As children, we were all told the story of “The Boy Who Cried Wolf”. We all know the moral of the story; don’t go crying for help unless you really need it! Well, Greece has turned into the boy crying wolf, or in the case of our Greek friends, crying Default. It is now time to put Greece and the possible ancillary effects of default squarely behind us once and for all.
Europe was in a “faulure is not an option” scenario when it came to the debt situation. It was apparent from the start that the problem in Greece, and the entire eurozone, was one of politics, not economics. Now that we have moved beyond the overblown drama that had been perpetuated by diehard bears, or as I call them, the Cassandras…Soothsayers of Doom (I remember my Shakespeare; the Jesuits taught me well at Loyola!), we can concentrate on fundamentals, which makes sense.
The one fundamental that stands above all else is the fact that equities are undervalued…period! The current earnings period has given us an S&P that is on track to earn around $104 a share, with the S&P 500 trading at 1360. This puts our present multiple at roughly 13 times forward current earnings. The norm for the past 50-plus years has been a market that trades around 16 times earnings, so what is the problem?
To paraphrase an old market adage, the market can stay illogical much longer than traders and investors can stay solvent! However, what if the market is not illogical and is simply providing investors with a rare opportunity to buy equities on the cheap?
When one looks at the present situation, it becomes acutely obvious as to what is wrong with this market; in a word, confidence! This is a market that is searching for confidence from the Oval office, the Fed, the eurozone, even the Chinese!
With all of the uncertainty created by the confidence void comes a gem of opportunity. Those who have been able to avoid the noise and concentrate on being exposed to the market properly have been rewarded with amazing returns. Let’s take a look: Bloomberg reported that if an investor had $10,000 to invest in December of 2008, here are the estimated returns on various investments as of February 2012:
If one had stayed in cash, it would have earned $184.60
If one had stayed in bonds (10 year), it would have made $1,644.00
If one had invested in the S&P 500 (including dividends), it would have earned $5,690.00.
It is very simple, we have entered a period in time for investors when not being exposed to the markets is the most dangerous situation a portfolio can experience. The bottom line is that these low valuations will not last forever and investors should use them as a buying opportunity! Currencies are being debased around the world and it becomes more important than ever to find a way to maintain purchasing power parity.
Look for the appetite for risk, or as I call it, the appetite for financial survival, lead the way higher in stocks and commodities. Portfolio managers are under-invested and will be chasing returns all year. The real question is when will we see the needed rotation out of bonds?
For those worried about the lack of confidence, remember, even an occasional Liberal in the White House cannot destroy the American entrepreneurial spirit!