“In our opinion, Canadian assets (bonds and equities) punch well above their weight and, as we believe Canadian equities remain underweight in global portfolios, global investors should heighten their focus north of the U.S. border,” he said. “We would also point out that Canadian domestic investors should temper their international endeavours and stick to a higher domestic bias in their portfolios.”
Posts Tagged ‘Valuations’
Q4 Earnings in Perspective
Tuesday, February 23rd, 2010
With most of the S&P 500 companies having reported financial results for Q4 2009, the chart below, courtesy of The Chart Store (via The Big Picture), shows how S&P 500 earnings declined by 92% from their Q3 2007 peak to the low of Q1 last year, and then subsequently rebounded by more than 600%. However, as shown by various measures of historical and prospective price/earnings multiples (see text in blue), the S&P 500 is not in cheap territory. Justifying current price levels will require stronger earnings growth than currently estimated by Standard & Poor’s.
Click the image below for a larger graph.
Source: The Chart Store (via The Big Picture), February 22, 2010.
Still on the earnings front, Bespoke highlights the final earnings and revenue beat rate for all US companies that reported this earnings season. “For the third quarter in a row, 68% of companies beat earnings estimates. The revenue beat rate was really strong this quarter at 70% - the highest reading since Q4 ‘04. Does this put the ’strong bottom line, but weak top line’ bearish argument to rest?” argued the report. Although these are good readings, more work is necessary to take stock prices higher without stretching valuations even more.
Source: Bespoke, February 19, 2010.
Tags: Amp, Big Picture, Bottom Line, Earnings Estimates, Earnings Growth, Earnings Season, February 22, Graph, Measures, Perspective, Price Earnings, Q3 2007, Q4 Earnings, Stock Prices, Valuations
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Deleveraging Through… Deflation? Has Ending QE Been The Ulterior Motive All Along? Andrew Smithers Thinks So
Wednesday, February 17th, 2010
This article is a guest contribution by Tyler Durden, ZeroHedge.com.
Confused by recent proclamations by Hoenig, Plosser, and other unnamed Fed members, who want an end to QE? Even more confused that this could actually happen? Andrew Smithers, former head of SG Warburg asset management before starting Smithers & Co., may have some iconoclastic insight into this development, which at its core is fundamentally deflationary, and a stark refutation to everything the Fed (presumably) stands for. A paradox? Smithers breaks the “Econ 101″ mold in this fascinating interview with Kate Welling. The most provocative perspective: Smithers goes against the grain of every economic textbook which says the only way to inflate debt away (deleverage) is by, well, inflation. Instead, what Smithers suggests is a slow, gradual process of deflation, in which incremental cash flow is converted into equity, and pushes debt out. Indeed, this is precisely what we have been seeing especially in the REIT sector where numerous names, courtesy of BofA, have raised equity on the basis of imaginary valuations, which may just become a self-fulfilling prophecy if enough people buy into them, and by throwing cash at these companies, allow them to lower their debt-to-capitalization ratios. Then again, with another half a trillion in equity needed for the REIT sector to fund itself out of a mid-term funding crisis, that’s purely a pipe dream. However the bigger picture of the Smithers perspective is that this deflationary approach is exactly what the Fed may be engaged in. By distracting the increasingly more vocal inflation hawks, who anticipate that inflation is and always will be the driving motive of the Chairman, Bernanke could very well be pursuing just the opposite: a slow-bleeding deflationary trend.
The clincher from the interview which took place in November 2009:
I think that you will find that several economists over the next few weeks and months will be expressing concern about quantitative easing…Because the most damaging thing that could happen to the world economy would be a third asset bubble collapse…Probably the best way of ensuring that is by making sure that asset prices simply don’t go up much more. What we need over time is a rebalancing of the economy in which we get deleveraging going on. And there are only two ways to delever: One is by generating cash flow and the other is by replacing debt with equity, either through bankruptcy, via the banking system, or directly, through the corporate sector. Now if you have deleveraging as the main driving force, you can only achieve that goal, really, if you switch the debt from the private sector to the public sector. Otherwise, you get the attempt for everybody to save more and everybody to invest less and you fall clearly into one of those problems that Keynes identified, where the adjustment process, rational on the individual level, just digs the economy, as a whole, deeper into a recession… [For this plan to be effective] we now want a period of slow contained growth, in which we can get a lot of deleveraging going on - without it having to burden the public sector debt by too much. For that, you need time and helpful markets. The sort of ideal market is one that down a bit - that has periodic bounces. So people can take advantage of the bounces to issue a great deal of equity, which also, of course means that the market is more likely to go down thereafter?
Is the entire equity market merely a plaything in one giant Fed-controlled deleveraging ploy? Are equity prices indicative of anything besides what the Fed wants them to be? Some day, when all the Fed’s secrets are revealed, we will know for sure. For now, all we can do, is to continue speculating and pointing out the obvious and ever more increasing irregularities in what was formerly at least passable for an efficient equity market.
Full Smithers interview.
Source: ZeroHedge.com, February 17,2010
Tags: Andrew Smithers, Asset Management, Bofa, Capitalization, Clincher, Deflation, Economists, Hawks, Incremental Cash Flow, inflation, Pipe Dream, Proclamations, Provocative Perspective, Qe, Refutation, Self Fulfilling Prophecy, Sg Warburg, Trillion, Tyler Durden, Ulterior Motive, Valuations
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David Rosenberg: Update and 5 Ways to Protect a Portfolio in a Deflationary Backdrop
Tuesday, February 9th, 2010
Below is an excerpt from Breakfast with Dave, February 9, 2010.
“We highlighted yesterday what this means for asset classes and sectors: If past is prescient, it would mean a test of 900 on the S&P 500 with defensive “yield” sectors taking over leadership (utilities, staples, health care — in fact, biotechs have held in very nicely during this recent market selloff). Bonds outperform stocks (with the Treasury market undergoing a bull-steepener — though see below why a bond rally may be led by the longer end of the curve this time around). Volatility increases substantially. Credit spreads widen and commodities get crushed. This is a time for conservative investing with cash on hand to be put to work once better valuations emerge — we are not quite there yet, in our view.
“It always pays to look and see how the market is positioned — this would have helped a lot when the appetite for risk peaked in late 2007 and reappeared in early 2009. So, we look to the Commitment of Traders report that is published every week and look at the “net” long or short position across the various asset classes (futures and options), particular among the ‘non commercial’ accounts, which is a proxy for the ’speculators’ or momentum investors.
We found that even after the move towards risk aversion and defensive positioning in recent weeks, there may be more to go. The VIX still has a net short position of 2,395 contracts. There are 9,225 net long Dow contracts and as far as the S&P 500 is concerned, speculators are still net long 99,675 contracts. The Australian dollar still commands a net long position of 33,524 contracts; and 17,209 net long contracts out there for the Canadian dollar.
There are 90,709 net short contracts with respect to the 10-year Treasury note, but 173,637 net long positions for the 2-year Treasury note (this would actually augur then for a bull flattener if these shorts on the 10-year not close out). The long bond is still net short by 92,358 contracts — again, if these shorts are covered then we could get one humdinger of a rally at the back end of the Treasury curve.
In the commodity space, only natural gas has a net short position (81,010 contracts) – there are 160,232 net long crude oil contracts, 222,282 net long gold contracts and 18,069 net longs on copper. Invest accordingly.
All we can say is that here we are with a 0% policy rate, a $2.2 trillion Fed balance sheet and a massive 10.5% deficit-to-GDP ratio and the strong undertow of deflation has not gone away, and governments have few, if any, bullets left in the chamber. We have industrial metals prices coming under downward pressure, price wars in the telecom sphere, and of course, ever since the Department of Agriculture told us last month that this year will provide a bumper crop of farm products, we have seen the likes of corn prices plunge 16% and soybeans by 7% (see page C1 of the WSJ for more). Below we list how to position the portfolio for a deflationary backdrop.”
FIVE WAYS TO PROTECT A PORTFOLIO IN A DEFLATIONARY BACKDROP
- A focus on safe yield, wherever you can get it. High-quality corporates (non-cyclical, high cash reserves, minimal refinancing needs)
- Equities: focus on reliable dividend growth/yield; preferred shares (”income” orientation)
- Whether it be credit or equities, focus on companies with low debt/equity ratios and high liquid asset ratios – balance sheet quality is even more important than usual. Avoid highly leveraged companies at all costs.
- Ultra-selectivity with regard to financials. Same for retailing.
- Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care).
Tags: Asset Classes, Australian Dollar, Biotechs, Canada, Canadian Dollar, Commercial Accounts, Commitment Of Traders, Commitment Of Traders Report, Commodities, David Rosenberg, Futures And Options, Gold, Momentum Investors, Move Towards, oil, Risk Aversion, Selloff, Short Position, Speculators, Staples, Treasury Market, Valuations, Vix, What This Means, Year Treasury Note
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Earnings into Focus
Friday, January 15th, 2010
As the US Q4 earnings reporting season kicks off, not only growth will be closely monitored but also the quality of earnings. These aspects will be very strongly on my radar screen over the next few weeks as I believe the intermediate trend of the stock market could take its cue from the state of corporate America.
This brings me to the topic of valuations (at 06:00 in the morning in the transit area of Munich airport!). Based on operating earnings (i.e. stripping out everything that is bad), the historical price/earnings (PE) multiple of the S&P 500 is 21.10; using “as reported” (GAAP) earnings the figure is a higher 25.7, but down from the 80+ valuations that characterized the previous few quarters. Getting past the loss-making fourth quarter of 2008 and calculating prospective multiples through December 31, 2010 reduce the valuations to 15.3 and 25.2 respectively - still hardly the type of valuations that will inspire one to be a buyer across the board. (The earnings estimates are courtesy of Standard & Poor’s.)
Another way of looking at valuation levels, and cutting through the uncertainty of having to forecast earnings, is by means of Robert Shiller’s cyclically adjusted price-earnings ratio (CAPE), effectively muting the impact of the business cycle by averaging ten years of earnings. Using rolling ten-year reported earnings, my research (based on Shiller’s methodology, but including some refinements) shows the “normalized” price-earnings ratio of the S&P 500 Index is currently 21.2. This compares with a long-term average of 16.4 and implies an overvaluation of 29.3%. The graph below show data since 1950, but the actual calculations date back to 1871.
Albert Andrews, strategist of Société Générale, provides an interesting graph showing the run-up in the US forward PE has not been accompanied by higher expectations of long-term earnings growth. “This means the equity market is far more reliant on the expectations for strong 2010 growth being fulfilled, said Andrews.
Source: Société Générale - Global Strategy Weekly, January 11, 2010.
I repeat my conclusion of Sunday’s “Words” from the Wise” review: “It goes without saying that the strong rally since March is bound to be followed by a correction at some stage. But rather than pre-empting (and more often than not getting it wrong as a result of short-term noise), I will be guided by the longer-term charts and the yield curve to identify a major top. Meanwhile, I am watching valuations carefully, and specifically how the Q4 earnings reports stack up. Although I am treading with caution after the 75% rally in the mature markets and 109% in emerging markets, I am not ignoring good old stock picking, and specifically those companies with strong balance sheets that will be growing their dividends over time with a reasonable degree of certainty.”
Tags: Business Cycle, Corporate America, Earnings Estimates, Earnings Growth, Emerging Markets, Fourth Quarter, Gaap, Intermediate Trend, Munich Airport, Price Earnings Ratio, Quality Of Earnings, Radar Screen, Reporting Season, Robert Shiller, Societe Generale, Stock Market, Strategist, Term Earnings, Transit Area, Valuation Levels, Valuations
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The Power of Conventional Wisdom
Thursday, December 31st, 2009
This article is a guest contribution by James Kwak, from Baseline Scenario.
The week between Christmas and New Year’s is probably a good time to throw out half-baked ideas on topics I don’t know much about.
First, there’s been a lot of talk about the “lost decade” for stocks. The S&P 500 is below where it was a decade ago. Dividend yields bring you back up to break-even (the Vanguard Total Stock Market Index Fund had average annual returns of 0.18% for the ten years through the end of November, and that’s after about 0.1% in expenses), but inflation sets you back a couple of percentage points per year. (Vanguard’s S&P 500 index fund, however, was negative over those ten years.) James Hamilton, drawing on data from Robert Shiller, has some thoughts on why the stock market did badly; the fundamentals were so-so, but the big factor was that valuations were at their historical peak at the beginning of the decade.
For me, the worrying thing about investing in stocks is not specifically the high price-earnings ratio. It’s the fact that in the 1990s, everyone started saying that stocks were the best long-term investment, because “over any thirty-year period ever stocks do better than any other asset class.” That’s not a direct quote, but I’m sure you can find hundreds that are virtually the same. There are two problems with this statement. The first is that it’s assuming the future will be like the past. But the bigger problem is this: if everyone thinks that X is the best long-term investment, then it probably isn’t, in part because enthusiasm about X will drive the price of it up. I believe people were saying roughly the opposite in the late 1970s, and look what happened in the next twenty years.
That said, I’m no investment genius, and I have a fair proportion of my money in equity index or near-index funds. But the general point is that when everyone agrees on an investment strategy, they are probably wrong.*
Second, there’s been a lot of China boosterism in the past year or so, as the Chinese economy has returned to growth and its stock market has soared. The Times had an article today on the topic. I’m far from an expert here, but wasn’t the government basically ordering state-owned banks to lend money cheaply and without asking too many questions? Aren’t Chinese economic statistics so bad that economists use electricity consumption as a proxy for GDP? Haven’t we seen this movie before all over emerging markets around the world?
I think some of the U.S. press coverage of China reflects our pessimism about ourselves; in that sense, it reminds me of the idolization of Japan that took place in the 1980s. Of course, there are huge differences. The Chinese economy has nowhere to go but up, and with over 1.3 billion people its economy will surpass ours in gross output in my lifetime. (On a per capita basis, though, I don’t think that will happen in my daughter’s lifetime, even if there is a Chinese immersion charter school down the road here in Western Massachusetts.) But just as the United States is not on the brink of world-historical disaster, so everything is not perfect in China.
* What’s the right grammar here? I know “everyone” is singular, but are you really supposed to say “when everybody agrees on an investment strategy, he is probably wrong”?
James Kwak is a former McKinsey consultant, a co-founder of successful software company, and currently a student at the Yale Law School. He is not, never has been, and never will be a member of the Yale Law Journal. However, on December 11, 2009, he was named Grand Heresiarch of the Ancient, Hermetic, and Occult Order of the Shrill by Brad DeLong. He is a co-founder of The Baseline Scenario.
Tags: asset class, Baseline Scenario, China, Conventional Wisdom, Dividend Yields, Emerging Markets, Equity Index, Half Baked, Index Fund, Index Funds, Investing In Stocks, Investment Strategy, James Hamilton, Kwak, Long Term Investment, Next Twenty Years, Percentage Points, Price Earnings Ratio, Robert Shiller, Stock Market Index, Valuations, Worrying Thing
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Investing in Range-bound Markets
Tuesday, December 15th, 2009
This article is a guest contribution by Vitaliy Katsenelson*, Portfolio Manager and Director at Investment Management Associates in Denver, CO.
December 15, 2009
In the bull market that preceded the collapse of Lehman Brothers and the financial crisis, equity valuations reached some very frothy levels.
The correction that followed lasted only until March, and since then the S&P 500 index and the FTSE Eurofirst 3000 have risen more than 60%. Even in spite of the post-Lehman correction, equity markets have been in a secular range-bound phase since 2000.
Investors must understand the dynamics of range-bound markets and the best ways of investing in such an environment.
Secular market cycles
Let me lay out my thesis for secular (long-term, longer than five years) market cycles.
Ask an investor what the stock market will do over the next decade, and he’ll tell you his expectations for the economy and earnings growth, and that will turn into his projection for the market. However, this kind of thinking looks at the half of the equation that explains stock market (and individual stock) returns, while completely ignoring a very important variable that is responsible for a significant part of stock returns: valuation.
Mathematically, stock prices in the long run (not minutes or days, but years) are driven by two factors: earnings growth and (it’s a very important and) changes in valuation (P/E ratios). Once you add a return from dividends, you’ve captured all the variables responsible for total return from stocks.
During the last two centuries, every time we had a long-lasting bull market the market what followed was not a bear but a range-bound, sideways market. (The only notable exception was the decline during the Great Depression.) This happened not because of some hidden, embedded magical pattern. No, there is no practical joke being played on gullible humans; it happens because our emotions get the best of us. Yes, emotions! Secular bull markets start at low, below-average P/Es. A combination of earnings growth and P/E expansion (which is a simple reversion towards the mean) bring spectacular returns to now jubilant investors.
Then the investors get overexcited about stocks and drive valuations (P/Es) to above- average levels.
P/E expansion is a powerful tailwind and a significant source of the returns during secular bull markets, but high P/Es can create a headwinds. When they start to fall, they curtail returns during secular range-bound markets. As P/Es stop expanding at the very late stages of a secular bull market, investors who were accustomed to above- average returns grow less than thrilled with lower rates of return. The higher the P/Es, the more difficult it is for stocks to continue to climb, as earnings growth alone cannot keep the secular bull market going. Returns from stocks decelerate to below the levels investors have learned to expect, and investors gradually migrate from stocks to other asset classes.
Welcome to a range-bound market!
Emotions now shift into reverse. P/E compression is like gravity pulling stocks down, where earnings growth is the force that counteracts its effects. All the benefits from earnings growth are gradually offset by constant P/E compression (the staple of range- bound markets). P/Es mean-revert from above to average to below-average levels. Stocks go nowhere for a long, long time in the process.
I discuss this topic in great detail with plenty of charts and tables on my Contrarian Edge website.
US equity markets remain locked in a range-bound state
In the US, economic performance has not been significantly different during range- bound and bull markets. That is, as long economic performance was not far from its average state we had either range-bound or bull markets. However, when you coupled high (above-average) valuations with long-term economic contraction, you had a secular bear market. This is exactly what took place during the Great Depression (and has taken place in Japan from the late 1980s until today).
In secular bear markets, economic growth does not offset a price/earnings (P/E) mean reversion; declining earnings add fuel to the fire and supersize the decline in P/E, thus causing stock prices to decline over a protracted period of time.
In the last (1982-2000) secular bull market P/Es reached their highest level ever. Today, nine years into a range-bound market, US stocks are still at above-average valuations. If over the next few years the US economy doesn’t achieve positive nominal earnings growth, we may slide into a secular bear market.\
The Fed is throwing an enormous amount of liquidity into the economy, yet it has very few tools to deal with deflation (you can make borrowing virtually costless, but borrowers may still choose not to borrow or to spend). The Fed is much better equipped to fight inflation: it can make money very expensive, and expensive money curbs spending. Thus, historically the Fed was willing to err on the side on inflation - be it in consumer prices, housing, commodities, or the stock market (”Bubbles-R-Us”). (In part we are paying today for the Fed’s handling of the 2001 recession: Alan Greenspan took interest rates to a very low level and kept them there for too long, starting a bubble in real estate.)
Current Fed actions may have the unintended consequence of promoting another bubble in stocks. I believe it will be harder to achieve a broad market bubble, since the more you stimulate the less effective stimulus becomes, over time; but I can see how a few sectors may (and already have) bubbled up.
The Fed and politicians will likely err on the side of overstimulating the economy, as the career risk for taking the economy back into recession through constrictive monetary policy is too great.
The exit strategy from a range-bound market
Will my observations continue to play out in the future?
In my book Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2007), I inadvertently created a framework that explains the mechanism behind stock market cycles. As things change over time one thing remains the same: our emotions will make us overexcited about stocks, and this will drive stocks to above-average levels, giving us cause to be underexcited (I think I just made up a new word), which will result in treacherous periods of range-bound markets.
If it were not for our emotions, stocks would always hew very close to their value levels (a normalized P/E of 15) and secular market cycles would not occur. I am oversimplifying; but if it were not for emotions, returns from stocks during short, intermediate, and long-term periods would be identical to their earnings growth.
Human emotions don’t let valuations (P/Es) remain in their average state of 15, and so they are driven to extremes, on both sides of the mean. Returns from stocks over short (one year) and intermediate terms (5, 10, or 15 years) may have a significant disconnect from their earnings growth. And the disconnect between earnings growth and stock market returns may persist for decades, or even longer.
Over, say, thirty years in the US (it takes that long for bull and range-bound markets to cancel out each other), returns from stocks will be in line with economic growth.
The role of technical analysis and market timing
About a month after my book came out I regretted its subtitle, “Making money in range- bound markets.”. People assumed that I knew what the range was, and the name also implied that I use technical analysis. “Sideways markets” would have been a more accurate description, but what’s done is done.
Secular market cycles are full of many cyclical bull and bear markets; the last range- bound market, which started in 1966 and ended 1982, had five cyclical bull and five cyclical bear markets. It is impossible to succeed at short-term market timing, as you have to get two things right: the short-term economic numbers and the market’s response to them, which in many cases may be irrational.
What I propose in the book (and practice at my firm) is active value investing. Instead of being a market timer, I’m a buy-and-sell investor, with a focus on valuing individual stocks.
Positioning against a decline in the dollar
Though problems in the US are well-known, I am not a long-term dollar bear (though, as a hedge, we own some stocks that would benefit if the dollar continued to decline).
If the dollar is to fall, one must ask what against currency will it fall?:
The Japanese yen? Japan has its own, more immediate crisis: its economy has been in recession since the late 1980s, it has one of the oldest populations in the developed world, and its savings rate has declined greatly and is still falling. Japan has been trapped in a zero-interest policy that it may not be able to sustain for much longer. Its debt-to-gross domestic product is second only to Zimbabwe’s, and even a small increase in interest rates will put a significant pressure on its budget. So the yen is not it.
As I have written previously, Japan was on the stimulus bandwagon for more than a decade; and with the exception of government debt-to-GDP tripling, Japan has nothing to show for it . Its economy is mired in the same rut it was in when the stimulus marathon started. It had a hard time giving up stimulus because the short-term consequences were too painful. Also, Japan is proof that a low (zero) interest-rate policy loses its stimulating ability over time and turns into a death trap for the economy as leverage ratios are geared to low interest rates. Now, even a small increase in interest rates (say, from 1% to 2%) would be devastating for Japan’s economy.”
The US is not Japan: our housing and stock market overvaluations were not as extreme; our corporations are in much better shape (though consumers are in worse shape); we are not xenophobic, thus our population is growing through immigration; we don’t have a significant cultural issue of “saving face” to overcome. Thus, although we sometimes don’t let bankrupt companies go bankrupt to the degree we should - at least not since Lehman - creative destruction is allowed to exist to a far greater degree here than it was in Japan.
The euro? The euro blankets a collection of 20+ countries with very different interests. As John Mauldin put it, and I agree, the euro was created for prosperity, not adversity. Europe has its own demographic issues, such as high unemployment. So I am not betting on the euro against the dollar, either.
The Chinese renminbi? The People’s Republic of China is neither the people’s nor is it a republic. Despite its economic progress, China is still a communist country with a totalitarian regime and limited human and property rights. The Chinese government made the choice of growth at any cost even if projects don’t (or barely) cover the return on capital. It has done so at the cost of undermining the purchasing power of its people by manipulating its currency, keeping it significantly undervalued. I’ve written a lot about significant Chinese economic problems will likely surface down the road.
Lately I’ve been hearing chatter of “nominating” the Chinese currency to reserve currency status. This is unlikely to happen for the reasons I’ve just mentioned, and also it goes against the Chinese business model. As long as the Chinese model is to be a low-cost producer and exporter to the world, reserve currency status is off the table. If the rest of the world decides to park their money in the Chinese currency, it will drive the renminbi up and decapitate China’s export industry.
Maybe the Russian ruble? Unfortunately, Russia is a a one-trick petrochemical pony. The natural resources of Russia are more a curse than a blessing, as they detract capital from and hinder development in non-commodity industries.
What’s happening in the US isn’t good for the dollar, but I’m not sure the rest of the world is in a much better position.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007).
Tags: Bull Markets, China, Collapse, Commodities, Denver Co, Dividends, Earnings Growth, Emerging Markets, Financial Crisis, FTSE, Great Depression, Investment Management, Lehman Brothers, Management Associates, Market Cycles, Portfolio Manager, Practical Joke, Ratios, Secular Market, Stock Market, Stock Prices, Stock Returns, Valuations
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Beware “nosebleed” valuations, says John Mauldin
Tuesday, December 8th, 2009
John Mauldin of Millennium Wave Investments says (via Yahoo Finance - Tech Ticker) long-term investors should ignore the temptation to get a piece of the stock market action. In his view there is only one metric to consider: valuations. At this moment, stocks are too rich for his blood - “nosebleed” is the term he used.
Mauldin said: “There’s lot of other things you can do while you’re waiting for valuations to come down.” According to Yahoo Finance - Tech Ticker, his recommendations include fixed-income and dividend-yielding utility stocks. He also thinks buying real estate for rental income is a smart move now that housing prices have come down so dramatically.
Source: Yahoo Finance - Tech Ticker, December 4, 2009.
Tags: Advertisement, Buying Real Estate, Dividend, Dividend Stocks, Fixed Income, Investments, John Mauldin, Metric, Millennium Wave, Nosebleed, Smart Move, Stock Market Action, Temptation, Term Investors, Utility Stocks, Valuations, Yahoo, Yahoo Finance
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Chart of the Day: Stock market rally long in the tooth
Monday, November 2nd, 2009
How does the stock market rally since the March 9 low compare with the 1929-1932 bear market - which also included bank failures, bankruptcies, severe stock market declines, etc.?
For some perspective, Chart of the Day provided the graph below, illustrating the duration (calendar days) and magnitude (percentage gain) of all significant Dow Jones Industrial Index rallies during the 1929-1932 bear market (solid blue dots).
As the chart shows, the duration and magnitude of the March 2009 rally of the Dow (hollow blue dot labeled “you are here”) are longer than any that occurred during the 1929-1932 bear market. Add an ugly technical picture and stretched valuations, and it is not difficult to conclude that it is prudent to be on the sidelines at the moment.
Source: Chart of the Day, October 30, 2009.
Tags: Bank Failures, Bankruptcies, Bear Market, Blue Dot, Blue Dots, Calendar Days, Dow Index, Dow Jones, Dow Jones Industrial Index, Duration, Graph, Magnitude, Market Rally, Percentage Gain, Perspective, Rallies, Sidelines, Source Chart, Stock Market Declines, Ugly, Valuations
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Jeremy Siegel: Stocks are attractive, even at these valuations
Tuesday, October 27th, 2009
Jeremy Siegel, Wharton School Professor and author of “Stocks for the Long Run,” is interviewed by Dan Richards, of Strategic Imperatives, and founder of a new resource, ClientInsights.ca.
You can view this interview by clicking here or on the image. This is a good piece that you can share with your clients.
You can register to use the ClientInsights.ca resources free at ClientInsights.ca.
Tags: Ca Resources, Jeremy Siegel, School Professor, Stocks, Strategic Imperatives, Valuations, Wharton School
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Jeremy Grantham: “Fair value on the S&P is 860″
Tuesday, October 27th, 2009
Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chief investment strategist of Boston-based GMO has just published the October edition of his quarterly newsletter entitled “Just desserts and markets being silly again”.
Before quoting from the report, Grantham recently put matters into perspective in a Kiplinger article, saying: “The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip companies, where valuations are most attractive.”
Here are a few excerpts from the Grantham’s newsletter.
“Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits. Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today’s market (October 19) at almost 25% overpriced, and on a seven-year horizon would move our normal forecast of 5.7% real down by more than 3% a year. Doesn’t it seem odd that we would be measurably overpriced once again, given that we face a seven-year future that almost everyone agrees will be tougher than normal?
“Price … does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labor cuts fades away. Second, the slow gravitational pull of value as US stocks reach +30-35% overpricing in the face of an extended difficult environment.
“It is hard for me to see what will stop the charge to risk-taking this year. With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1,100. It can certainly happen. Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well-informed guess, I hope) that before next year is out, the market will drop painfully from current levels. ‘Painfully’ is arbitrarily deemed by me to start at -15%. My guess, though, is that the US market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1,098 on October 19).
“Unlike the really tough bears, though, I see no need for a new low. I think the history books will be happy enough with the 666 of last February.”
Click here for the full report on Grantham’s reasoning for his cautious stance.
Source: Jeremy Grantham, GMO, October 2009.
Tags: Chief Investment Strategist, Co Founder, Desserts, Excerpts, Gmo, Guess, Horizon, Jeremy Grantham, Lean Years, Lows, October 19, Panies, Price Earnings Ratios, Profit Margins, Quarterly Newsletter, Rally, Risky Assets, S Market, Valuations, Wreckage
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Canada: There’s no place like home
Thursday, September 10th, 2009
Scotia Capital has published a research report discussing “reasons to own” Canada. Canadians have never really had to think about this one. Now Canadians should prepare for the onslaught of capital that will come from global investors who agree, by positioning ahead of it. Let the record show that PetroChina’s largest North American investment to date, made in Canada just a few weeks ago, is early evidence of this.
When RSP (for non-Canadians, the near-cousin of the 401K) rules mandated it, we invested at home, now and then discovering ways to circumvent the rules with a clone fund or some other RSP strategy. We didn’t like having Canada rammed down our throats, so we, and this country’s best domestic equity fund managers, became really good at stockpicking in Canada.
When the RSP rules were loosened so that there were no longer restrictions, it came at a time when we were complacent, enjoying the benefits derived from investing in Income Trusts and the boom that ensued, and we didn’t care about the repealed mandate. Then one Halloween, the axe fell, when Jim Flaherty killed income trusts, and gave us reasons to look at the global alternatives.
Finally, Canada, has universal appeal. Canada really may finally be the best, safest place in the world, for us to invest.
A strong, and perhaps the healthiest, banking system in the world, a massive natural resources and commodities-based economy, and a sound fiscal disposition, irrespective of the US- and UK-centric credit and economic crisis.
“Canada’s main attributes are emerging market exposure with lower volatility, cheaper valuations relative to MSCI World, stronger domestic fundamentals, Canadian dollar strength relative to the U.S. dollar and British pound, proximity to the U.S. economy and above average market capitalization in financials, materials, technology and Industrials,” portfolio strategist Vincent Delisle wrote.
…
Mr. Delisle said the country’s “superior” risk-reward profile makes it a compelling destination for investors. In the last 10 years, the compounded annual growth rate for Canadian stocks outpaced the MSCI world index by 8.5 per cent.
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“Hence, Canada offers the stability of a developed economy with an exposure to growth in developing nations through its commodity sensitivity,” he wrote. “Admittedly, Canada’s marginal size doesn’t initially attract attention and puts it alongside other mid-tier specialized markets such as Australia, Sweden or Norway.”
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Also, Macleans Magazine features “Our Big Chance,” an excellent article about our chance as a country to shine, to pull away from the rest of the western world. We have what the fastest growing countries of the world need. In fact, for this last reason, we do, perhaps, need to realize as a nation of investors, that we need to protect our greatest assets by funding them and owning them ourselves. I’m not suggesting for one second that we adopt a protectionist stance, but lets stop giving away our best businesses and resources to dragons in return for funding, and start supporting and sponsoring them ourselves. Let’s lead, not follow, foreigners into our markets.
Our big chance, Macleans Magazine, August 27, 2009
For Canada, a country that has spent the better part of 20 years nervously wringing its hands over its perceived inadequacies, the dramatic reversal over the past year has been striking. Our banks were once seen as lacking innovation; now world leaders hail the boring Big Five as being among some of the safest and most profitable banks in the world. We fretted that our economy was overly reliant on commodities; now our rocks, oil and gas are seen as a natural hedge against havoc in the manufacturing sector. We worried that Canada’s strict mortgage rules were a drag on our housing market; now we can brag that we don’t put people into homes they can’t afford. Almost any way you look at it, Canada is uniquely positioned. So as other developed nations struggle, the question is: will we squander this once-in-a-generation opportunity or take advantage of our good fortune to punch above our weight?”
H/T: G&M Market Blog, , Steve Ladurantaye, September 8, 2009
Reasons to Own Canada, PDF, Scotia Capital, September 9, 2009
Tags: 401k Rules, American Investment, Banking System, Canada, Canadian Dollar, Commodities, Delisle, Dollar Strength, Domestic Equity, Economic Crisis, Emerging Market, Emerging Markets, Equity Fund, Fund Managers, Global Investors, Income Trusts, Industrials, Jim Flaherty, Market Capitalization, Market Exposure, Materials Technology, oil, Petrochina, Portfolio Strategist, Risk Reward, Rsp, Scotia Capital, Universal Appeal, Valuations, Volatility
Posted in Emerging Markets, Markets | 4 Comments »
Robert Arnott: Too far too fast?
Friday, July 17th, 2009
In his latest newsletter, Robert Arnott, founder of Research Affiliates, and innovator of FTSE-RAFI(tm)Fundamental Indices, asks the question “Too far too fast?,” and provides a comprehensive analysis of the market and his outlook. Here is an excerpt:
The tremendous comeback in financial assets that began in March and extended through the second quarter of 2009 has proved a welcome relief to investors of all types, a blessed batch of showers for our drought-ridden portfolios. The classic 60/40 stock (S&P 500 Index) and bond (BarCap Aggregate) mix advanced 10.2%, experiencing its third best quarter since 1988. As we predicted coming into 2009, in a broadly diversified GTAA context, some of the most dislocated credit categories from last fall-high-yield, emerging market bonds, convertibles, and bank loans- were some of the biggest winners in the fi rst six months of 2009 as all four dramatically outperformed mainstream stocks and bonds.
Undoubtedly, most portfolios are still well underwater (60/40 is still down 21% from its October 2007 high) and likely have many years of catch up. But the respite has allowed investors to assess their portfolios and begin to make asset allocation decisions with an eye toward the future. A thorough exercise of asset class valuations reveals that many once beleaguered asset classes may have come too far, too fast in this recent rally. Accordingly, now is likely a time to take profi ts and to resume our cautious vigilance of 2008.
Read the whole newsletter here.
Hat tip: Investment Postcards
Tags: Asset Allocation Decisions, Asset Classes, Asset Valuations, Bank Loans, Convertibles, Credit Categories, Emerging Market Bonds, Emerging Markets, Fi Rst, Financial Assets, Ftse Rafi, Hat Tip, high yield, Innovator, Portfolios, Research Affiliates, Respite, Robert Arnott, Stocks And Bonds, Valuations, Vigilance, Welcome Relief
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