June Newsletter – Prices Paid for U.S. Stocks Continue to Balloon

Social Security Trustees Report on Fund Status

Disability Insurance “Trust Fund” projected to deplete in 2016

6.13 Short Range OASI and DI Combined Trust Fund RatioOld-Age and Survivors Insurance and Federal Disability Insurance (commonly referred to as Social Security) is providing benefit payments to about 40 million retired workers, 6 million survivors of deceased workers and 11 million disabled workers and dependents of disabled workers. Almost all of us look to Social Security as a significant part of our future retirement income.

There are two separate “trust funds” dedicated to the programs, one for the “OASI” portion (Social Security) and one for the “DI” (disability insurance).

6.13 OASDI Income, Cost, and Expenditures as Percentages of Taxable Payroll

All taxes levied by the government for these programs are credited to the funds, and all benefits and costs are paid by them. Excess funds are invested and earn income.

Social Security’s costs now exceed combined income from taxes and investments; a trend projected to continue through 2022 and beyond. This means they are drawing down the trust funds that have been built up over time.

OASI Trust Fund is estimated to be depleted in 2033. After that, Social Security will have to rely exclusively on taxes for funding each year, which, if left unchanged, will provide 77% of scheduled benefits.

DI Trust Fund is projected to be depleted in 2016. That’s 3 years! The DI program cost has exceeded non-interest income since 2005.

Will Social Security Go Away? It is highly unlikely that we would allow the government to go back on the vast majority of promises and commitments made to date. However, total Social Security liability has reached $16.4 trillion, and total U.S. unfunded liabilities (Social Security, Prescription Drugs, and Medicare) have reached $124 trillion, nearly $1.1 million per taxpayer. It is mathematically impossible to meet these unfunded obligations without significant changes in future tax revenue plans or benefit promises to future recipients.

Prices Paid for U.S. Stocks Continue to Balloon

Downside risk at historical levels

Another month of gains for U.S. stocks distorts even further the level of stock prices and the historical value investors have placed on corporate earnings and dividends.

Let us take a look at just a few of the facts:

  • Sales growth for S&P 500 companies over the last twelve months has been an anemic 1.3%.
  • Operating earnings per share actually fell by 1% from the first quarter of 2012 to the first quarter of 2013.
  • Despite the above, stock “analysts” are projecting S&P earnings growth of 18% by the end of the year and over 26% by the third quarter of next year.

The doubling of stock prices from the market bottom in March, 2009 through the end of May has been accomplished with only a 26% growth in long-term corporate earnings. During that period, we have seen a bubble-like increase of 63% in the prices investors are willing to pay for those earnings. For perspective, if attitudes reverse and investors become overly pessimistic as opposed to overly optimistic, we would see stock prices decline over 40% from current levels.

We are well overdue for some of the risk in this market to be realized. In this environment, when the downside potential is so great, it continues to make little or no sense to chase a few extra percentage points of gains.

Manager of World’s Largest Bond Fund Attacks Ben Bernanke

… Well it’s been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution…

… Perhaps financial markets and real economic growth are more at risk than your calm demeanor would convey.

– William H. Gross, Investment Outlook, June, 2013

Speaking of Social Security…

Other than Social Security, there are very few 1935 vintage products still in use…

-Kevin Williamson, The End Is Near and It’s Going to Be Awesome

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