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Kane Cotton, CFA

 
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  • Why It's A Mistake To Hold Cash In This Market [View article]
    Chuck,

    Once again, you are a voice of analytical reason in this crazy world which offers a lot of information but little insight. For those with a long time horizon, holding cash in your long-term portfolio is a speculation.

    That said, for those with a shorter horizon, cash can be very valuable from the financial planning standpoint. The distinction between planning and investing is important.
    Dec 13, 2013. 01:12 PM | Likes Like |Link to Comment
  • The Fallacy Of High P/E Ratios [View article]
    While the AAPL and GOOG cases are true and certainly relevant to the author's case, what is missing when you ignore valuation is your margin of safety in being wrong.

    Some deep value stocks are cheap for a reason, and some are cheap because they are misunderstood and offer opportunity. In the same way, some high P/E stocks have high P/Es for a reason (high future earnings growth), while some are misunderstood (over-optimistic assumptions).

    Decent article for specific cases, but I'd be careful about generalizing this theme.
    Aug 22, 2013. 10:35 AM | 1 Like Like |Link to Comment
  • A Bond Convexity Primer [View article]
    Nicely laid out. Great driving analogy. Using that analogy, I think the long bond has been slamming its breaks and swerving to miss deer in the road for the last month or so.
    Jun 27, 2013. 10:21 AM | Likes Like |Link to Comment
  • If You Want To Know Where Stocks Are Headed, Don't Ask The Economy [View article]
    Well stated.
    May 23, 2013. 03:49 PM | Likes Like |Link to Comment
  • If You Want To Know Where Stocks Are Headed, Don't Ask The Economy [View article]
    Jeffrey,

    Great observations, and thanks for your comment. Yes, I'm using a simple linear regression using ordinary least squares methodology. There are no other factors, and there were no adjustments to the raw data. It is simply the S&P 500 lagged/leading GDP by different time frames...simple as that. A far more robust regression could be performed with more variables. (Vanguard authored a whitepaper recently that showed similar results to mine.) I did not do that in this exercise. There are also other issues that could be measured/improved with a more robust analysis (the non-normal distribution of stock market returns would be one example).

    Your comment about the test on decades is spot on. I wouldn't trust results with only 7 data points. It is not statistically robust. Further, smoothing likely has a massive effect in the improved results...I stated that in the article. At the same time, I think the chart is telling, in that over longer time frames, stocks and GDP trend together. It may be spurious, but it's there nonetheless.
    May 22, 2013. 07:17 PM | Likes Like |Link to Comment
  • If You Want To Know Where Stocks Are Headed, Don't Ask The Economy [View article]
    Whidbey, Thanks for your recommendation to look into J.H. Ellis. While I appreciate your comment on the fact that this is a well researched topic, I'm a big believer that there is great value in doing one's own research and going through the process of testing your own data. Thanks again!
    May 21, 2013. 05:33 PM | Likes Like |Link to Comment
  • If You Want To Know Where Stocks Are Headed, Don't Ask The Economy [View article]
    Fair point, MLP trader. My point is more that correlation is not causation. R-squared is not causation either...in observational stats, it does, however, lean that way compared to correlation. In rereading the sentence, I could have chosen my words better. Thank you for so tactfully pointing that out.

    Perhaps you and grave-bound stats teachers everywhere would be more satisfied with calling r-squared an explanatory statistic or suggesting that it measures the amount of variability in y (stocks) that is explained by x (GDP).
    May 21, 2013. 03:51 PM | Likes Like |Link to Comment
  • Another Look At Valuations: Why Playing Defense May Be More Expensive Than Playing Offense [View article]
    tew,

    Your points are fair, though I think it does make sense to be aware of apples to apples, oranges to oranges and apples to oranges comparisons when you are trying to formulate an opinion...so long as you consciously recognize what proverbial fruits you are dealing with.

    I think it's important to come at the valuation argument from many angles (relative, absolute, intrinsic, forward, backward, historical, etc.). Any single methodology will lead one astray at different points in time.

    Shiller, Crestmont and Hussman methodologies tell us that the market is expensive...of course they have told us that since about 1996. Forward S&P operating earnings usually make the market appear undervalued. ttm EPS makes things look slightly stretched. Intrinsic valuation, of course, relies on forward assumptions. None are perfect, thus the need to analyze and be aware of them all.

    You can find an article on a Hussman study that does something similar to what you suggest in your last paragraph here:
    http://bit.ly/Y4cmsA

    Vanguard put out a nice white paper comparing the predictability of different valuation methodologies here: http://bit.ly/X41SXf

    Fidelity also looks at future returns based on historical ttm P/Es here (page 28): http://bit.ly/XVFrjB

    The good run in January stretched things a bit shorter-term, but I'm not in the Shiller/Hussman camps that suggest rampant overvaluation. My analysis (of all kinds of different fruits) suggests things are not cheap or expensive, but within a reasonable range.
    Feb 6, 2013. 11:17 AM | Likes Like |Link to Comment
  • Another Look At Valuations: Why Playing Defense May Be More Expensive Than Playing Offense [View article]
    To clarify,

    I am comparing apples to oranges, as you say, on that one point. Ops earnings only go back to 1988 in S&P data, so I'm using the longer full EPS data set (1871 -June 2012) when talking about average historical.

    For reference, the operating P/E from Q3 1988- Q3 2012 is about 18.6. This would suggest an undervalued market. I don't subscribe to that belief given the point that you make. Namely, that this 18.6 historical average is inflated by the valuation excesses of the 1990s.

    The historical data I use to get historical average is from Robert Shiller's dataset:
    http://www.econ.yale.edu~shiller/data.htm

    I am not using average CAPE (10-year cyclically adjusted P/E)...I am using his data to calculate average trailing 12-month P/E.
    Jan 31, 2013. 01:56 PM | Likes Like |Link to Comment
  • 2012 Review: Why Stocks Rose, Where I Was Wrong And What I Would Do Different [View article]
    To chime in on valuations, I generally agree with your "normal range" comment for the S&P.

    On Europe, however, many markets were VERY cheap when fear was heightened. Spain with a 5-6 times earnings multiple last summer is one example. Yes Spain's economy was a disaster, and yes, they have massive structural and social reforms to attempt to accomplish. To be sure, there was and still is plenty of risk there.

    At those valuations, though, it's hard to not take a look with one's risk capital. The situation was different here in the U.S. at different secular valuation troughs, 1981 for example, but nibbling away at stocks at those valuations (before the reforms were made and the masses recognized the opportunity), turned out to be quite prescient in hindsight. I'm in no way saying that Europe is in the clear, but valuation is the main driver of long term returns, and there is a lot that looks (or looked) cheap in Europe.
    Jan 31, 2013. 01:33 PM | 2 Likes Like |Link to Comment
  • Another Look At Valuations: Why Playing Defense May Be More Expensive Than Playing Offense [View article]
    Agreed. The 2013 estimate for operating earnings was about $118 in March of 2012. Now it stands at about $112. Estimates are coming down. They will probably come down more based on the trend. S&P updates these estimates on a weekly basis, so they aren't that dated.

    As for your comment on diversification, I agree. There is nothing wrong with owning all of the GICS sectors in a diversified portfolio. In fact, I'd argue that one should own them in their long term bucket. That said, the "yield chasing trade" seems long in the tooth to me, especially in the sectors I mentioned as being expensive. An underweight may make sense depending on one's investing style.
    Jan 31, 2013. 11:17 AM | Likes Like |Link to Comment
  • Another Look At Valuations: Why Playing Defense May Be More Expensive Than Playing Offense [View article]
    Good and fair observation, tew. In this case, I am comparing ops P/E to historical averages.

    If we run the same metrics using full year 2012 EPS (still using estimates for Q4 since earnings season is still in progress) provided by S&P, the ratios do rise as follows:

    Sector P/E PEG
    S&P 500 15.33 1.42
    S&P 500 Consumer Discretionary 17.99 1.16
    S&P 500 Consumer Staples 17.15 1.85
    S&P 500 Energy 12.61 1.63
    S&P 500 Financials 14.17 1.43
    S&P 500 Health Care 15.22 1.67
    S&P 500 Industrials 15.34 1.37
    S&P 500 Information Technology 14.26 1.01
    S&P 500 Materials 16.85 1.96
    S&P 500 Telecommunication Services 44.04 5.88
    S&P 500 Utilities 15.64 3.91

    The historical average P/E is about 15.5. This would put the market as a whole near fair value, if we use historical average as fair value. Whether we use historical average as a measure of reasonableness for valuation is a decision we all, as analysts, have to make. If the economy continues to chug along in slow growth mode and avoids recession, I think it's a reasonable measure. If we roll over, things change.

    The sectors I highlight as having unattractive valuations (utilities and telco) still look expensive to me using these alternate metrics, and more cyclical sectors still look cheaper. Cyclicals typically look relatively cheap in strong earnings cycles.

    Your question really gets at the heart of the debate for valuations going into 2013. Namely, "Do we trust analysts' estimates on full year 2013 numbers to justify current valuations?" To this, I answer with the article's closing thought:
    "Our message continues to be that corporate health continues to improve, and if we have no economic disaster - one that would probably be caused by politicians or sovereign debt - valuations remain reasonable."
    Jan 30, 2013. 04:24 PM | Likes Like |Link to Comment
  • An Analysis Inspired By Grantham And Hussman On Profit Margins [View article]
    Nice analysis. I agree with some of the comments above suggesting that it would be nice to see this type of analysis performed on longer/different time periods.
    Dec 20, 2012. 01:26 PM | Likes Like |Link to Comment
  • Merger Arbitrage ETFs Just Got Better [View article]
    Interesting. Do you know what the likely range of longs vs. shorts would be in MRGR? The description you give in the article makes it sound like the short portion of the portfolio could end up being very small. If so, and depending on the structure of future deals, this sounds like it could be a mostly long fund that simply invests in buyouts. To me, "arbitrage" generally suggests a somewhat equal trade off of risks between the long side and short side.
    Dec 17, 2012. 11:24 AM | 1 Like Like |Link to Comment
  • The Long Slog Toward A Cheaper Market [View article]
    Free data is available at standardandpoors.com. EPS data goes back to 1988. Revenue and book value data go back to about 2000. I think you'd need a subscription to a data provider to go back further or to get aggregated cash flow data...though it would likely yield some interesting results if you could get it.
    You can find a spreadsheet with a very long earnings data stream at Robert Shiller's website: http://www.econ.yale.edu~shiller/data.htm
    I see that you are a PhD candidate. To get more complete and longer data sets, you might check with your university to see if they have a subscription to compustat or a similar data provider.
    Dec 7, 2012. 04:37 PM | 2 Likes Like |Link to Comment
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