasp of life. My hopes that I could park my "cash" in short term bond funds are now muted (especially since I have 40 X as much in the first 2 and the latter was positive on
Fri, but it's only one day.)
In my IRA at TDA, EVBAX was relatively costly, as mentioned above, but there were no additional charges. This was a minimum investment to keep me attentive.
I think (hope) there is too much money waiting for an entry point for stocks to drop 30 -60%, and Gaffney's comment about the portion of Treasury debt that the Fed is buying suggests there is a high floor for the short term. I think I'll start adding money at the 10% drop and take the additional hit, if it occurs, and reassess if there is a 10 - 15% gain above the 10% drop. I don't think 2008 was a once in a lifetime event, but I don't think it was a once in a decade event.

Professor Malkiel has been one I pay attention to when I can. However I am surprised he used just one factor ( CAPE ratio) to make an assumption.
The M* writer does bring up the low rates.
Emerging markets and muni bond. The professor mentions these as good places to be in. If the investor is well diversified then maybe they are set. A lot of investors look for the hot spot at the moment. Usually that means chasing yields.
A good article but Professor Malkiel's books are better. A Random Walk Down Wall Street is his classic and worth every investors time to read.

A nice sharp comment from the current Malkiel WSJ piece, which is weak, by a James Lear:
\\\ The CAPE analysis by Dr. Schiller is an example of sophisticated mathematics done badly. Two reasons:
1) the "cyclically adjusted" portion of his index is a 10-year moving average on *earnings* (the denominator of CAPE) but not on the price. The SMA is a common tool in electrical engineering signal processing. It removes high frequency noise but it also delays the signal by 1/2 the period of the moving average. In this case, the delay is 5-years. It turns out that it is the delay that makes CAPE seem work as a predictor, not the filtering. In other words, we can use today's price divided by earnings from five years ago, and voila we have something very similar to CAPE. The beauty of using the delayed 5-year earnings as opposed to the SMA is we can roll forward (e.g. look at 4-year earnings) and look ahead at what Schiller's CAPE will be in the future at today's prices.
2) The CAPE correlation coefficients are low.

FYI: The United States stock market looks very expensive right now. The CAPE ratio, a stock-price measure I helped develop — is hovering at a worrisome level.
Regards,
Ted
http://www.nytimes.com/2014/08/17/upshot/the-mystery-of-lofty-elevations.html?_r=0&abt=0002&abg=0

He should wonder if the CAPE has any value.

Pardon if this was already posted.
In yesterdays NYT, Shiller wonders aloud about whether there is any basis for the CAPE ratio being so high.
http://www.nytimes.com/2014/08/17/upshot/the-mystery-of-lofty-elevations.html?_r=0&abt=0002&abg=1

@Scott, I was thinking the same thing.
Does this mean I should be careful about DoubleLIne Shiller CAPE fund? It is based on another Nobel laureate, Robert Shiller's CAPE index...

May the demise of this brilliant fund serve as downlifting inspiration to the many other zombie funds staggering around the landscape. (Psst--- just let go, you'll feel so much better when you do, as will your investors, so much better).

Item 2) Some say I have way too many funds … perhaps so, perhaps not! In comparing my portfolio’s performance to Morningstars Moderate Target Risk as a benchmark … well I have handily bettered the benchmark.
Old_Skeet

Congratulations Old_Skeet. You've done a great job, and most importantly, you've done it 'your way.' You've navigated the investment landscape and come up with a system that works for you.

Good piece, backing up the clear tendency of market-cap indexes to be great on the way up and very un-great on the way down. It's amazing how something as simple as the clearly documented record of those indexes in up- and down-markets escapes the cognition of the 'indexes are all you need, now and forever' commenters.
I'd been thinking the reason there's been so much of that sentiment flying around the finance sphere is that many of those making said comments must be thinking only in terms of the standard return periods, and any of those from 1-5 years show market-cap indexes as brilliant choices because the last 5y neatly coincides with the latest bull market - clearly the sweet spot of a market cap index.
One of the best analyses of an optimal stake in stock indexes in a long-term portfolio came from, believe it or not, Gus Sauter, former bigwig at Vanguard (sorry, no link, haven't been able to find it recently), which took into account many years of data and concluded that something like 30%, but no more, of a stock portfolio in index funds made an optimal contribution to long-term returns.

FYI: Vanguard spokesman John Woerth in a statement says the company denies wrongdoing, affirms the legality of its practices and says it will defend against the suit vigorously.
Regards,
Ted
Read more at http://www.philly.com/philly/blogs/inq-phillydeals/Has-Vanguard-Group-underpaid-its-income-taxes.html#ogqZ3XlQifG3jzFh.99

@Charles: thanks for your take on this with individual stocks.
For someone not purchasing individual stocks, but taking an approach with stock index funds or exchange traded funds, how would you let the Shiller CAPE ratio influence your investing decisions?
One approach some take is to let the Shiller P/E influence their asset allocation, backing off on equities when the Shiller P/E is elevated. Based on this (Shiller P/E way above long term historic levels of 16.5), some only have 50% or so of their normal allocation to equities right now. Another possible approach is choosing funds that have lower P/E ratios, such as GVAL, the DoubleLine DSENX, the exchange traded note CAPE, investing in the 4 U.S. stock sectors with the lowest Shiller P/Es, and choosing a traditional value fund (based on low P/E and low price/book ratios)

@rjb112.
Yes sir. Meb fan I am.

How then do you think investors should use the Shiller P/E in their investing decisions?

Every now and then, I fear Mr. Faber does sound a little like a Cape Crusader. But I think I most align with his preference to find the intersection of value and momentum.
Aloca AA comes to mind this past year. BAC last couple years.
If I jump-in on low valuation only, even if I really like the company, I'll have it on a short leash. There is just so much unknown. Always.
But once the stock gets some altitude, thanks to momentum (be it due to earnings or group think), I'll try to use 200 day or 10 mo SMA. If it dips below that, I'll look to exit.
If momentum turns a 1 bagger to a 2 bagger to a...10 bagger. I will try to stay with it regardless of valuation and use only momentum to determine whether to remain or exit.
So, I guess the short answer is: I seem to be most comfortable entering a position when it has both value and momentum, but once established, momentum is the driver.
That's what seems to be working for me these days. FWIW.
Hope all is well.
c

Yes, the current P/E ratio and/or the CAPE ratio are currently a tad (that’s a scientific measure) on the high side relative to long term averages. But these signals, which according to a Vanguard study do provide a 20-30% explanation of market price movements, are not sufficiently above the norm to likely generate negative equity returns for the upcoming decade.
They are not in the worrisome zone yet, but warrant some watching.
Based on current values and historical average data, I expect stock dividends to yield 2% annually, productivity gains to yield a 2% gain, demographics to enhance returns by 1% annually........
Adding these factors together projects an expected 10-year positive 7% annual equity reward.

1. What is your thinking regarding expecting "demographics to enhance returns by 1% annually....."? One of the biggest demographic issues in the U.S. is "The Graying of America", the aging of America. Substantial numbers of baby boomers retire every day, reducing the overall GDP and productivity, which in and of itself as a factor decreases the profits of corporations. What are the demographic trends you think will add to stock returns going forward?
2. Re: "according to a Vanguard study do provide a 20-30% explanation of market price movements.
Do you have a reference to this study, or link/URL? I'm not doubting what you are saying, but would like to read it
3. Re: 'the current P/E ratio and/or CAPE ratio a tad on the high side relative to long term averages....not in the worrisome zone yet'
James Montier is a key member on Jeremy Grantham's GMO team, who write their monthly stock market 7-year forecast. The Shiller CAPE is a significant factor they consider.
James Montier does not agree that the Shiller P/E is a tad high. He says it is exceedingly high.
In this interview from May 15, 2014: http://money.cnn.com/2014/05/01/pf/stocks-overpriced.moneymag/index.html?iid=SF_M_River
he is asked:
Interviewer: "Are stocks overpriced?"
James Montier: "There is no doubt that the U.S. stock market is exceedingly overvalued."
Interviewer: "What makes you so sure?"
James Montier: "The simplest sensible benchmark is the Shiller P/E. Right now we're looking at a broad index like the Standard & Poor's 500 trading at something like 26, 27 times the Shiller P/E. Fair value would be 16 or 17 times historical earnings."

Hi Guys,
I’m in davidrmoran’s and Charles’ corner on this issue.
Yes, the current P/E ratio and/or the CAPE ratio are currently a tad (that’s a scientific measure) on the high side relative to long term averages. But these signals, which according to a Vanguard study do provide a 20-30% explanation of market price movements, are not sufficiently above the norm to likely generate negative equity returns for the upcoming decade.
They are not in the worrisome zone yet, but warrant some watching.
Here’s why. I’ll be using the methodology formulated in Chapter 2, On the Nature of Returns, of John Bogle’s classic “Common Sense on Mutual Funds” book.
Based on current values and historical average data, I expect stock dividends to yield 2% annually, productivity gains to yield a 2% gain, demographics to enhance returns by 1% annually, inflation to contribute about 3%, and since the P/E ratio is nearing a tipping point, I expect a modest regression-to-the-mean to subtract maybe 1% annually.
Adding these factors together projects an expected 10-year positive 7% annual equity reward. That’s roughly 3% below the long-term returns because of a little muted GDP growth rate (which impacts productivity profits) and a likely slight regression-to-the-mean of the present P/E status.
Well, that’s my guesstimate. It directly reflects the Bogle long-term returns model, historical data sets, and current parameter valuations. Given the depressed character of current bond performance, stocks still don’t appear to be a bad deal, but also don’t expect the historical average of equity returns. Too bad, but not really too bad.
Well, that’s my hat in the forecasting ring. Forecasting the next 10-year return is actually easier and more reliably made than projecting next year’s return. I hope this helps.
Best Regards.