Reports of Equities' Death Are Greatly Exaggerated 23 comments
- Roger Nusbaum's articles on Seeking Alpha
- Email Roger
- Follow Me on Twitter Roger's blog: Roger's wealth management firm:
an article to
-
Font Size:
-
Print
- TweetThis
In Sunday's NY Times Paul Lim has a sort of 'What Should Investors Do Now?' article. As the title implies, the article questions many, if not all, of the assumptions investors have about how to have long-term success investing in the capital markets.
The viewpoint (as I read it) of the article is that it may take a long time for equities to recover, and even when they do, equities may not be so hot.
There is a huge flaw in the logic, in my opinion. We are in the middle of the event. As we stand now, the S&P 500 is down 30-something percent from its peak, uncertainties abound, and emotion is causing people to reevaluate every financial aspect of their lives. The middle of the event is not the time where people have the perspective to see such game-changing events. How can anyone know the paradigm has shifted until it has shifted (sounds like something Master Po might say)?
As there are more and more articles questioning the death of equities these days, there are a couple of facts that no one should lose sight of. It is actually possible we are in a bull market right now. The S&P 500 bottomed (for now?) in November around 750, and going into Monday the S&P 500 is at 930. That is 24% up in less than two months. I think the probability is greater that 24% in a month and a half is a bear market rally, but we can't know the answer until later.
Anyone thinking about giving up on equities should realize where they are emotionally right now in conjunction with where the market is right now. I'll save writing about why giving up on equities is a bad idea for another time and for now just focus on the emotion that is triggering that idea.
If you are pondering throwing in the towel, it would make more sense to remember how you feel now, then when things recover some more and you no longer are afraid ... that would be the time.
Back to the article which, as mentioned above, talks about it taking 16 years to recover from 1966 to 1982 and a similar circumstance in the 1930s. We are of course living through some version of that now. People still working who are smart enough to keep saving and investing are obviously buying at lower prices along the way and would recover much sooner.
Finally, note the ringing endorsement treasuries are given in the article:
AND as this bear has shown, no investment can beat Treasury bonds when it comes to protecting one’s portfolio in a downturn.
How's that for looking in the rearview mirror?
And the one sector that will do extremely well in such a market will be Treasury bonds.
How well can they do from here? This seems like the exact same thought process that is lamented at the beginning of the article about equities. Long-dated treasuries are up 30%, so buy them for their safety? Every one percent increase in 10-year yields works out to about an 8% drop in price; at 30 years it is about a 12% drop in price. The lower yield trend could, of course, continue for a while but buying now is buying after an historic rise in prices.
All of this ties in with extrapolation. The thing that caused people to call for $200 oil when it was at $147 causes them to think equities will never work again, and that US treasuries will always be safe (price-wise). This is what causes people to buy high and sell low.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
So now we have BAC, Citi, and all the other big banks borrowing money from the government and, among other things, buying treasuries at historically absurd prices in a desperate attempt to shore up their reserves. What happens in a year or two when rates are at least one percent higher, their 10 year bonds drop 8%, their 30 year bonds drop 12%, and they borrowed money to buy these things in the first place?
Sounds like bank wipeout part 2 to me. These losses are close to the increased default rates on the mortgage-backed securities that got us into this mess in the first place.
"There is a huge flaw in the logic, in my opinion. We are in the middle of the event. As we stand now, the S&P 500 is down 30-something percent from its peak, uncertainties abound, and emotion is causing people to reevaluate every financial aspect of their lives. The middle of the event is not the time where people have the perspective to see such game-changing events. How can anyone know the paradigm has shifted until it has shifted (sounds like something Master Po might say)?"
So how do YOU know that we're in a paradigm shift?
"As there are more and more articles questioning the death of equities these days, there are a couple of facts that no one should lose sight of. It is actually possible we are in a bull market right now. The S&P 500 bottomed (for now?) in November around 750, and going into Monday the S&P 500 is at 930. That is 24% up in less than two months. I think the probability is greater that 24% in a month and a half is a bear market rally, but we can't know the answer until later."
Instead of using specific dates, I'd recommend using average price levels. I don't think most astute investors, to say nothing about the general public, were able to call the Nov 20 bottom nor last year's top with precision.
Otherwise, good article...sometimes the title is all it takes, and it's a great title.
Fair value is subjective. Many commentators say that since they are down 35% from their peak then they must surely be cheap and it's time to buy. But down 35% from an absurd bubble level does not necessarily imply cheap, just like an oriental rug that is 40% off does not mean that it's a great value, as you have to consider 40% off of what?
The author suggests that at current levels, stocks are cheap and a great value. But that is what most pundits have always said, regardless of market level. They said the same thing in 2000, and in 2007, and the gullible followed their advice and paid the price.
I'd suggest that if you look at long-term trends and value metrics such as P/E ratios and dividend yields, as well as the quality of the underlying company's business models and balance sheets, you may conclude that most stocks are, in fact, quite expensive at their current levels. Thus, while no one knows the future, my guess (and only a guess) is that another 25%-35% drop is not out of the question, and it is quite possible that stocks will be still at generally similar levels several years from now. After all, they are still lower in Japan almost twenty years after their bubble burst.
Now this asset allocation model is dead as well as the current mega crash proved that stock investing is pure speculation that has nothing to do with the overall economic growth.
How come global economy grows 2-4% a year and stocks grow 10-20% a year, doesn't this public companies participate in the global economic cycle or they are on their own?
Think about it.
Equities change prices far more rapidly than global activity levels because equity values are normally based on EARNINGS not REVENUE. A small change in the top line can mean a big change in the bottom line because of fixed costs. Finance 101 chapter 4.
GM and Ford are some of the largest companies in the world when it comes to revenue, but they are going BK because their earnings are negative.
On Jan 05 11:52 AM Larry House wrote:
> Thanks, Roger. Stocks may be dormant for a long time. We just don't
> know. We have NO way of knowing what the U.S. and world economy
> will look like when the processes we are going through now are completed.
> Caution is still a wise stance. For many people, Roger, stocks are
> dead because they have left the market and aren't coming back. The
> Baby Boomers, of which I am one, are just too far along in life to
> make a big bet on stocks in the next few years. Time is now working
> in our favor now. I own stocks and will continue to, but they probably
> will never make up 70% of my portfolio again. I posted a piece some
> time back about what we don't know, and we still don't know. We
> are in uncharted territory. How do you behave when you don't know
> what is going to happen next?
Any long-term investor needs to be doing something else to have any chance of successful preservation of buying power.
The best possible result for holding any bond [to maturity] is to get your principal back plus the stated rate of interest. With currently available rates on treasuries these are unacceptable returns.
The presumption, for example, that stocks are cheap at current levels because they've fallen so far so fast requires one to simultaneously hold the views that the market is inefficient now, but was efficient at some time in the recent past. Said differently, the argument is equivalent to saying "..the market had it right when the S&P was at 1300, but at 800 the market is acting irrationally."
The NYT article makes a valid point when it observes that many equities are essentially flat from 1998 through 2008. If the author had wanted to pile on, he might have mentioned that the Nikkei will have to rise around 30,000 points or 375% in 2009 to finish 2009 flat with its peak 20 years ago.
Also, if we recover from here, it would be the fastest we have ever recovered from something like this.
www.concisetrading.blo.../
Ryan
On Jan 05 11:19 AM prudentinvestor wrote:
> Equities are a necessary part of any long-term investor's portfolio.
> For buy-and-hold investors, as opposed to traders, the only question
> is when to buy them. My view, indeed any value investor's view, is
> to buy them when they are fairly valued, and to avoid buying them
> when they are overvalued.
>
> Fair value is subjective. Many commentators say that since they are
> down 35% from their peak then they must surely be cheap and it's
> time to buy. But down 35% from an absurd bubble level does not necessarily
> imply cheap, just like an oriental rug that is 40% off does not mean
> that it's a great value, as you have to consider 40% off of what?
>
>
> The author suggests that at current levels, stocks are cheap and
> a great value. But that is what most pundits have always said, regardless
> of market level. They said the same thing in 2000, and in 2007, and
> the gullible followed their advice and paid the price.
>
> I'd suggest that if you look at long-term trends and value metrics
> such as P/E ratios and dividend yields, as well as the quality of
> the underlying company's business models and balance sheets, you
> may conclude that most stocks are, in fact, quite expensive at their
> current levels. Thus, while no one knows the future, my guess (and
> only a guess) is that another 25%-35% drop is not out of the question,
> and it is quite possible that stocks will be still at generally similar
> levels several years from now. After all, they are still lower in
> Japan almost twenty years after their bubble burst.
On Jan 05 10:36 AM SteveTN wrote:
> The author is correct. It would be prudent to dollar cost average
> into the market over the next 9 months to get your allocation to
> it's normal level. Equities will never be "dead" in our society
> unless capitalism is abolished.
Thus, the market was probably inefficient at 1300, and is probably inefficient again at 800. In otherwords, it was irrationally exuberent then, and is irrationally pessimistic now.
The takeaway is sell exuberance, and buy pessimism. Benjamin Graham had this philosophy many years ago, and it works.
I lucked out and sold my entire portfolio in early September, and am now buying back into the market. Its going to happen in stages because I'm trying to keep my cash in the account under the 250K insurance limit the brokerage provides. The non-invested cash is actually in TIP ETF shares, so I have to sell them before I have the cash to buy. This is a 401K so I can't buy on margin.
I try to choose my words carefully lower prices (what I do say) is not the same thing as cheap (what I DON'T say).
Funny that one or two think I am too bullish as I call it a bear market rally. I will say I do not think these are end times.
On Jan 05 11:34 AM 1977°C wrote:
> EQUITIES ARE DEAD in my view, because in the past all investors from
> 10,000$ investor to 1 trillion $ pension mutual fund made their calculations
> that stocks will average 10-15 yearly return.
> Now this asset allocation model is dead as well as the current mega
> crash proved that stock investing is pure speculation that has nothing
> to do with the overall economic growth.
> How come global economy grows 2-4% a year and stocks grow 10-20%
> a year, doesn't this public companies participate in the global economic
> cycle or they are on their own?
> Think about it.
Similarly, investment pundits would like you to believe that stocks always go up faster than GDP. Real estate brokers would like you to believe the same about real estate. Obviously these are specious arguments.
Similar observations can be made about the government's inflation data, as we keep hearing that the cost of healthcare goes up faster than inflation, then we hear the same about higher education, and about postage stamps, and about rents, and so on. So one wonders, if almost everything inflates faster than inflation then what is inflation?
On Jan 05 03:05 PM PROXIMO wrote:
> I am also curious as to how stock prices in aggregate can continually
> outpace economic growth over the long term. Aren't corporate profits
> a component of GDP? Unless corporate profits increased as a percentage
> of GDP, which I think is unlikely, then I would think it mathematically
> impossible for stocks to permanently outperform. Still,equities may
> not be dead (life support maybe).
Thiink our founder's planned that when they drafted the Constitution for a new way of gov't in America? As its turned out, I don't see much difference from any other gov't, as all gov't's can be best defined by what it keeps secret from its citizens, and that's why none ever work in the long run.