Wednesday, September 30, 2009
Tuesday, September 29, 2009
Monday, September 28, 2009
Saturday, September 26, 2009
Kraft CEO Irene Rosenfeld has promised employees she won't let "animal spirits" take over as the company pursues its proposed acquisition of Cadbury.
That's the phrase Warren Buffett used in a CNBC interview last week as he said Kraft's $16.4 billion stock offer is a "full price." That's seen as a signal Buffett does not want Kraft to raise its offer, despite Cadbury's rejection of the bid as too low.
Thursday, September 24, 2009
The banker J.P. Morgan was fond of saying: “I never buy at lows, I never sell at the highs, I play the middle 60 per cent.” Well, from our lens, we are well past that middle 60 per cent point of this bear market rally.
At the lows in the equity market in March, the S&P 500 was de facto pricing in a 2.5 per cent decline in real gross domestic product and $50 of operating earnings for the year. Guess what? Far from being grossly undervalued (although some stocks were – especially financials, priced for bankruptcy), the market at those lows was fairly priced on a price-to-book and price-to-earnings basis.
Usually at bear market troughs, the S&P 500 goes to silly cheap levels. It did not this time round and, six months and 60 per cent later, there is yet again, in 2007 style, tremendous risk in this market. Never before has the stock market surged this far, this fast, between the time of the low and the time the recession (supposedly) ended. What is “normal” is that the rally ahead of the recovery is 20 per cent. This market is now trading as if we were in the second half of a recovery phase, yet it has not even been fully ascertained the downturn is over.
Remember, Mr Dow and Mrs Jones are not always rational beings. At the stock market highs of October 2007, equity valuation was embedding a 5.0-5.5 per cent GDP growth profile. What did we end up with? Try flat, on average, over the subsequent four quarters. Fast-forward to today and the S&P 500 is priced for 4 per cent real economic growth in the coming year. It is far from impossible to see that, but the odds are low – less than 20 per cent in my view.
An unprecedented eight-point price/earnings multiple expansion during a six-month faith-based rally has left the market at its most expensive (26 times operating profit, 180 times reported profit) in seven years. On a reported basis, this market is nearly four times overvalued, as it was during the tech bubble! Indeed, when we look at the history books to see what happens after the P/E multiple on trailing earnings pierces the 25 times threshold, the average total return a year out is -0.3 per cent and the median is -6.2 per cent. The total return is negative a year later 60 per cent of the time, so when we say that there is too much growth and too much risk embedded in the equity market right now, we like to think that we have history on our side.
Wednesday, September 23, 2009
"Is this a bubble or a recovery?" It is a question often asked, but it is one that threatens to distract investors, consumers and governments.
A bubble involves a rapid and unfounded rise in prices. Buying assets in such circumstances requires investors to rely on the "greater fool" argument, to believe, mistakenly, that they will make money on the up and get out before the burst.
Irrational exuberance is not evident today. It is rational to have revalued companies upwards by 50 per cent from those frozen post-Lehman days as the world recognised that they were not going out of business, and it is rational to expect further uprating of equity valuations. We are living a rational bubble. Beware, then, of writing it off. That way lies missed opportunity.
With money set to stay artificially cheap, with many governments facing commitments they cannot meet, and with taxes rising, it is rational that investors want assets whose value is as far as possible independent of governments.
Equities buy a slice of a company's future earnings and current assets. Commodities buy something tangible and possibly scarce. Gold is portable wealth. It is rational to seek returns not correlated with governments' ability to pay. This is a rational bull market in real assets, with room to run.