Bill Gross: Welcome to a New Universe, Investors!

From Pimco's Bill Gross, in his December 2008 'Investment Outlook':

Today’s Q ratio has almost never been lower and certainly not since WWII, implying extreme undervaluation... P/E’s are cheap but less so, slightly below their mean average for the past century...

Recent Investment Outlooks and indeed, discussions in PIMCO’s Investment Committee and Secular Forums for the past several years have pointed to the necessity to view current changes as not only non-cyclical, but non-secular. They are, in fact, likely to be transgenerational. We will not go back to what we have known and gotten used to. It’s like comparing Newton and Einstein: both were right but their rules governed entirely different domains. We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money...

My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.

Comments

[Steven Hansen:]

well said Mr. Gross.

2008 Dec 03 06:04 AM

[Tom Armistead:]

Bill Gross is always worth listening to. The demise of "wild west capitalism" and "entrepreneurial testosterone" (with other people's money) will be a welcome change.

P/E multiples for companies that can consistently make money by providing physical goods or services without using excessive leverage or creating systemic risk will increase to premium levels.

2008 Dec 03 07:38 AM

[William Samedy:]

It’s fun to see that after all there’s some reluctance to accept the lesson learned and that we really don’t know what tomorrow’s world will look like.

It’s ok to have a working hypothesis but what matters is the unknown unknowns. And it would be naïve to assume that regulation will stop the creativity. www.leveragedinsight.c...
Actually it might enhance it.

2008 Dec 03 11:55 AM

[WAKEUP:]

At last! Someone in these pages other than myself who realizes that the party IS ACTUALLY OVER, and not just in recess. It's not just another "this time it's different" perception; it's not only different, this time; it's NEW. Only the sheer size of our economy, plus the accumulated material goods which Joe Average is holding, but which will wear out are preventing the obvious from becoming the Very Obvious; that is, that the mirage of wealth that too many people have believed in is GONE. Now the wounds that won't quite stop bleeding will take their toll. No new house, no new car, no more trips to the mountain/beach cabin (sold), forget the European vacation. Joe Jr. CAN'T go to Dartmouth, it's probably going to be community college, instead. Now it's a question of whether or not to try to keep the house, and hmmm, I wonder how many years our Honda will last?

2008 Dec 03 08:48 PM

[Did U Think...:]

Well at least the guy can tell the truth now that he got his fannie and freddie bail out. He's just telling investors what has always been true: you can't fool all the people all the time. The stock market is a ponzi scheme and they always bust sooner or later.

2008 Dec 04 02:15 AM

[kurt walter:]

Ask Gross about closed end fund PCK. ...

2008 Dec 05 08:45 PM

[AlexR:]

This doesn't sound right... "One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well."... the government only got Preferreds with a measly 5% return. Nowhere near 20% of bank profits will flow to the government.

2008 Dec 13 10:11 PM