What We're Reading

"A lie told often enough becomes the truth" - Vladimir Lenin

Imagine for a minute you lived centuries ago when people believed the earth was flat, or the earth revolved around the sun, or that planets were Gods, or that disease was angry spirits or supernatural powers. You'd have an explanation for everything ... only it would be wrong. And that "wrongness" would stand in the way of true understanding and true progress until they were discarded as falsehoods.

And so it is with the Stock Market. Let me explain.

First, let me be perfectly clear. I'm a statistician so I'm not referring to philosophical or political or gut feelings or anything other than Statistical Misrepresentations. Fact, not opinion.

I can hardly go a day without reading an article or hearing a TV pundit or someone regurgitate misconceptions that are so integrated in our minds ... we believe them to be the truth.

These misconceptions cause us to make investing mistakes because we take them as axiomatic when they are

You'll hear "reverting to the mean" or "mean reversion" bandied about occasionally however not on a daily basis......unless you're watching gold's long sell off since it's explosion to the upside.  According to Investopedia, mean reversion is:

A theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry.

Case in point is my theory that commodities are/have been doing just that.  Click on this long term chart of the CRB Index for a better view.

After decades trading in a wide range, commodities took off as the dotcom bubble broke in 2000.  Money had to go somewhere, didn't it?

But with a weak economy worldwide and no shortage of supply in grains or crude oil, just how low commodities will go is anyone's call at this juncture.

While the continual question remains, why are bonds holding up?  Why isn't that money flowing into equities?  We highly recommend recommend this piece from Variant Perceptions.  These gusy have nailed it over and over again in the past and maybe, just maybe big investors are embracing something that the little guy doesn't wish to accept.  That profit margins in our "new recovery" are unsustainable.  We may crawl higher, but they wouldn't bet the bank it will last long.  That's great!  I'd prefer reverting to the mean and loading up on names..........at lower levels.  Enjoy-

Profit margins in the US have hit modern-day record levels, and this has been used to help justify high equity valuations. Consensus estimates are for profit margins to remain steady, or even increase from current levels. We disagree for ironclad economic and accounting realities, and think margins will fall, taking equities down too.

Profit margins have, at least until now, exhibited mean-reversion like behaviour. Th