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marți, 8 februarie 2011

SEOmoz Daily SEO Blog

Keyword Research - Using Categories to Make Your Process More Actionable

Posted: 08 Feb 2011 07:48 AM PST

One of the earliest and arguably most important parts of the SEO process is keyword research. Keyword research helps you answer that all important question, "In what quantities do people use search engines to find the products and services on my website?". Your research process will ultimately govern the method you use to structure your website, inspire your content strategy and kick start your link building campaigns.

So, it's a bit of a shame that some SEO's don’t like doing keyword research. It’s data intensive, requires some heavy lifting with Excel, and, let’s be honest, at times feels a bit like guess work. We're reliant on data to make the right decision, and that decision could have consequences months if not years down the line for your SEO project.

This is a "give it up" post

For several years now, I have used a methodology for our client keyword research that I believe adds deeper, actionable insight in to the decision making process. You see, a list of keywords with search volumes is all well and good, but it’s not particularly actionable, is it? I’m going to show you part of a process that helps to change all of that.

Before we get started, I’ll make the disclaimer now – I believe in this process so much that I built a keyword tool that does all of this work for you. Obviously I’m going to give a nod to that point, but none of what you'll learn in this post depends on using our tools.

What you need to know first

To follow along, you need to understand a key principle in my methodology. That principle goes a little like this:

To make keyword research more actionable, you need to be able to categorise, group and filter keywords. Deep insight into category based search behaviour can make your research considerably more effective.

That’s it! Now, let’s think about what I just said. For my example, I’m going to use an automotive / cars based analogy, (I love cars, though this concept works for nearly any industry!)

Imagine you’ve got a used cars website, and you want to know if there’s any potential search traffic in location based terms for popular car brands, like “used Audi in Birmingham” or “second hand Mercedes London”. If you wanted to determine the top, most searched for locations for keywords that contain known car manufacturer brands – you might have a problem. If you generate a lot of keyword data, how are you going to be able to group the terms into their corresponding keyword categories?

Here’s a basic example of what I mean:

A chart showing branded, location based keywords

At first glance, this chart looks like it’s been produced from a single list of keywords. It has in fact been produced with only 2 simple filters in a much larger dataset. “Brand” and “Location”. The data in this chart might help you decide in what order to target your keywords (and their variations) with content, or even justify an entirely new content type for your large scale dynamic website.

What I'm going to show you will teach you a way to generate your data first and sort it all out by categorising it later, and not just by “location”, or “brand”, either. Let’s get started.

Gather your keywords

Firstly, we need to build a keyword list. Let’s start by listing the sources of keywords you can get inspiration from, like Google Analytics, Wordtracker’s keyword suggestion tool, Wordstream’s tool, and my all time personal uber-favourites – Mergewords.com and Ubersuggest. If you’ve got access to PPC data, use that too.

Want some ideas on how to build a rich and varied keyword list full of potential opportunity? Using my example, I want to build a list of car manufacturers (“brand”) by UK City (“location”), and I’d like to compare demand for used vs new (“condition”). To do that, I’ll choose some of my favourite manufacturers, Porsche, BMW, Mercedes and VW.

Grab your list of cities and head over to mergewords.com

Mergewords is awesome

Yay! 2,376 new keywords. Now for the search volumes.

Get search volumes

So you have a few thousand keywords to gather search volume for. You’ve got a few options, one of those being an epic copy and paste mission via Google’s keyword tool . Don’t panic, it’s actually not that bad. You’d be surprised just how quickly you can collect a lot of keyword data, even manually, if you get your process right.

By using Chrome , you can build up a sweet downloads folder full of CSV files, 100 keywords at a time. A reasonable copy, paste and download mission can yield a great data set.

Chrome and GKWT are ok

Obviously, this stage requires effort. For you savvy SEOs with development skills, you might want to consider writing a script to access the Google Adwords API. Freelancer.com or oDesk are good places to go to get a script written, too. I found a worthy solution in a script I had made by a freelance developer on Freelancer.com, from which I automated the keyword data collection process via Mozenda . Being able to gather data for around 50,000 keywords at a time really enabled me to do some interesting things, like capture 10 related keywords from the suggest API and run all of those through the search volume API, too. Big data for the win.

Create your categories

Ok, time for some Excel heavy lifting. We’re going to start by creating our keyword categories, and then use an Excel array formula to categorise each of the keywords in our data set. For our example, we’re really interested in filtering for keywords that have location, brand and “condition” based keywords.

Do bear in mind this is advanced Excel, and will require some problem solving on your part. Stick with it, it’s very, very cool.

Create a category table with headers for each of your category names and add “markers” in to each category:

It's a category table, with category names and keyword markers

Next, in a separate Excel tab, you’re going to need to build up your keyword search volumes table. Create columns for your keywords, search volumes and category names:

Keyword list with blank category fields

Next, the awesome bit. We’re going to use an Excel array formula to identify keywords that belong in a category by matching strings of text between our category markers and the terms contained in the keyword list. Here’s what a categorised list will look like:

Categorised KW list

And here’s the formula we use to make it happen:

{=IF(SUM(NOT(ISERROR(FIND('Keyword Types'!$A$2:$A$7,$A2)))*1)>0,P$1,"Non-"&LOWER(P$1))}

Where “'Keyword Types'![CELLRANGE]” refers to the category column we’re matching in the category table, “$A2” is our keyword, in this case “audi” and “P$1” is the name of our category column, in this case, “Brand”.

You’ll also notice that there are some curious curly brackets included in the formula. That’s what makes our formula work across an array.

What’s an array formula?

“An array formula is a formula that works with an array, or series, of data values rather than a single data value.” – Chip Pearson

We’re using an array formula because we’re attempting to match values across a range of cells. Any one keyword marker string could appear in our keyword, so our formula needs to be capable of checking across a range of values. Array formulas can unlock an entirely new level in Excel, as my good friend Tom Szekeres taught me some time ago. They're just amazing! That. Is. All.

Putting the data together

Follow this step by step process to see if you can get your first categorised list of keywords to work in Excel:

1) Paste the formula into excel and highlight the part of the formula surrounded in red in this screenshot:

Step by Step 1

2) Click your category tab and highlight your category list. Press F4.

Step by Step 2

3) Press CTRL, Shift and Return and Boom! A categorised list of keywords – in our case any keyword that contains “new”, “used”, and “second hand”.

Step by Step 3

Why such an advanced approach to add to your keyword research methodology?

When you’re designing a brand new site architecture, or enhancing an existing one, justifying new content groups, changes to dynamic meta templates or defining keyword strategy decisions should always been made on the data. If you have the capability to work with large, expanded data sets, with a scalable categorisation approach, there’s no doubt you can make decisions a lot more confidently. I hope that with a little practice and perseverance, you will agree with me. Some example categories for your industry might include:

- Gender ("Men's", "Women's", "Girl's", "Boy's")
- Occasion ("Christmas", "Valentine's Day", "Easter")
- Location by Cities or States ("New York", "Washington", "New Hampshire")
- Colours ("Red", "Green", "Blue")

You've also got product groups and names, buyer intent (research, review, purchase) and perhaps even groups that directly reflect the position of a category page in your site architecture ("Tier 1", "Tier 2"). Cool huh?

What data should I use?

All of it. Everything you can find. As much as you can get your hands on. That’s the point. You might not want to rely solely on Google search volumes, and, if you can, you should build rankings data and analytics entries into your data set. All I can say is thank the gods for VLOOKUP. That’s another blog post though – if you want me to write it, shout out in the comments.

What should I do next?

Well, the next most sensible suggestion might be to analyse your data using a pivot table. Making pivot tables is a really easy way to quickly deep dive into your data across multiple data points. I wrote a pivot table tutorial (including how to make pretty charts for keyword research), the content of which is designed specifically for keyword researchers.

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Did SEOmoz PRO Just Become Free?

Posted: 07 Feb 2011 01:44 PM PST

Posted by randfish

Yes. Yes it did (sort of). In fact, you could skip this post and sign up free for 30 days right here (though there's more cool details I'll explain below).

Last week, in the midst of an extremely busy day, the team at SEOmoz huddled around a bowl of green jelly beans to share something even more magical than tiny green candy - our numbers. We recently passed 7,500 PRO members and January was our biggest traffic month ever, with nearly 1 million visits to SEOmoz + Open Site Explorer. The web app alone is tracking nearly 20,000 campaigns (sites), 500K keywords and 60mil+ pages each week. Linkscape just had its three fastest index updates, meaning the data in OSE, the mozBar and the web app are the freshest and most accurate ever.

January has been good to us, so it's time we return the favor. That's why, starting today, we're making SEOmoz PRO membership 100% FREE to try for the first 30 days.

But... That's not all. For the first 10,000 folks who take the free trial, we're entering you to win PRO membership free for life:

If you're already PRO (or sign up before 12am midnight tonight), you're already entered to win. If not, you can try it right now for free, so I'd suggest doing that :-) You can get all the details of the contest here.

The free trial includes every feature inside PRO, including:

#1: Track Campaigns in the PRO Web App

SEOmoz Web App Link Analysis Tab for Search Engine Land's Campaign

The new competitive link analysis tab in the web app

Create a campaign for the sites you care about and every week, the web app tracks:

Keyword rankings for hundreds of keywords on the engine of your choice (including ccTLD extensions like Google.de or Google.com.br)
Up to 10,000+ pages on your site, which it crawls every 7 days to report errors, missed opportunities and friendly notifications (like rel=canonicals or 301 redirects)
Key search traffic metrics (via integration w/ Google Analytics)
Link data for you and up to 3 competitors (as in the screenshot above)
On-page recommendations for any page(s) ranking for a keyword that might have an opportunity to perform better

The web app is still in beta, so new features launch every few weeks and we're always open for feedback about what you want to see included.

#2: Unlimited Access to Open Site Explorer

Our link analysis tool, Open Site Explorer, has become one of the most popular SEO tools on the web and PRO is the only way to get unlimited access to metrics, reports, link lists and CSV exports.

A list of anchor text phrases pointing to searchengineland.com

There have been some great posts on how SEOs use and apply the data in OSE including - An Inside Look at Competitors' Backlinks (from Fabio Ricotta), How We Used Open Site Explorer at Microsoft (from Chris Moore) and HTTP Status Reports w/ OSE, VLookup and Xenu (from Richard Baxter).

#3: Use of the Entire SEOmoz Toolkit

Although we're constantly upgrading and migrating features into the web app, we've still got an impressive collection of dozens of useful tools for SEO professionals and web marketers. PRO gets you the awesome upgrades to the mozBar - our SEO toolbar for Mozilla Firefox and Google Chrome.

Just a few of the SEO tools we provide

And it includes great tools like the new On-Page Optimizer, the powerful Keyword Difficulty Tool, our classic Historical PageRank Tool and many more.

#4: Ask Your Burning Questions to the Q+A Experts

Sometimes you have all the answers, but you still want to double-check. SEOmoz's team of experts has years of consulting experience and we love to share out knowledge and our advice with PRO members.

a very kind tweet from DavidBlg on Twitter

In addition, there's 4 years worth of questions and replies to search through and find an answer instantly.

#5: Exclusive Invites to PRO-only Training Webinars (and the webinar archive)

Every month, we give educational, 90 minute webinars covering topics ranging from The Cutting Edge of Organic Marketing to Local SEO to Advanced, Competitive Link Building.

A slide from December's webinar on Cutting Edge of Organic Marketing

I personally make and deliver many of these, and the feedback is always tremendous. Plus, the slides are always available for download and use, meaning you can re-use my cheesy comics to help present your ideas and plans internally (and educate your team, too).

OK, technically there's lots more, but you've got the idea - PRO membership is definitely worth trying FREE for 30 Days. And, heck, you might win a lifetime of free PRO, just for signing up.

Any questions? Just ask us in the comments!

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Advise the Advisor

Your Daily Snapshot for
Tuesday, February 8, 2011

Advise the Advisor

Advise the Advisor is your direct line to President Obama's senior advisors at the White House. Here's how it works: a member of the President’s senior staff will post a short video to let you know what they are working on at the White House and give you an opportunity to give your advice, feedback and opinions about key issues.

We’ll read through as much of your feedback as possible and post a summary of what you had to say a few days after the video is posted. Senior Advisor to the President David Plouffe is kicking off the series and asking for your feedback on American innovation.

Watch the video and give your feedback.

SEOptimise

How to Avoid Being Labelled as a Content Farm

Posted: 07 Feb 2011 08:45 AM PST

Google’s latest algorithm update has been specifically targeting so-called ‘content farms’. Most people probably still don’t know what a content farm, is while some sites may already be affected negatively by this update.

So today I want to suggest ways to avoid being labelled as a content farm in order to stay afloat on Google.

A content farm is, generally speaking, a site geared towards search engine users. In most cases, it has low quality content based either on automatic recycling (scraping) or low paid labor force. Either way, the content is quite well “optimized” so that it shows up above sites perceived as having a higher quality content.

I don’t want to debate here on whether a content farm is spam or has some value. I want to tell how you can make sure you don’t appear to have a content farm on your website.

One of the most criticized content farms these days is Demand Media’s eHow. While eHow articles are certainly not complete spam, they have several obvious characteristics shared by other content farms that could be used to determine their low quality.

As a (bad) example, I have used three content farms that perform better or worse for the keyphrase [how to celebrate chinese new year] and compared them to the (mostly non-content farm) sites that actually rank for the more competitive [chinese new year] by itself. Then I came up with quite a few characteristics which the content farms have in common which are not shared by the legit sites.

The three content farm examples are:

http://www.ehow.com/how_6172_celebrate-chinese-new.html

at #5 for [how to celebrate chinese new year]

http://www.wikihow.com/Celebrate-Chinese-New-Year

at #3 for [how to celebrate chinese new year]

http://chinesefood.about.com/od/chinesenewyear/a/newyearlegends_2.htm

at #1 for [how to celebrate chinese new year]

What obvious characteristics do they display? They are:

- Keyword optimized

The title tag/headline just focuses on one keyphrase: “How to Celebrate Chinese New Year”

- Repetitive

The eHow article has an enormous keyword density of above 10% for both main keywords “Chinese” and “year”. That’s in fact the only reason actually to measure keyword density – to find out whether you’re spamming already.

- No linking out

in the editorial part, or all external links having been stripped of passing authority by the nofollow attribute. There are no (real) links to sources or other resources.

- Low reading level

Chinese characters or words could be used in such an article, but content farms are too superficial to do that.

- No author name

“By an eHow Contributor”

- Heavy internal linking

There are lots of internal links to only slightly relevant content.

- Redundancy

Lots of similar-sounding articles rather than a focus on one main resource:

See: http://www.ehow.com/chinese-new-year/

- List-only posts

The content farm articles are list-only pieces. They are only overviews, with not enough context or explanation.

- One size fits all

Content farms often deal with all kinds of topics on the same site. The content farm is about anything and everything. It’s random.

Note that some of the mistakes cited above have not been made by all three content farms. Thus about.com and Wikihow rank better than eHow.com. This suggests that even adapting your obvious content farm to Google’s new standards might improve its overall performance in the search results.

Content farms are not all bad, so they won’t be banned on Google as they are on Blekko. This was more of a PR stunt, but I’m sure that you want to avoid being labelled as a content farm anyway.

So you have to attempt to do the exact opposite of what I have summarized above:

- Use natural language

Don’t focus solely on keywords; spice it up with some very specific terms.

- Use synonyms

Don’t repeat the same term or phrase over and over; try to find other similar expressions.

- Link out

Link out to your actual sources and add more external links to resources that offer even deeper insights.

- Write for adults

Don’t write for children and people new to the topic only. Make the article understandable for everybody, but make it interesting for experts as well by going in-depth.

- Be a person

Add a name and profile to the articles you’re the author of.

- Add internal links for users, not search engines

Don’t use automatic keyword-based interlinking programs to your copy. Use internal links wisely. Link to more in-depth knowledge which someone would actually read, not a general article on a slightly related topic that happens to be mentioned.

- Focus on one resource

Don’t add more and more resources on the same particular topic, but optimize one page by adding more resources to it and updating it.

- Add lists

Add lists to articles to make them more readable but don’t write superficial “listicles” consisting only of a list of bullet points.

- Focus

Make a site that focuses on one topic, like ours does on SEO; do not try to cover everything, as you end up covering nothing in depth.

Any other ideas? Have you been affected by the latest anti-content farm update? Have you improved your site’s rankings since?

* Image by benketaro

Seth's Blog : The new craftsmanship

[You're getting this note because you subscribed to Seth Godin's blog.]

The new craftsmanship

There's always been a bright line around the craftsperson, someone who takes real care and produces work for the ages. Everyone else might be a hack, or a factory guy or a suit or a drone, but a craftsperson was someone we could respect.

A craftsman might be a blacksmith or a carpenter, a visual artist or even a dedicated teacher. Someone to look up to.

Perhaps we're entering a new age of craftsmanship, one where we can see craft in the way a new business is devised, a sale is made or a website is coded. A craftsperson might be particularly talented and connected in the way she deals with clients, or be able to meet deadlines with alacrity.

Just because it's not in a crafts fair doesn't mean it didn't demand craft.

• Email to a friend •

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luni, 7 februarie 2011

Mish's Global Economic Trend Analysis

Mish Interview on Spanish Site "Libertad Digital" Regarding the Global Economy
Fed Succeeds in Fostering Massive Speculation in Junk Bonds and Equities
Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

Mish Interview on Spanish Site "Libertad Digital" Regarding the Global Economy

Posted: 07 Feb 2011 08:38 PM PST

In Mid-January I received a request from Angel Martín to do an interview for the Spanish newspaper "Libertad Digital".

Dear Mish,

I am a follower of your blog. I work for the economics section of a Spanish classical liberal online newspaper, LibertadDigital.com, with a strong Austrian flavor in economics. We have published exclusive interviews to people such as Jim Rogers, Marc Faber, Antal Fekete, Robert Higgs, or Gerald O'Driscoll.

We plan to open a new newspaper, called Free Market, and exclusively limited to economic and financial issues. It would be a great honor to have an interview with you in the opening of the website (on your predictions for 2011, your perspective on Spain and the European debt crisis, and so on). What do you think about it?

Thank you very much for your time.
Best regards,

Angel Martin Oro

Interview Questions and Answers

I was happy to oblige "Libertad Digital". Here is the interview in Spanish: "No confíen en gobiernos o bancos centrales: son los culpables de la crisis"

Here is the interview in English.

Q: What is your general prediction for 2011? Will the crisis be over at the end of this year?

A: I covered many specific topics for the US and global markets in my post Ten Economic and Investment Themes for 2011

My general long-term thesis is the US will go in and out of deflation for a number of years just as Japan has done.

Stocks are richly price and historically are poised for no gains for another 10 years. That is not a prediction for 2011 as timing is very difficult. However that equity warning is similar to one I made in 2006-2007.

Q: On Europe, what is your view of the European Bailout Funds? Should sovereign states go bankrupt? How could this be done? Will the European Monetary Union and the Euro survive?

A: The Euro is likely to survive, but I can see things that could cause the member group to shrink. One thing I am certain of is there will be haircuts on sovereign bonds. What cannot be paid back won't. Eventually Ireland and Greece will default.

However, it is important to step back and understand just who is being "bailed out" here. It is certainly not Ireland. It is bondholders of Irish debt that are being bailed out. Those bondholders are UK banks, German banks, French banks, and US banks in that order. The person footing the bill is the average Irish citizen.

Those Irish citizens should not stand for it and they won't. I made my suggestions for the next Irish Parliament in my post Irish Government Collapses, Six Cabinet Members Resign, Election March 11; How To Negotiate Haircuts

Prior to that, I talked about Ireland on numerous occasions. In general, this is how I see the IMF's "Trojan Horse Bailout of Ireland"

That comic is from To Ireland With Love

In that post I noted how Iceland came out of its crisis by forcing haircuts on bondholders. Ireland should do the same.

Q: In the United States, is the banking system healthy now, after the Paulson's Plan and the government interventions? Or do you expect more turbulence and troubles coming from the US banks?

A: The entire global banking system is technically bankrupt. There is $40 trillion in US denominated debt that cannot possibly be paid back. European banks are in no better shape.

That is what the sovereign debt crisis in Europe is all about. Look at Japan. It has a debt-to-GDP ratio of 200%. Yet, Japan's demographics could not be worse. The Japanese people were savers, but the government squandered it all and 100% more in foolish efforts to defeat deflation.

The US is making the same mistake. Bernanke is crowing now, but US unemployment is still near 10% (if you believe the reported numbers). I don't. Unemployment in the US is higher.

Q: What about China and the emerging economies (India and Latin America)? Will they be able to sustain such outstanding growth rates?

China is overheating. It has the world's largest property bubble. I talked about that a number of times recently. Here are a few links.

Shanghai Prepares for Property Tax to Curb 'Speculative' Buying; China Addresses Symptom NOT Problem

"Consensus Nonsense"; Is the Yuan Undervalued? Who Wins a Currency War?

China Secretly Buying US Treasuries Via UK Accounts? Trade Deficit Math; "Hot Money" Math

Q: Many people, since 2008, have feared high inflation as a consequence of the expansionary monetary policy of the FED. However, this has not taken place yet. Why were they wrong? And also, will 2011 be a year of very high inflation as some predict?

Fears of rampant inflation in the US are misguided. Yes, the Fed is "printing" but so is China, the ECB, the UK and for that matter everyone else. China is the real culprit regarding commodity prices and inflation.

It's important to have an understanding of what inflation is. Here is my definition: "Inflation is a net expansion of money supply and credit, with credit marked-to-market".

"Deflation is a net contraction of money supply and credit, with credit marked-to-market".

That last phrase "marked-to-market" explains the US stock market rally nicely. Credit never expanded, but Bernanke reignited the junk bond market and bonds banks were holding went from "priced for bankruptcy" to "good as gold".

This happened even though credit card debt, consumer loans, home equity loans, and consumer debt in general still continue to contract.

This helps explain the recovery in financial assets but not the real economy or jobs. In contrast, prices are soaring in China along with unsustainable levels of credit expansion. Those who focus on prices as well as those who focus solely on money supply both miss the boat.

Greenspan ignored rapidly expanding credit in the housing bubble years. China is doing the same now.

In China, credit is expanding at 35% a year with GDP rising less than a third of that. That is a distinct sign of an overheating economy. India is in the same inflation boat with China.
Australia is dependent on commodity demand from China.

It should be easy to see what happens to Australia when China slows. Notice I said "slows". There is a good chance China crashes. Moreover, Australia faces a double whammy because its property bubble is starting to implode now.

Those paragraphs should explain how interconnected and unbalanced the global economy is.

Q: What is your view on the Spanish economic troubles? As an investor and analyst, would you trust the current Spanish Government?

A: At first glance, Spain's woes appear similar to US and Ireland (housing bubble and property speculation) and dissimilar to Greece. However, all of the countries just mentioned are alike in regards to problems with public unions. In the case of Greece, public unions and unsustainable pension problems are the overriding concern. In other countries it is private sector debt. Thus, all of the countries have the same problems; it's just the order of importance of the problems that differs.

I see no reason to trust any governments or central banks. The Fed took illegal actions and so did the ECB. Jean-Claude Trichet broke every major promise he ever made by cutting interest rates to nothing and by buying sovereign government bonds. Buying bonds was against the Maastricht Treaty. Germany has done things that are arguably against its constitution.

There is even a power struggle at the ECB now as Trichet's term expires. Axel Weber is the leading candidate but he was against Trichet's bond purchases. I suspect they may declare an emergency and keep Trichet on beyond his term.

Greece lied to the EU to gain admission. Japan's policies over the last two years have been a disaster. Are we supposed to believe Spain? Italy? Any central bank? Why?

Q: Since the minimums of March 2009, the US and European stock markets have risen more than 60 %. What would you expect for the foreseeable future?

A: I have a saying: "They don't know and neither do I". However, as I stated above, equities are hugely overpriced here. Expect Long-term gains to be minimum and most likely negative.

Q: Finally, what are your recommendations for policy-makers to get out of the financial and debt crisis as soon and healthy as possible? And even more importantly, what must be done to avoid future crisis like this one?

Everyone likes to blame lack of regulation. However, I like to point out that regulation created Fannie Mae, regulation empowered the big three rating agencies, regulation gave tax breaks to homebuilders, Greenspan openly endorsed derivatives, etc. I can go on for hours regarding the failure "of" regulation.

In a free market, there would have been no Fannie or Freddie. Nor would there be 30 year mortgages. The first thing a decent regulator would do is shut Fannie and Freddie down. Instead we just guaranteed their debt.

If you want to see just how screwed up the credit rating agencies in the US are, please read Time To Break Up The Credit Rating Cartel

That is another clear case of government screwing up a perfectly workable system.

I am not against all regulation, however. Regulation that protects property rights and prevents fraud is fine. Glass-Steagall should not have been revoked. It provides a wall to prevent some forms of fraud. However people use Glass-Steagall as a scapegoat. It would not have stopped this crisis at all.

Finally, it is important to understand the root cause of this mess: Fractional reserve lending and the Fed (and central bankers in general). Note too, that it was regulation (legislation) that created the Fed. Together the Fed and fractional reserve lending are the driving forces that allow unmitigated creation of debt. They are all guilty. However, the Fed and the People's Bank of China are the worst.

The result of central banker sponsorship of credit is bigger boom and bust cycles of increasing amplitude. Unfortunately, there will be another crash as the global imbalances and root causes of this mess have not been addressed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Fed Succeeds in Fostering Massive Speculation in Junk Bonds and Equities

Posted: 07 Feb 2011 10:45 AM PST

Another day, another market high. The longer this goes on, the bigger the next crash. In the meantime the Fed is openly bragging about its efforts even though Bernanke Warns of "Rapid and Painful Response to a Looming Fiscal Crisis".

Bloomberg reports Fed Spends 40% on Benchmarks as Newest Prove Cheapest

The Federal Reserve's Treasury purchases already have succeeded in driving investors to junk bonds and stocks. Now, policy makers are focusing on benchmark government securities, helping contain rising yields that set rates on everything from corporate debt to mortgages.

It pains me to see such inaccurately worded statements. No one can be pushed into stocks, in aggregate. Except for new stock issuance, dept offerings, IPOs etc., for every buyer there is a seller, and at the end of the day sideline cash is the same.

Moreover, this has been a futures-driven rally. Volume of actual shares trading hands has been low. However, the Fed has, for the time being, succeeded in reigniting a massive Greater Fool's Game in terms of what speculators at the margin are willing to pay for financial assets.

Bloomberg Continues:

More than 40 percent of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20 percent in December and 15 percent in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers' holdings of Treasuries to the lowest since November 2009.

"They're getting all the bang for their buck that they can" by purchasing so-called on-the-run bonds, said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, which oversees $22 billion. "When you're the largest buyer out there, when you replace China in terms of the size of your holdings of Treasury securities, that will happen."

Bang for the Buck?

In terms of treasury and mortgage yields, the Fed has not gotten any bank for the buck. Yields are way higher except at the very short end of the treasury curve.

However, the Fed has succeeded in creating speculative demand for junk bonds. That in turn has helped lift the stock market.

Quantitative easing has boosted demand for Treasuries as President Barack Obama's budget deficits exceed $1 trillion, adding to the nation's $8.96 trillion in marketable debt. Investors bid $3.04 for each dollar of bonds sold in the government's $178 billion of auctions last month, the most since September, according to data compiled by Bloomberg.

Understanding Demand

It is hard to say there is huge "demand" for treasuries when the Fed is buying them, others are unloading them, and yields are soaring on the high end.

The next Bloomberg quote is correct.

Since Nov. 3, when Fed Chairman Ben S. Bernanke announced the plan to buy government debt to keep the economy from falling into deflation, 10-year yields have increased about one percentage point as expectations for inflation rose. The purchases and signs that the economy is recovering have reduced demand for the safety of government debt in favor of riskier assets and the Standard & Poor's 500 Index has risen 9.4 percent.

Speculative-grade corporate bond yields fell to 4.68 percentage points, or 468 basis points, more than Treasuries last week, the least since November 2007 and down from 6.22 percentage points in November, according to Bank of America Merrill Lynch index data. Debt rated lower than Baa3 by Moody's Investors Service or less than BBB- by Standard & Poor's is below investment grade, or junk.

Fed's Willingness to Foster Speculation

This is what the recovery has come to: the Fed's willingness to foster speculation in financial assets to the point of creating more financial bubbles.

Once again, it will not be the banks that get hurt by the Fed's corrupt policies but those on fixed income and those chasing junk bonds and equities at bubble valuations.

For details, please see

Hello Ben Bernanke, Meet "Stephanie"

Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

In response to my last post, someone commented "The biggest mistake one can make is to expect federal stimulus will end."

Such thinking is common. It is also wrong.

This is the correct way of looking at things: "The biggest mistake one can make is to think it will matter if federal stimulus doesn't end."

Valuations eventually matter, and the market will at some point take matters into its own hands regardless of what the Fed does. Europe (especially Greece, Ireland, and Iceland) provides painful examples.

Rapid and Painful Response to a Looming Fiscal Crisis

Quoting the economist Herbert Stein, Bernanke said: "If something cannot go on forever, it will stop. The federal government must stabilize its budget. The question is whether these adjustments will take place through a process that weighs priorities and gives people adequate time to adjust, or whether there will be a rapid and painful response to a looming or actual fiscal crisis."

The longer the Fed pursues these corrupt policies while egging on Congress to do the same, the bigger the financial bubbles, and the bigger the resultant crash. That is what happened in 2008 and it will happen again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

Posted: 07 Feb 2011 01:25 AM PST

Market cheerleaders keep ratcheting up expected earnings, failing to note that much of the recent earnings growth is simply not sustainable.

Reasons for Unsustainable Earnings Growth

Much of the recent earnings growth is directly related to federal stimulus that will eventually end.
Much of the earnings in the financial sector are a mirage, based on assets not marked-to-market and insufficient loan loss reserves. The Fed and the FASB have repeatedly postponed rules changes for the benefit of banks and other financial institutions.
Earnings in both the financial and nonfinancial sectors have margins outside historical norms, based on very low headcounts and outsourcing.

Nonetheless, let's ignore the above factors and assume earnings will keep rising. Does that mean the stock market will go up, or is even likely to go up on a sustainable basis?

Stock Market Cycles and PE Ratios

Crestmont provides stock market returns and PE Ratios, for every year going forward, from every year since 1900.

Nominal Returns (not inflation adjusted), including dividends (reinvested), transaction costs, and taxes paid: S&P 500 Nominal Returns + Dividends
Nominal Returns (not inflation adjusted), without dividends, transaction costs, or taxes: S&P 500 Nominal Returns
Real Returns (inflation adjusted), including dividends (reinvested), transaction costs, and taxes paid: S&P 500 Real Returns Including Dividends

PEs in the matrix tables are Case-Shiller normalized PEs.

The matrix tables listed above are for taxable accounts. Crestmont also provides matrix tables for tax-exempt accounts.

The concept may be hard to visualize until you see it, but as word of warning I have a 24 inch monitor and the matrix tables will not come close to fitting on my screen. To read the text and numbers in the PDFs, you will need to enlarge the size making it impossible to see the entire table at once.

Nonetheless, please open up one of the above tables to get an idea of their size. The diagonal black line running through each table is a 20 year-line.

Essential Ideas

In spite of what efficient market theorists say, for a period of at least 20 years, it very much matters whether the starting valuation (PE) is high or low when one starts to invest.
However, in any given year (or even for several years), stock market returns may do random things. In other words, just because a market is richly valued does not mean it cannot get more so. Likewise, just because a market is cheaply valued, does not mean it cannot get cheaper.
As a result of the preceding point, many think that returns are random. While that may be true in a given year, over a sufficient period of time, expected future returns are anything but random.
The stock market fluctuates over long periods of time, between low and high PE valuations. Those cycles can last 20 years, and in that timeframe, people are apt to forget or ignore long-term cycles of PE expansion and PE compression.
The bulk of stock market gains frequently come from PE expansion, not from improved earnings.
It is important to know where in the cycle one is (whether PEs are in a state of expansion or contraction).

It is invalid to exclude dividends, so I used the matrix (nominal returns + dividend) as the starting point for the following tables and analysis.

The table below shows a sampling of years (some high valuation years and some low) along with annualized returns for two decades.

Annualized Rates of Return for Select Years

Click on any table to see a sharper image

Note how much the starting PE valuation matters. Someone who started investing in 1929 received an annualized rate-of-return of 0% for two full decades, even if they religiously reinvested dividends every year.

However, someone investing in 1982 received an excellent annualized rate-of-return for two full decades (12% for the first decade and 9% annualized for 20 years).

Note year 2000. Starting valuations were the highest in history. It should not have been a surprise to discover that 10 years later, the annualized rate-of-return was -2%.

Bear in mind, the Case-Shiller normalized PE for the year ending 2010 is 23. Does that bode well for the next decade?

Of course no one knows what this year or next year will bring.

Take a look at 1996 in the above table. In spite of several years of huge stock market gains, the annualized rate-of-return to date sits at 3.

Cycles of PE Compression and Expansion

Over long periods of time PE ratios tend to compress and expand. Unless "it's different this time", history says that we are in a secular downtrend in PEs. From 1983 until 2000, investors had the tailwinds PE expansion at their back. Since 2000, PEs fluctuated but the stock market never returned to valuations that typically mark a bear market bottom.

Moreover, demographically speaking, the current decade not only starts with very rich valuations, but also comes at a time when peak earnings of boomers have passed. Those boomers are now heading into retirement and will need to draw down savings, not accumulate large houses and more toys.

Of course, the market can of course do anything this year (or the next few years), but history strongly suggests that stock market returns for the next 10 years will be lean years, perhaps negative years.

Annualized Rates-of-Return Starting PE Above 21

The following table shows annualized rates-of-return for the current year, the 10th year, and the 20th year for each year in which the PE started at 21 or higher.

Annualized Rates of Return with Starting PE 21 or Greater
Year	PE	AR 1	AR 10	AR 20
1901	22.7	9	4	3
1902	22.0	-12	4	3
1928	21.3	33	-2	2
1929	27.6	-16	-4	0
1930	21.5	-30	-3	1
1964	22.6	7	1	4
1965	23.3	-3	0	5
1966	21.3	8	2	6
1967	21.6	7	1	7
1968	21.5	0	1	6
1995	22.7	21	7	?
1997	31.0	19	4	?
1998	36.0	18	1	?
1999	42.1	4	-1	?
2000	41.7	-17	?	?
2001	32.1	-16	?	?
2002	25.9	-2	?	?
2003	24.1	17	?	?
2004	26.4	7	?	?
2005	26.0	9	?	?
2006	26.0	13	?	?
2007	26.8	-16	?	?
2010	23.0	?	?	?

Variance over Time

The first year rate-of-return ranges from -30 to +33.
The annualized rate-of-return for the first decade ranges from -4 to +7.
The median rate-of-return for the first decade is +1.

That median rate of return going forward will be influenced in an unknown but likely negative fashion from the current starting point and high PE valuations for the years that have yet to be determined.

Annualized Rates-of-Return Starting PE Less Than 13

The following table shows annualized rates-of-return for the current year, the 10th year, and the 20th year for each year in which the PE started at 13 or lower.

Annualized Rates of Return with Starting PE 13 or Less
Year	PE	AR 1	AR 10	AR 20
1913	11.9	-3	4	4
1914	11.1	7	5	5
1915	11.5	18	7	5
1916	12.0	-3	7	6
1917	8.8	-7	10	6
1918	6.4	20	14	7
1919	6.5	-5	15	5
1920	5.3	-11	13	5
1921	5.4	26	10	5
1922	7.5	6	1	3
1923	7.9	9	4	5
1924	8.4	26	4	5
1925	10.1	16	2	4
1926	11.7	24	5	4
1932	8.1	32	5	9
1933	11.1	13	5	8
1934	12.2	9	5	8
1942	9.2	34	13	11
1943	11.0	10	10	10
1944	11.3	21	11	10
1947	11.2	5	12	10
1948	10.7	2	12	10
1949	9.9	24	5	4
1950	11.2	24	15	10
1951	12.0	23	12	9
1953	12.0	21	10	9
1974	10.9	5	8	9
1975	10.2	19	9	10
1976	11.5	-2	10	10
1977	10.4	0	12	11
1978	9.4	9	11	12
1979	8.9	16	12	12
1980	8.8	10	10	12
1981	8.5	-5	11	10
1982	7.3	33	12	9
1983	9.6	1	10	8
1984	9.4	17	10	9
1985	10.7	25	10	8

Variance over Time

The first year rate-of-return ranges from -11 to +34.
The annualized rate-of-return for the first decade ranges from +4 to +15.
The median rate-of-return for the first decade is +10.

Valuations Matter in the Long Run

Please consider the following snip is from the Sitka Pacific 2010 Annual Review.

Depending on how closely you follow the financial markets, it may be surprising to learn that profits are at new highs even though stock prices, as measured by the S&P 500, are still 20% below their highs. In other words, new highs in profits haven't translated into new highs in stock prices. If we go back even further, after-tax corporate profits soared 175% from the first quarter of 2000 through the second quarter of 2010. However, during that same time, stock prices fell roughly 15%.

In fact, there is nothing novel about a period of falling stock prices and rising earnings. Since the end of World War II, corporate profits have more or less trended continuously higher, with only minor interruptions during recessions. However, stock prices have gone through long periods in which they trended sideways or down, even though earnings continued to rise. From 1966 to 1980 after-tax corporate earnings rose 244%, but the price of the S&P 500 rose only 18% during that period. In contrast, earnings grew only 112% during the next 14 years from 1980 to 1994, but the S&P 500 rose 327% over that time.

Although very short-term returns are influenced by corporate earnings, beyond the short-term it is not trends in earnings but valuations and trends in valuations that determine stock market returns. In short, when valuations are low and increasing, long-term stock market returns are high. When valuations are high and decreasing, long-term stock market returns are low—even negative at times of peak valuations.

There are many ways to measure the valuation of the stock market, but relatively few ways that have value when they are applied across many types of bull and bear markets. Over the past year we have focused on the price-to-earnings measure popularized by economist Robert Shiller, which uses a 10-year average of earnings. Since earnings have at times fluctuated wildly in the short run, a 10-year average captures a much more reliable snapshot of the long-term profitability of public companies.

As you probably know, the stock market peak 10 years ago was the largest bubble in this country's history. Previous bull markets ended with a 10-year P/E ratio in the 23–33 range, with the high point being the peak in 1929 at 33, just prior to the Great Depression. However, the bull market that ended in 2000 recorded a peak 10-year P/E ratio of 44, a valuation that was 33% higher than in 1929.

To really understand on a practical level how high valuations were at the peak in 2000, it helps to look at market returns from different valuation levels before the bubble in the 1990s. The chart below has a blue dot for every month from 1881 through 1990. The horizontal axis at the bottom shows the 10-year P/E of the S&P Composite during that month, and the vertical axis to the left shows the subsequent 20-year inflation adjusted return of the market.

Click on chart to see a sharper image

Prior to 1990, each month in which the 10-year P/E was under 10 (to the left of the green line) had a positive inflation-adjusted return over the next 20 years. That means that at those low valuations, you could confidently buy-and-hold stocks for the long term and know that the market would beat inflation over time—often by a significant amount.

However, for 10-year P/E ratios above 22 (to the right of the red line), there is not a single month between 1881 and 1990 in which the market had a positive inflation-adjusted return in the subsequent 20 years. And for P/E ratios above 25, past returns have approached −10% annualized, a rate of return that gives an 88% inflation-adjusted loss over 20 years.

Since 1995, the market had been above 10-year P/E valuations of 22 for 13 consecutive years, until July 2008. After a brief decline in 2009 into valuations that would be considered "average" historically, the market ended 2010 with a 10-year P/E of 23. Although this is about half of the peak valuation in 2000, it is still above valuation levels that have produced positive inflation-adjusted returns in the past.

With a peak 10-year P/E ratio of 44 in 2000, it is no mystery why returns over the past decade have been poor. On a consumer price index adjusted basis, the S&P 500 ended last year 31% below its 2000 peak, for an annualized return of −3%. Although we'll have to wait another 10 years to see the S&P 500's 20-year inflation-adjusted return from its record P/E of 44, it is almost certain to be a negative number, and probably a large negative number.

Notes:

The above chart was produced from data from Robert Shiller: Real Returns (inflation adjusted), including dividends (reinvested).
The PE of 44 mentioned above is a midyear high and thus differs slightly from the tables I created.
To reiterate the key take-away from the above chart: 20-year real returns are negative for any starting 10-year PE over 22. At the end of 2010, the 10-year PE was 23.

Swimming Upstream

History shows that stock market valuations range from extremely cheap (10-year normalized PEs near 10 to extremely overvalued, 10-year normalized PEs of 44). Peak to trough changes in valuation occur over long periods as the market goes from one extreme to another.

Here is another chart looks at things from the point of view of PE compression (stocks moving from extremely overvalued conditions to extremely undervalued conditions).

Bear Market in PEs

Click on chart to see a sharper image

The 10-Year PE declined from 44 in 2000 (the richest valuation ever), to a current valuation of 23. That is about a 47% decline in the PE ratio, yet as discussed above, a PE of 23 is a very rich valuation.

When PE valuations are declining, and history suggests we are nowhere near the bottom of the PE compression cycle, generating positive returns in the stock market is much like trying to swim upstream.

Even if earnings increase (a dubious point to start with as noted in the beginning of this article), prices will likely be dragged lower by the weight of declining valuations.

Where to From Here?

Hopefully you now realize that expectations of rising earnings being tremendous for the stock market is a fallacious construct. Such talk ignores high valuations, the long-term trend in valuations, and demographics. Moreover, it's debatable if earnings are likely to rise in the first place.

With that in mind, people chasing this market as well as those fully invested do not realize how lucky they have been.

Last week I received an email from someone who fears being out the market. I heard the same thing in 2007. I suggest people ought to fear being fully invested with no hedges. The same applies to pension funds. Note that most pension plan assumptions are on the order of 8% annualized rates-of return, and pension funds are typically 100% invested, 100% of the time.

However, I do not know where the market is headed this year, nor does anyone else. 2011 may turn out like 1998 or it may turn out like 2008.

Either way, history strongly suggests that 10-year and 20-year returns looking ahead are likely to be low, if not negative.

Investing, like life, is a marathon not a sprint. Sometimes the prudent thing to do is sit on the sidelines waiting for better opportunities, even if it means enduring cat-calls and taunts from those who do not have any understanding of risk or history.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

marți, 8 februarie 2011

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