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Be wary of multiple expansion, heterogeneous high-yield universe: GMO's Inker

  • "Our problem is that the S&P is up this year about 25% on earnings that are up 3%. So we've got a market that is rising because of P/E expansion," 21-year GMO veteran Ben Inker tells Barron's (one recalls a similar warning from Guggenheim back in August).
  • Inker argues that because P/E multiples are still expanding at a time when profit margins are "already as good as we've ever seen," the prospects for upside surprises to profit growth look "pretty dim" going forward.
  • As for bonds, Inker characterizes the return on U.S. government debt as "horrible" and says corporate debt "is riskier than people are making it out to be, particularly the very low-rated stuff."
  • Inker's picks for the current environment: TIPS, "high-quality" U.S. companies, and emerging-market stocks where reasonable valuations leave room for some upside.
  • "High-quality" U.S. stocks mentioned include: JNJ, MCD, WMT, MSFT
  • TIPS ETFs: TIP, VTIP, IPE, SCHP, LTPZ, STPZ, TIPZ, STIP, TPS, TDTT, TDTF, TIPX
  • EM ETFs: EEM, VWO, EDC, EDZ, SCHE, IEMG, EEV, PIE, ADRE, EUM, EET, GMM, EEME, EMCR, DBEM, EWEM, FEM, EMLB, EMSA, EMFT, EMDR
  • High-yield ETFs: HYG, JNK, HYS, HYLD, SJNK, PHB, SJB, ANGL, XOVR, UJB, QLTC
Comments (4)
  • Walter P. Chrysler
    , contributor
    Comments (300) | Send Message
     
    interesting call and appreciate the Barron's reprint here. always good to be reminded that there is an asset class you can buy into if inflation is your primary concern. obviously the Government has been minting money in this space going on many years now so i'm sure they're quite happy with the recommendation. while we do have an apparently very "dovish" incoming Fed Chairperson she doesn't appear to be "rocking the boat" as it were either. i thinking "weaning" all the various interested parties of QE will be quite the challenge even for an "uber Fed Chief." it does amaze me that there is apparently no actual "number" where the Fed will be forced by the bond market to stop monetizing. If anything the exact opposite appears to be true. if there was an "accident" that Chairman Bernanke discovered in preventing 2008 from becoming a full blown depression with likes of Detroit "dotting the landscape only on a much bigger scale" (Wisconsin had a lot of problems back then as i recall) it was not only in beginning the policy of QE but that he actually came public with the zero bound rate policy. that was indeed news...i think it will be interesting to see what the studies are that will be done vis a vis "to what extent did going public have an added effect." the Japanese obviously never did this when they became the first to try QE back in the late 90's. i think this is important subject to explore because "the same might be true in reverse"...in other words "it was a mistake to say you're exiting QE" just as it may have been the right thing to do to say "you're entering QE." not an expert by many means...just thinking of "thinking outside the box" here.
    16 Nov 2013, 10:27 PM Reply Like
  • Stone Fox Capital
    , contributor
    Comments (5914) | Send Message
     
    the problem with that argument is that it ignores that stocks were extremely undervalued especially compared to even normalized yields. It also ignores that companies are long overdue for an expansion cycle that includes revenue and profit growth.
    16 Nov 2013, 11:03 PM Reply Like
  • King Rat
    , contributor
    Comments (603) | Send Message
     
    With all due respect, the S&P 500 p/e is near the level it historically peaks at, or about 30% higher than the historic median.
    If you discount the possibility of a sudden drop in the market, then there is only one possible outcome:
    Even with an expansion cycle of revenue and profit, there will be an extended period where profit/earnings will outperform market returns. The longer the market rises on sub-par earnings, the longer the future stagnation will be.
    17 Nov 2013, 12:33 AM Reply Like
  • BAHAMAS1
    , contributor
    Comments (1897) | Send Message
     
    Agree with Stone Fox.

     

    Imo, Just another set of comments from another pundit. Printed in one of the most bias negative papers that exist !
    Oooh barrons -- Pleeeze !

     

    The next quote will be from someone of an opposite forecast in another "financial journal".
    It truly gets boring after sooo many years of incorrect "forecasts".

     

    Own quality, reinvest dividends. All will work out profitably.
    Good luck to all.
    17 Nov 2013, 04:57 PM Reply Like
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