Examining the Case for Equities, Iceland

 |  Includes: AL (defunct), DIA, QQQ, SPY
by: Roger Nusbaum

A few things from Tuesday worth mentioning.

Jeremy Siegel had a commentary run in the FT re-making a case for equities for the long run. I don't disagree in the biggest picture sense but I am not as sanguine on the fate of domestic stocks versus foreign. The dynamic of many other countries gaining on the US as the US tries to hold on simply makes those other countries more compelling.

He correctly, in my opinion, goes after Robert Arnott's comments from the spring about bond outperformance, noting that for that brief moment when stocks were at their lows bonds did outperform but that cherry picking a point in time like that did not make a lot of sense. I similarly picked on the Arnott article when it first ran.

I think Siegel misses on a couple of points, however. He notes that the S&P 500 is now trading at 14 times 2010 earnings estimates which is cheap compared to the 18-20 time he cites for other periods of low inflation and low interest rates without specifics of when that was or attribution.

Regardless of whether US equities are the best performers over the next ten years or the worst, an argument based on earnings estimates for 2010 and maybe 2011 is not exactly firm ground. The potential volatility in earnings and estimates in the next year or two make valuing the stock market, for people inclined to focus on that, particularly unreliable. Given the freakish speed with which estimates were cut early in the bear market combined with the potential shoes to drop that we know about makes for a weak argument. That is not to say that stock can't go up a lot, making the bulls correct, but PEs can he high and stocks go up anyway.

He also makes the point that "every dollar of US international indebtedness is matched by a dollar of assets abroad. S&P 500 companies now obtain almost 50% of their revenue outside the US and that share will most certainly rise as growth in the emerging nations continues to outpace that of the developed world."

Frankly I think this argument ignores too many macro factors. He may be drawing the correct conclusion for all I know but in order for this point to be convincing now I think he needs to demonstrate that he understands the really big picture and do some refuting. I'm not saying he doesn't understand the macro, I'm saying he doesn't articulate it in this article.

The next issue is that things are still not looking good in Iceland. The citizens seem to not want to join the EU or eventually adopt the euro. They feel they will lose control of their fishing industry which was one of the building blocks of their success. I've written several times that I think there is a way to harness their geothermal for more manufacturing similar to what Alcan (AL (defunct)) has been doing for years there and also for data farms. There are obstacles to both but with a little ingenuity I think they could figure it out.

Lastly, in case you did not see the article from the Independent that caused all the hubbub yesterday about the dollar, here it is. It seemed to read strangely to me. Decide for yourself.