5 Things That Should Spook Investors

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In the spirit of All Hallows Eve, I've compiled a list of five things that should have you spooked -- they certainly spook me.

1.) Unemployment: It isn't a problem
There is a quote that is often attributed (falsely, in all likelihood) to The New Yorker journalist Pauline Kael regarding Nixon's 1972 election victory. She "couldn't believe that Nixon had won" as no one she knew had voted for him. (Despite this, Nixon managed to carry all but one state.)

If you've got a college degree, unemployment isn't a problem for you (statistically, that is; I don't know everyone's personal circumstances). Indeed, the rate among you and me and your peers is only 4.2%. It's hard to imagine what a 9.2% unemployment "looks" like, never mind 14% -- the rate among those without a high school diploma. I expect it puts tremendous strain on families and communities -- it's terrible for the social fabric.

Worse still, nearly half of those who are unemployed have been so for over six months. At a time when U.S. workers need to remain competitive, that's a very unwelcome phenomenon.

2.) European Crisis: The main show is just getting under way
Huzzah, boys! Those Johnny Foreigners in Greece have fixed their debt problem -- we can all get back to tennis and Pimm's. Or not.

It should be clear by now that Greece is merely a sideshow at the Euro-circus. No one is quite sure who the ringmaster will be on any given night -- it's a rotating position that is alternatively filled in no seeming order by German Chancellor Angela Merkel (on occasion, she shares the role with French President Nicolas Sarkozy), the European Central Bank or the IMF. On certain nights, representatives from smaller, fiscally righteous Northern European countries insist on grabbing the ringmaster spot.

Tonight's main-ring performance has Prime Minister Silvio Berlusconi chained to his position at the head of the Italian government; I suspect it's a disappearing act. Expect more acts to follow after Berlusconi.

3.) U.S. Elections: It's only going to get noisier
Speaking of circuses, our politicians will soon be entirely focused on the most important issue they face: Getting elected. Expect from the candidates a constant stream of posturing, distortion, economic fantasy, etc. Although there are certainly some comedic aspects to elections, they come at a terrible cost, as they preclude any serious discussion of real problems. As the election campaigns ramp up, so, too, do the problems politicians don't want to tackle.

4.) Stock Prices: Back to the 1960s
The P/E10, a price-to-earnings ratio that uses average earnings over the prior 10-year period, has gained some recognition over the last several years. That's entirely positive since it's one of the few reliable indicators of long-term value. Unfortunately, it's flashing red right now: Based on Friday's closing price of 1,285.09, the S&P 500 index (Index: ^GSPC) has a P/E10 equal to 21.6 By comparison with the indicator's long-term average, that suggests stocks are roughly 30% overvalued.

That might not sound like much, but, prior to 1995, you have to go back to the late 1960s to find P/E10 values that were consistently higher than today's levels. What happened next? The 1960s ended with the S&P 500 at 92.06. A decade later, it was above that, at 107.94. That's an annualized return of less than 2% (it wasn't straight-line growth, though; investors suffered through a brutal bear market in 1973-74).

Unfortunately, the 1970s were also a period of high inflation. On an inflation-adjusted basis, investors lost 5.4% on an annualized basis. Those numbers don't include dividends, but I think they give some idea of the savage beating the market endured.

I'm not suggesting that we'll experience exactly the same thing, of course, but it's a cautionary example; overpaying for stocks is unlikely to produce a good result under any circumstances.

5.) Harold and Kumar: Is a third installment really necessary?
Just four days from now, the third movie in the "Harold and Kumar" franchise is released -- in 3-D! It's not only investors who ought to fear that -- everyone should be concerned. Who's greenlighting this tosh?

What's got you spooked this season? Let us know in the comments section below.

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