Attractive Stock Valuations – Here Today, Gone Tomorrow [View article]
By the standards of the latest bubble era (1994-2008), stocks are indeed attractively priced. By long-term historic metrics, they are way too expensive, with a paltry dividend yield that does not in any way compensate for the significant risks going forwards.
If you think the attempts to extend the bubble era will succeed, then by all means load up on stocks and enjoy the ride to the next top, just be prepared to get out before the bubble collapses again. If, like me, you think we are returning to more normal valuations based on long-term metrics, then its time to get out of equities.
There is a saying amongst traders and investors that "... you should always leave something on the table for the next guy..", so if you are sitting on profits and cash out, you should not be disappointed if the market climbs another 10% or 20%, as you have already gotten your profit, and the next guy should get some too ! On my part, I have been gratefully cashing out slowly but surely, as I suspect we are near a new top. I am not begrudging any profits I left on the table for others who follow this author's advice and perhaps get further upside.
S&P 500 Watch: March 'Winners' Are Actually the Biggest Losers [View article]
Thanks for an informative analysis. When the market was near its lows I had argued that sound stocks were by no means "cheap"; and that the low SP500 was more due to some of its constituents being demolished, rather than due to its good companies becoming "cheap". This was just an observation, now bolstered by your excellent analysis, which says that the demolished ones have stirred back to life in the ER, boosting the SP500.
I still maintain that at current levels stocks are not "cheap" except relative to the bubble era. Dividends are being slashed at astonsihing rates, and historically, companies which drastically cut dividends have restored them slowly, if at all. Thus, I expect SP500 dividends will not climb back to 2007 levels for many years, and this suggests to me that stocks will be worth less than they were in 2007 for many years as well.
I am glad you have turned optimistic because your opportunity range of 6500-6800 on the dow has arrived. I certainly agree that there are good values in many stocks, but many still are overvalued, and I suspect that the current general levels of the markets (+/-25%) will be with us for some years, as they are closer to normal levels than the irrational exuberance that began in the mid-90's.
I must respectfully take issue with some of your points, as shown below:
One: Economic fundamentals are a lot worse than you hear. Productive activity has been reduced, and replaced by frothy paper shuffling over the past two decades. Americans are still creatures of excessive optimism, not necessarily warranted by facts.
Two: "Geithner will ride to the rescue", but all he can do is create inflation, and further distort the economy by having the productive subsidize the unproductive.
Three: Obama will constrain American ingenuity, with punitive taxes on successful entrepreneurs.
Four: "General Electric is not dead" - Agreed!
Five: "The market will rise, and fast". If it does, it will only be to fall again. The current general levels (+/- 25%) are consistent with pre-bubbles history and with rational metrics and realistic economic expectations. The notion that we shall shoot back to bubble levels soon and fast is doubtful.
13 Safe Stocks in a Return to the 1970s [View article]
Great article.
I suspect I may be a bit younger than your Dad, but I do remember the notion of "risk premium" that has been rendered quaint in the era of the Great Bubbles. This states that since stocks had higher risk than bonds, their return based on their earnings, of which a reasonable proportion was expected to be paid out as dividends, should exceed that of bonds.
In the era of the Great Bubbles, the notion of "risk premium" was replaced by the notion of the "greater fool", i.e., that someone will always be willing to pay you more for a stock, even if its earnings are miniscule and its dividend is nil. After all they say that "a sucker is born every day".
I agree that quaint notions like "risk premium" are back in vogue, as we are running out of "greater fools".
Short-term bounce on great oration, perhaps, but not even guaranteed to offset all the fundamental problems.
Longer-term, for most of 2009 in my opinion, investors will increasingly fret over the pace of layoffs, drops in earnings, and slowdown in all manner of economic activity, both domestically and globally.
Consumers are satiated, and so I doubt demand will be rekindled, no matter how much the government tries to coax people into borrowing to keep overconsuming goods and services that they now recognize they didn't even need in the first place.
I posted the comment below in response to another article on this website, just a few days ago. It bears repeating, as I believe many shareholders may not have realised how management uses share buy backs to defraud them:
Dividends benefit all shareholders equally, while buybacks disproportionately benefit management who have options.
If you are a CEO of a company with a stock price of $20 and have an option on a million shares at $22. A year later, the stock price has gone up to $23. Your options are now worth $1 each, i.e. $1,000,000. Now the company has $1 per share of surplus cash which can either be paid in dividends or used to buy back, let's say, 10% of the outstanding shares.
If you pay out the $1/share in dividends, all shareholders, you the CEO included, benefit equally, and your take is modest, just the dividend on the shares you already own.
If you buy back 10% of the stock, the price per share for the 90% remaining outstanding share increases by 1/0.9=11%, so your options are now worth 1.11x23 minus the strike price of 22 = $3.53 per option, i.e. $3,530,000 instead of $1,000,000 that they would have been worth if you paid the $1/share as dividend.
Thus, you the CEO, get $3.53 m instead of $1m if you buy back shares, whereas if you paid dividends your extra income per share that you already own will just be as modest as what the other shareholders get.
If company proxies were voted by knowledgeable shareholders, share buy backs would either be disallowed, or any outstanding options should be re-priced upwards to reflect the reduced number of shares outstanding.
The reality, however, is that most shares are voted by mutual fund managers, who are either ignorant of the basic math, or who are members of a "club" that includes the management, so options are not re-priced to adjust for fewer shares outstanding, and share buybacks are used to enrich option holders at the expense of the other shareholders.
Attractive Stock Valuations – Here Today, Gone Tomorrow [View article]
If you think the attempts to extend the bubble era will succeed, then by all means load up on stocks and enjoy the ride to the next top, just be prepared to get out before the bubble collapses again. If, like me, you think we are returning to more normal valuations based on long-term metrics, then its time to get out of equities.
There is a saying amongst traders and investors that "... you should always leave something on the table for the next guy..", so if you are sitting on profits and cash out, you should not be disappointed if the market climbs another 10% or 20%, as you have already gotten your profit, and the next guy should get some too ! On my part, I have been gratefully cashing out slowly but surely, as I suspect we are near a new top. I am not begrudging any profits I left on the table for others who follow this author's advice and perhaps get further upside.
Equities Update: Energy, Financials Derail Dow's Run [View article]
On Nov 12 08:55 PM LaChic wrote:
> well, we had the job report and to some this was great news, and
> the market went down, which brings me to my question? is this is
> it?
S&P 500 Watch: March 'Winners' Are Actually the Biggest Losers [View article]
I still maintain that at current levels stocks are not "cheap" except relative to the bubble era. Dividends are being slashed at astonsihing rates, and historically, companies which drastically cut dividends have restored them slowly, if at all. Thus, I expect SP500 dividends will not climb back to 2007 levels for many years, and this suggests to me that stocks will be worth less than they were in 2007 for many years as well.
Five Predictions for This Market [View article]
I must respectfully take issue with some of your points, as shown below:
One: Economic fundamentals are a lot worse than you hear. Productive activity has been reduced, and replaced by frothy paper shuffling over the past two decades. Americans are still creatures of excessive optimism, not necessarily warranted by facts.
Two: "Geithner will ride to the rescue", but all he can do is create inflation, and further distort the economy by having the productive subsidize the unproductive.
Three: Obama will constrain American ingenuity, with punitive taxes on successful entrepreneurs.
Four: "General Electric is not dead" - Agreed!
Five: "The market will rise, and fast". If it does, it will only be to fall again. The current general levels (+/- 25%) are consistent with pre-bubbles history and with rational metrics and realistic economic expectations. The notion that we shall shoot back to bubble levels soon and fast is doubtful.
13 Safe Stocks in a Return to the 1970s [View article]
I suspect I may be a bit younger than your Dad, but I do remember the notion of "risk premium" that has been rendered quaint in the era of the Great Bubbles. This states that since stocks had higher risk than bonds, their return based on their earnings, of which a reasonable proportion was expected to be paid out as dividends, should exceed that of bonds.
In the era of the Great Bubbles, the notion of "risk premium" was replaced by the notion of the "greater fool", i.e., that someone will always be willing to pay you more for a stock, even if its earnings are miniscule and its dividend is nil. After all they say that "a sucker is born every day".
I agree that quaint notions like "risk premium" are back in vogue, as we are running out of "greater fools".
The Bull Run Begins This Week [View article]
Longer-term, for most of 2009 in my opinion, investors will increasingly fret over the pace of layoffs, drops in earnings, and slowdown in all manner of economic activity, both domestically and globally.
Consumers are satiated, and so I doubt demand will be rekindled, no matter how much the government tries to coax people into borrowing to keep overconsuming goods and services that they now recognize they didn't even need in the first place.
Don't Buy Into Share Buybacks [View article]
Dividends benefit all shareholders equally, while buybacks disproportionately benefit management who have options.
If you are a CEO of a company with a stock price of $20 and have an option on a million shares at $22. A year later, the stock price has gone up to $23. Your options are now worth $1 each, i.e. $1,000,000. Now the company has $1 per share of surplus cash which can either be paid in dividends or used to buy back, let's say, 10% of the outstanding shares.
If you pay out the $1/share in dividends, all shareholders, you the CEO included, benefit equally, and your take is modest, just the dividend on the shares you already own.
If you buy back 10% of the stock, the price per share for the 90% remaining outstanding share increases by 1/0.9=11%, so your options are now worth 1.11x23 minus the strike price of 22 = $3.53 per option, i.e. $3,530,000 instead of $1,000,000 that they would have been worth if you paid the $1/share as dividend.
Thus, you the CEO, get $3.53 m instead of $1m if you buy back shares, whereas if you paid dividends your extra income per share that you already own will just be as modest as what the other shareholders get.
If company proxies were voted by knowledgeable shareholders, share buy backs would either be disallowed, or any outstanding options should be re-priced upwards to reflect the reduced number of shares outstanding.
The reality, however, is that most shares are voted by mutual fund managers, who are either ignorant of the basic math, or who are members of a "club" that includes the management, so options are not re-priced to adjust for fewer shares outstanding, and share buybacks are used to enrich option holders at the expense of the other shareholders.