U.S. stocks are trading at their cheapest levels since at least 1990, according to such commonly used valuations as price-to-earnings and price-to-book ratios as well as dividend yield, Bespoke Investment Group says.
This realization will lift the S&P 500 Index (INDEX: ^GSPC - News) by 11 percent to 1,400 this year or maybe more, according to the research firm's 2012 outlook report.
"The S&P 500 is currently trading below its historical average P/E and P/B ratios, and these ratios are also at their lowest levels in the careers of a large percentage of money managers," wrote strategists Paul Hickey and Justin Walters.
To start 2012, the benchmark had an earnings multiple of 13, the lowest since 1990 and below the 80-year average of 15, according to Bespoke. It would take a move back to 1,484 to get the benchmark back to this long-term mean P/E.
The price-to-book ratio is 2.05, below the average since the late 1970s of 2.43. To get back to that average P/B, the benchmark would need to increase to 1,491.
One more valuation-dividend yield-points to above 1,400, argue the two strategists.
"At the end of 2011, the S&P 500 was yielding 13 percent more than the 10-Year US Treasury," wrote Hickey and Walters. "Outside of the credit crisis, the last time the S&P 500 yielded more than the 10-Year Treasury was before 1960."
They added: "In order for the dividend yield to get back to its historical average relative to US Treasuries, either the 10-Year yield would have to rise back above 2 percent, the S&P 500 would have to rally to 1,410, or you would have to see some combination of the two."
-- via pbo
***
Googling a little further, the market doesn't looks so cheap according to this and this
Sunday, January 29, 2012
Saturday, January 28, 2012
Soros is not here to cheer you up
Soros is shrewd, he has a keen eye for investments, and he knows how to play the markets. Therefore, when he makes a prediction, it might be safe to say it’s worth a listen. After all, his predictions (among other things) have made him the multi-billionaire he is today.
So you might want to pay attention to a recent story from The Daily Beast that claims George Soros is nervous about the future of the global economy and that he warns of dark things to come.
“At times like these, survival is the most important thing,” Soros said.
As he sees it, the world faces one of the most dangerous periods of modern history—a period of “evil,” writes the Beasts’ John Arlidge. “Europe is confronting a descent into chaos and conflict. In America [Soros] predicts riots in the streets that will lead to a brutal clampdown that will dramatically curtail civil liberties [emphases added]. The global economic system could even collapse altogether.”
And to add a little color, Aldridge notes Soros says it all while “peering through his owlish glasses and brushing wisps of gray hair off his forehead.”
“I am not here to cheer you up. The situation is about as serious and difficult as I’ve experienced in my career,” Soros told Newsweek. “We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”
[via pbo (who else?)]
***
Soros is absolutely right: I am not cheered up...
Thursday, January 12, 2012
2012 U.S. Stocks Forecast
Bart DiLiddo of Vectorvest reports:
U.S. stocks are expected to end next year with modest gains, despite the threat of a global downturn brought on by the euro zone debt crisis and a tepid domestic economy that may still need more stimulus, a Reuters poll found.
Strategists polled had solid hopes for the U.S. economy and many cited historically low price-to-earnings ratios. But the euro zone crisis has battered stock markets this year and there was a wide range of views on where Wall Street is headed.
The Standard & Poor's 500 index .SPX.INX is expected to rise about 7.5 percent from Wednesday's close to 1,340 by the end of next year, according to a median forecast from over 40 respondents polled over the last week.
Forecasts range from a high of 1,550 to a low of 718, almost as low as the nadir of March 2009, when it touched 666. That 832-point spread was the widest in all of the quarterly Reuters polls since the financial crisis began in 2008.
...
In summary, the global economy will be sluggish in 2012 with the likelihood of a recession in Europe. The US economy will be sluggish, but it will probably not go into a recession if our leaders continue to provide stimulus. The S&P 500 will probably trade in a range of plus or minus 10% of today's close in The Year Ahead.
U.S. stocks are expected to end next year with modest gains, despite the threat of a global downturn brought on by the euro zone debt crisis and a tepid domestic economy that may still need more stimulus, a Reuters poll found.
Strategists polled had solid hopes for the U.S. economy and many cited historically low price-to-earnings ratios. But the euro zone crisis has battered stock markets this year and there was a wide range of views on where Wall Street is headed.
The Standard & Poor's 500 index .SPX.INX is expected to rise about 7.5 percent from Wednesday's close to 1,340 by the end of next year, according to a median forecast from over 40 respondents polled over the last week.
Forecasts range from a high of 1,550 to a low of 718, almost as low as the nadir of March 2009, when it touched 666. That 832-point spread was the widest in all of the quarterly Reuters polls since the financial crisis began in 2008.
...
In summary, the global economy will be sluggish in 2012 with the likelihood of a recession in Europe. The US economy will be sluggish, but it will probably not go into a recession if our leaders continue to provide stimulus. The S&P 500 will probably trade in a range of plus or minus 10% of today's close in The Year Ahead.
Tuesday, January 10, 2012
booms and busts
After booms come busts, and after busts come booms. Happens over and over.
Going back to 1820, stocks have never produced two consecutive decades of real losses. After a decade of losses (like we just experienced), the worst subsequent 10-year return we've seen is about 12% a year. That's a hefty return by any measure. [The chart doesn't bear that out. The 1880's lost -7.9% while the 1890's gained 13.4%. I assume that's total return, far from 12% a year. Remember that 2000 marked the peak of the bubble, so it's no surprise that the decade hence was negative. Didn't realize how negative. The Nasdaq I'm sure was quite a bit more negative. Remember it hit 5000 and now 12 years later it's still only 2700.]
Of course, history isn't guaranteed to repeat itself. And what drives stocks to a decade of low or high returns isn't the calendar; it's valuations. Stocks do well after they're cheap, and poorly after they're expensive. So the real question shouldn't be how long stocks have been stagnant, but whether they're cheap.
That's a matter of constant debate.
Going back to 1820, stocks have never produced two consecutive decades of real losses. After a decade of losses (like we just experienced), the worst subsequent 10-year return we've seen is about 12% a year. That's a hefty return by any measure. [The chart doesn't bear that out. The 1880's lost -7.9% while the 1890's gained 13.4%. I assume that's total return, far from 12% a year. Remember that 2000 marked the peak of the bubble, so it's no surprise that the decade hence was negative. Didn't realize how negative. The Nasdaq I'm sure was quite a bit more negative. Remember it hit 5000 and now 12 years later it's still only 2700.]
Of course, history isn't guaranteed to repeat itself. And what drives stocks to a decade of low or high returns isn't the calendar; it's valuations. Stocks do well after they're cheap, and poorly after they're expensive. So the real question shouldn't be how long stocks have been stagnant, but whether they're cheap.
That's a matter of constant debate.
Friday, January 06, 2012
Ben Graham, Margin of Safety
"If you were to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” — Benjamin Graham
When Ben Graham wrote "The Intelligent Investor", he saved the most important chapter for last; Chapter 20 of the investment classic directly addresses the concept known as margin of safety. I consider the last chapter of the book to be the single most important piece ever written about value investment philosophy.
So what exactly does Chapter 20 tell us about risk? After all, the concept of margin of safety is directly related to risk since the primary focus of all successful value investors is to minimize downside risk while being able to fully participate in upside market potential.
According to Graham: "Observation over many years has taught us that the chief losses to investors come for the purchase of low-quality securities at times of favorable business conditions."
Without question, the most common blunder investors make is failing to realize that the earnings power of a business is frequently temporary in nature. More specifically, the cyclical nature of earnings is generally under estimated and the duration of the competitive advantage of a business is frequently over estimated. In such cases, the trailing price to earnings ratio presents investors with a mirage rather than a margin of safety.
When Ben Graham wrote "The Intelligent Investor", he saved the most important chapter for last; Chapter 20 of the investment classic directly addresses the concept known as margin of safety. I consider the last chapter of the book to be the single most important piece ever written about value investment philosophy.
So what exactly does Chapter 20 tell us about risk? After all, the concept of margin of safety is directly related to risk since the primary focus of all successful value investors is to minimize downside risk while being able to fully participate in upside market potential.
According to Graham: "Observation over many years has taught us that the chief losses to investors come for the purchase of low-quality securities at times of favorable business conditions."
Without question, the most common blunder investors make is failing to realize that the earnings power of a business is frequently temporary in nature. More specifically, the cyclical nature of earnings is generally under estimated and the duration of the competitive advantage of a business is frequently over estimated. In such cases, the trailing price to earnings ratio presents investors with a mirage rather than a margin of safety.