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Q1 '10 SHORT-TERM SENTIMENTS |
rffrydr
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 Posted: Sun Jan 03, 2010 10:41 am Post subject: Q1 '10 SHORT-TERM SENTIMENTS |
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Let the good times roll:
| Quote: | At a time when prices for commodities such as tea, cocoa and sugar are soaring to their highest levels in years, lobster, a delicacy associated with luxury living, is selling at bargain prices.
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http://www.ft.com/cms/s/0/e2c976c2-f715-11de-9fb5-00144feab49a.html
Nothing is obvious.
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Q1 '10 SHORT-TERM SENTIMENTS Replies |
rffrydr
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| Posted: Mon Jan 04, 2010 8:33 pm Post subject: |
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Why not a "fat pitch"?...why not a "goldilocks" economy of the multiple expanding steady to lower inflation of Abby J. Cohen fame? We certainly didn't get it when we were supposed to be living it. And we can expect the dividend stream to be fairly strangled by now with the promise of the banks dividend next year and the return of REIT throwouts as a core adjustment. And you don't have to go overseas to realize it doesn't have to be all about the consumer. Rate structures are crying out for corporate investment--and replacement. Then there's a national re-investment program encompassing healthcare and energy.....and a war (or two). Institutional analysts always list the dividend stream first--it's the "foundation" of a very fanciful building project with far more than GDP as its architecture. GDP should be Morningstar's guide but not ours.
I'm no super-bull but recognize the risk--to the upside. Culturally, failed retirement plans could lead to crazy living plans.
FT's Authers ("Okay I got the rally wrong and here's why") handles it better with three scenarios and a Tobin valuation (which, I'm afraid is an anachronism)--but, as this other piece from the summer shows, he's worried about only one--the upside suprise.
http://www.ft.com/cms/s/0/04f40cee-f73e-11de-9fb5-00144feab49a.html
| Quote: | ...Now, where do we find ourselves? After a calamitous 16-month fall, the S&P 500, the world's most tracked stock index, has clawed back just more than half its losses in a rally that is now more than nine months old. The recovery of China, and of the US banking sector, both aided by phenomenal sums of government cash, have been pivotal in driving the rise.
The most foreseeable risks are that China goes off the rails, the US and Europe lapse back into a banking crisis, or that the money spent on these problems leads to inflation or higher bond yields.
These facts could fit one of three narratives.
First, the 2007-09 crisis was an irrational "Great Panic". While investors were panicking, there was a real risk that the financial system would crash altogether, which was factored into share prices. That panic had the real world consequence of a short, sharp shock to the global economy. But at bottom, it was a panic. Once nerves recovered, the risk of disaster went away, and created a buying opportunity for investors, and profit opportunities for companies, which could cut costs more easily.
A second scenario is a "Standard Bear Market" - that this rally was the normal adjustment after a market crash. It follows a pattern seen after the crash of US stocks in 1929, of Japanese stocks in 1990, and US tech stocks in 2000. In all these cases the first ghastly fall gave way to a rebound that made some people richer, but those gains were short-lived. Instead, these markets settled in for a decade of trading in a range, never approaching their previous highs. On this scenario, there is money to be made but by traders rather than long-term investors. The likely next direction is downwards.
A final scenario is the "Second Great Bust". On this narrative, the cheap government money rescued markets from the full consequences of their actions. The US put its credit rating on the line, while China deliberately inflated its own credit bubble. On this analysis, the next big event will be a market disaster, taking us below the nadir of 2009.
Which is right? The most critical determinant of how markets perform over a period is how expensively they are priced at the outset. Two strong measures of value have been Tobin's Q - the ratio of stocks' market value to the replacement value of assets on balance sheets - and the cyclically adjusted price/earnings ratio, which shows prices as a multiple of average earnings for the previous 10 years. Both tell the same story. The market bottomed when these measures were cheaper than historic norms, but nowhere near as cheap as they have been at previous bear market bottoms. The cyclically adjusted p/e is back above 20, at its level on the eve of the Lehman bankruptcy in September 2008. Its historic average is 16.35.
Tobin's Q implies that stocks are 40 per cent overvalued, according to Capital Economics.
This is not helpful for the "Great Panic" theory. It gives some support to the "Great Bust" idea, but seems more in line, to me, with the notion that we are in a grinding bear market. The odds are that we take a clear move downwards long before markets regain their highs of 2007.
I would guesstimate the odds on the "Bear Market" scenario at between 60 and 70 per cent. Stay balanced, and look for stocks with strong and reliable cash flows.
The chances of the "Second Great Bust" or "Great Panic" scenarios playing out both seem to me to be between 10 and 20 per cent. Both are conceivable, but the bust would require a lot of mistakes in the next 12 months, while much must go right for the "Great Panic" scenario to come true. So the message is to hold on to some stocks, but also to hold on to cash, because it is still a very risky world.
I appreciate that a precise number would be more reassuring. But I fear this scenario analysis may be more accurate, and more useful. |
http://m.ft.com/cms/s/0/28084484-88fd-11de-b50f-00144feabdc0.html?catid=111&SID=4c93056842d8e3b22b05904d70872b0d
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HenryTo
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| Posted: Mon Jan 04, 2010 6:50 pm Post subject: |
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What the Director of Equity Research at Morningstar is thinking:
http://news.morningstar.com/articlenet/article.aspx?id=320566&pgid=stockarticle
| Quote: | However, neither of these arguments really addresses the two big issues most on my mind at the moment. On the positive side, I'm thinking a lot about the effect of non-U.S. revenue on corporate earnings. On the negative side, valuations are not compelling.
Let's start with the globalization theme. Over the long haul, U.S. GDP growth and U.S. corporate profits have tracked each other fairly well, though with large cyclical swings. So, if future GDP growth is muted due to de-leveraging and weak job creation or weak income growth, it would seem logical for corporate profit growth to be weak as well.
However, there is a valid reason why U.S. corporate profits may grow meaningfully faster than U.S. GDP, which is the "D" in GDP. Large-cap corporate America is much less exposed to the domestic economy than one might think--in fact, around 40% of the S&P 500's net income comes from non-U.S. sources. Granted, a decent chunk of that is Europe, which is growing at the same speed or slower than the U.S., but a decent portion is emerging markets, which are growing much faster, and from a firmer economic foundation.
So, if prospective global ex-U.S. economic growth is higher than U.S. GDP growth, it's entirely possible that large-cap U.S. corporate profit growth could exceed U.S. GDP growth by a meaningful amount. Quantifying this effect is tough, but it seems to me a darned good reason why corporate profits may not be as constrained by the deleveraging U.S. consumer as some fear.
That's the good news. The bad news is the second big issue on my mind, which is valuation. Taking a step back, equity returns can be decomposed into dividends, earnings growth, and the change in valuations (earnings multiples). The yield on the S&P 500 is currently 2.1%, which is low by historical standards. Earnings growth has historically been about 6% nominal. Current earnings multiples are in line with mid-teens long-run averages based on consensus estimates for 2010, but are more stretched at about 19 based on the Shiller data, which uses an inflation-adjusted 10-year average.
Putting this together, it doesn't seem like a good idea to bank on the multiple-expansion tailwind that powered the last bull market starting in 1982--our starting point just isn't low enough right now. Yields are what they are, and while that 2% is nice to pocket, it's low on an absolute basis. So, we're largely left with corporate profit growth as the X factor that will have to power equity returns going forward.
I don't have any special insight into whether that figure will be meaningfully higher or lower than it has been over the past several decades, but I do know that I dislike putting all my eggs into one basket. I'd be a lot more comfortable if we had higher yields or lower valuations as insurance policies against a run of lower earnings growth. With luck, foreign income to U.S. companies will be the X factor that keeps equity returns moving up at a decent clip--but that's far from a slam dunk bet.
Before I wrap up, let me approach the earnings and valuation issues from another angle. The S&P 500 earned about $90 per share during its 2006-2007 peak. If we assume that the next peak will be somewhat lower, as the economy de-levers and adjusts to a "new normal," perhaps we get $75 to $80 in earnings. A 15x multiple on that earnings stream gets you to about 1100-1200 on the S&P, which is within shouting distance of current levels.
Now let's assume that the next peak is 10% higher than the last one. Why? Well, perhaps foreign income grows at a decent clip, and perhaps we get some operating leverage from the recent barrage of cost-cutting across corporate America. A 15x long-run multiple on $100 in earnings would be 1500 on the S&P 500--pretty meaningful upside from current levels.
The upshot from this scratchpad analysis is unfortunately the same: Substantial upside from here for the broad market seems to require that either the next peak in earnings is closer to the 2006-2007 peak, or that we get some sustainable multiple expansion. Both are certainly possible, but neither is what I would call a "fat pitch." |
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rffrydr
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| Posted: Mon Jan 04, 2010 5:32 pm Post subject: |
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Cramer likes it:
| Quote: | I don't know why people figured they would have it easy if they locked in profits in November, like so many hedge funds did, and then avoid a down December and skip a difficult January. I sense that many funds just aren't long enough. In fact, some of what I see on my screen looks like panic buying: Goldman Sachs (GS - commentary - Trade Now) up $5, Occidental Petroleum (OXY - commentary - Trade Now) and Chevron (CVX - commentary - Trade Now) up more than $2, BHP Billiton (BHP - commentary - Trade Now) and FCX roaring ahead. It is as if everyone is underweighted economic strength just when we are getting signs of a strong economy.
It feels like everyone's getting it wrong. |
Looks like they're not afraid of putting banks in the portfolio now that declarations are a quarter away. Would have liked to see more, something, in CRE today but we'll take it.
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HenryTo
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| Posted: Sun Jan 03, 2010 1:37 pm Post subject: |
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Cheap lobsters, cheap champagne, and cheap "happy hour" sushi vs. high commodity prices but high inventories. The China growth story is still in place - and will probably be in place for 1Q 2010.
Since this thread only covers the first quarter, I will just stop here.  |
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