Investing For the Medium Run

[TromboneAl]

Time for a quick pause in our doom and gloom to reflect on and appreciate our nice run-up of the last year.

SPOneYear.jpg

OK, that's all. Back to worrying...

[Gone4Good]

Quote:

Originally Posted by TromboneAl Time for a quick pause in our doom and gloom to reflect on and appreciate our nice run-up of the last year.

Which is part of the reason I worry.

[RonBoyd]

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Originally Posted by Gone4Good Which is part of the reason I worry.

Yeah, as irrational as it is, I share the same concern.

[clifp]

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Originally Posted by RonBoyd Yeah, as irrational as it is, I share the same concern.

Not irrational at all. The economic future of the country doesn't look 70% better today than it did a year ago.

On the other hand, they say that Market climbs a wall of worry. So we are just doing our part in building in that wall.

[brewer12345]

Quote:

Originally Posted by clifp Not irrational at all. The economic future of the country doesn't look 70% better today than it did a year ago.

It doesn't? As I recall, a year ago people (who were devoid of tinfoil helmets) were seriously speculating whether the feddle gummint was about to nationalize several of the largest banks, for example.

[Gone4Good]

Quote:

Originally Posted by brewer12345 It doesn't? As I recall, a year ago people (who were devoid of tinfoil helmets) were seriously speculating whether the feddle gummint was about to nationalize several of the largest banks, for example.

I agree that things are much better than they were 1 year ago. Certainly a major rally off of 2009 March lows is warranted. As I remember it, my worry at the time wasn't so much that the banking system would be nationalized, but rather that the "Let them all fail" crowd (some of whom are poking around on these boards) would carry the day. Very scary times.

So an SPX well north of 666 is warranted. But risk premiums in both the equity and debt markets seem pretty low for the risks that still face the economy.

[brewer12345]

Quote:

Originally Posted by Gone4Good So an SPX well north of 666 is warranted. But risk premiums in both the equity and debt markets seem extraordinarily low for the risks that still face the economy.

Perhaps, perhaps not. I think corporate credit spreads are getting o the point of not-so-great compensation for underlying risks, although we are far from the inifinitesimal spreads of 2006-2007. Equity premia, I am not sure I agree that they are too low. I see plenty of firms that are priced at very wide discounts to their present condition and future prospects.

[Gone4Good]

Quote:

Originally Posted by brewer12345 I see plenty of firms that are priced at very wide discounts to their present condition and future prospects.

That maybe true. But at the macro level I see the S&P pricing at a trailing PE of ~18x and small cap stocks north of 30x. And then I see 10% unemployment and a whole host of economic uncertainties, I think to myself "these markets should be cheaper".

[clifp]

Quote:

Originally Posted by brewer12345 It doesn't? As I recall, a year ago people (who were devoid of tinfoil helmets) were seriously speculating whether the feddle gummint was about to nationalize several of the largest banks, for example.

If you are talking about the Oct 2008 to Jan 2009, than I agree the economic conditions were bad and the future looked even worse. However by March 2009, when the market hit bottom, the prospects were much improved, and the "we are doomed talk" was once again primarily from the tinfoil brigade. Here is a timeline from the NY Fed. Note that tomorrow is the 1 year anniversary of Bernake's talking about green shoots.

Clearly last year the market was crazily undervalued and you and I were in the camp saying "don't sell, buy". But we've had a heck of a rally in the last year. Now when I do a bottom up comparison of most of my portfolio companies, and I look at price, sales, current and future P/E compared to 3 or 5 years ago they look overvalued. There are exceptions, SYY being one and JNJ being a second.

IMO, the market on absolute basis looks fairly or slightly overvalued compared to historical levels. Stocks don't exist in a vacuum. On a relative basis compared to cash, bonds, gold, real estate, stocks look reasonably cheap. Which means that I continue to be fully invested, with less bonds and more cash than normal, but I am not happy camper. Which is why I've been whining like prima dona for the last few months...

[audreyh1]

Quote:

Originally Posted by Gone4Good That maybe true. But at the macro level I see the S&P pricing at a trailing PE of ~18x and small cap stocks north of 30x. And then I see 10% unemployment and a whole host of economic uncertainties, I think to myself "these markets should be cheaper".

The high unemployment rate may limit economic expansion, but I don't see it adversely affecting company profitability.

Audrey

[brewer12345]

Quote:

Originally Posted by clifp If you are talking about the Oct 2008 to Jan 2009, than I agree the economic conditions were bad and the future looked even worse. However by March 2009, when the market hit bottom, the prospects were much improved, and the "we are doomed talk" was once again primarily from the tinfoil brigade. Here is a timeline from the NY Fed. Note that tomorrow is the 1 year anniversary of Bernake's talking about green shoots.

I remember last March with painful clarity, especially as I was in the middle of some of the things on that timeline. We are at least 70% better off than last March. More like 200%, in my estimation.

[clifp]

Quote:

Originally Posted by brewer12345 I remember last March with painful clarity, especially as I was in the middle of some of the things on that timeline. We are at least 70% better off than last March. More like 200%, in my estimation.

Fair enough, I guess we will just agree to disagree. I sincerely hope you are right and I am wrong and that market will be even higher a year from now.

[brewer12345]

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Originally Posted by clifp Fair enough, I guess we will just agree to disagree. I sincerely hope you are right and I am wrong and that market will be even higher a year from now.

Heh, we will know in a year.

[haha]

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Originally Posted by clifp IMO, the market on absolute basis looks fairly or slightly overvalued compared to historical levels. Stocks don't exist in a vacuum. On a relative basis compared to cash, bonds, gold, real estate, stocks look reasonably cheap. Which means that I continue to be fully invested, with less bonds and more cash than normal, but I am not happy camper. Which is why I've been whining like prima dona for the last few months...

I don't try to do overall market valuation myself. I just look at the data very generously provided by Shiller and also A. Smithers. By these metrics, we are quite overvalued, notwithstanding that we were much more overvalued at times during the past 12-15 years.

There are things to buy, but it may be be the smartest thing to go buying. Like Brewer says, we'll see.

I lightened up over the summer and early fall, and though that has hurt my performance, it is amazing how little it has cost me to be 50% or so invested, vs my more usual 75-85.

Ha

[Gone4Good]

Quote:

Originally Posted by audreyh1 The high unemployment rate may limit economic expansion, but I don't see it adversely affecting company profitability. Audrey

To get earnings growth from here we'll have to see some follow through on the demand side, and high unemployment could be a hindrance. There is also the huge unknown of what happens when world governments start removing all of the liquidity that's sloshing around. Meanwhile we have 50 states trying to balance budgets by raising taxes and cutting spending. The Federal government isn't that far behind.

That's a lot of uncertainty in my mind. Just one year removed from The Great Recession I would have expected asset price valuations to still reflect some level of stress. I don't really see that almost anywhere.

I don't want to come across as a pessimist, because I'm not. If companies do as well this year as the Street thinks they will, then we're looking at an S&P valued at just under 15x 2010 earnings. That will look plenty cheap if the economy achieves sustainable growth. But that assumes earnings come in 37% better than 2009 and down just 15% from their all-time bubble peak. It also assumes no other major economic shoes drop. That's no easy lift.

[traineeinvestor]

Lot's of negative sentiment here - surely that has to be positive for future stock returns

As an aside, it is often said that stocks are a leading indicator which anticipate economic conditions 12-18 months in advance. If so, I would expect stocks to advance well before economic conditions materially improve.

To look at it slightly differently, if we had full employment, low inflation, low interest rates, government surpluses and tax cuts, then I would be worried and think it was time to sell out - things could only deteriorate from there.

[haha]

Quote:

Originally Posted by traineeinvestor Lot's of negative sentiment here - surely that has to be positive for future stock returns

Absolutely correct, if you assume that we are dumb money.

Ha

[Mickslick]

I just don't think you have much choice but to make sure your diversification plan makes sense and stay the course. If you move everything to cash you make essentially nothing and if inflation kicks in your screwed. If the whole world collapses your screwed anyway.

On the bright side, one can argue that we are in the midst of working through the mess the world has made of our financial systems. It's painful and ugly, but it is more likely now that we have had enough of crashing and potentially dangerous scares to cause the economic and political systems to start working on working out of it. In addition some needed political turnover this November may shore up badly needed confidence - who knows this time next year we might be experiencing strong recoveries in multiple sectors and much better investment results.

But, again, the world might implode and then there wasn't really anything you could have done about it except stockpile gold and guns but even that will only buy you a few more months of suffering through the Apocalypse

[haha]

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Originally Posted by Mickslick ... and if inflation kicks in your screwed.

This turned out not to be true the last time the US had a sustained inflation, during the 70s. While gold, silver and commodities did best, short term cash equivalents were much better performers than bonds or equities.

Ha

[ziggy29]

Quote:

Originally Posted by haha This turned out not to be true the last time the US had a sustained inflation, during the 70s. While gold, silver and commodities did best, short term cash equivalents were much better performers than bonds or equities.

Which is pretty bad when you recall that the combination of tax rates and inflation were a killer on cash. Even if you got 10% on cash, that may be 5-6% after taxes (given the rates of the day) with inflation at 12-14%. Ouch.