Maya_

Market Outlook: We're in the 'Bounce Phase'

Why is 14X overvalued? If we use a long rate of 2.5% and a risk premium of 5% and long term real earnings growth of 2% (same level as GDP), the index should command a multiple of 17. Based on $68 in real earnings (which I think is on the high side for as reported earnings but okay for operating earnings) the SP500 could be at fair value at 1143. That is the long term.
As far as near term is concerned, I expect the markets to weaken in q3 as focus shifts to post stimulus earnings expectations. Leading indicators are strong on the back of stimulus spending - another round appears unlikely because of the rather large deficits. The leading indicators will likely weaken during q4 unless private spending picks up to fill the gap left as stimulus spending peters out. An increase in private spending will come, but possibly at a lower levels compared to the recent past. Savings rates are begining to look more reasonable now and common sense says they should stay that way. All in all private spending should recover, but not enough to replace stimulus spending. The good news is that increased savings goes a long way in deleveraging consumers. In addition, savings means investment for there is little else that can be done with money - money gets spent on consumpsion, what is left is saved, what is saved is invested - this liquidity is supportive for asset prices; at the same time reduced consumpsion keeps consumer inflation subdued. Ultimately rising commodity/asset prices should feed through to inflation; but provided wage inflation stays under control, CPI should remain below 3%.
So while markets are reasonably valued on a long term basis, I would look for a decline to 800-825 to put new money to work. Technically I would like to see the markets fall and hold 5% above the November lows; if this occurs we can be relatively sure that the March lows were the bear's bottom!

Wednesday Outlook: Commodities, Global Markets

The 10 year spy volume data is most interesting. Compare the volumes during this bear with those on the prior one - volume is high, very high this time round. It looks like there has been a generational shift in wealth; possibly from older folks to those younger. I do not think capitulation of this level has ever been evident since the 70's. Maybe, just maybe the buyers are now ready to hold long term. More money chasing reluctant sellers might mean more upside. I would like to see volume return to less surreal levels in a long term context - the VIX has now returned to a more sensible level in the long term basis maybe much lower volumes will soon follow.

Looking to Buy BRIC? The 'ABC's Are Better (Part II)

Wow. Spot on. Personally, I try to invest in Oz & Candada because they can deliver what China & India need. I have always avoided direct investment in China, India & Russia,simply because a safer return can be obtained by investing in their needs rather in the Countries. Unfortunately, BP has significant Russia interests so I guess I have indirectly invested in Russia - am thinking of switching to RDS. Brazil for some reason I have ventured into in a small way through an investment in Vale & I would not mind some Petrobras either - I have worked for and with Brazil in my job for a number of years and recognize that working in Brazil is difficult for a foreign company or foreigner; but Brazilian entities manage to be successful - I particularly like the management at VALE.
Being Indian, I do have some Indian investments but they amount to a very small fraction of my portfolio - I tend to chose from the DJ India Titans, avoid any companies in the Reliance ADAG group and avoid all public sector under takings - after that check valuations, hold your breath, jump. Often the payout justifies the risk!
I will certainly keep my eye open for MNC's with significant Botswana interests for the future.
As far as corruption, governance, transparency, intellectual capital is concerned; problems are widespread in all EM's. But I think about it this way -
- for every Satyam there is an Enron;
- for every Harshad Mehta there is a Bernie Madoff;
- for every corrupt government official there is a subtantial political contribution or lobbying payment (only real difference is that it is disclosed and legal - still does not make it any less a polite form of bribery);
- for every corrupt employee there is a morally bankrupt management (look at management compensation in US and you will see management stealing from shareholders; only difference is that it is disclosed and legal!).
People just tend to change the words for the old actions to give them new legitamacy when social norms change. In India, a maid was called an "Aya"; once that became an impolite word, they were called "Didi" (means elder sister). Now calling a person Didi offends some. Cynical eh!

Jeremy Grantham: Collapse is Over, But Monumental Challenges Remain

Go to his website (gmo.com), register (its free) and read his quarterly updates - these provide substantial details of allocation to equity and specific shares invested. I suspect his own monies will be invested in a substantially similar manner, probably through in house managed funds.

On May 07 12:36 PM mwswi wrote:

> Any idea(s) what particular investments Jeremy Grantham is leaning
> towards or favors during the "V" run-up and what investments he would
> retreat into during the "L" portion/era? It's difficult to interpret
> what investments he would direct (1) his clients monies and (2) his
> own personal portfolio from this, his current thesis.

Jeremy Grantham: Collapse is Over, But Monumental Challenges Remain

As always Mr. Grantham's work is a pleasure to read. Though this time round it confuses me. On the one hand he observes that in real terms, the index may well take 20 years to recover. On the other, the recent 7 year asset class return forecast indicates real returns of 7.5% on US large cap and 7.4% on small caps at end of March 2009. With SP500 at 797 at end March, in about 9.5 years the real index expectation in today’s $ could run to 1584 (higher in nominal terms) which is somewhat higher than the Index high in the economic cycle just past.

I also get the feeling that the despair and anger in the publication comes because Mr. Grantham is shifting out of the bearish camp where the visibility was clear to a more normal opaque environment which will apply to the future. He is out of his comfort zone and it is clouding his vision.

On his comments about the bank rescue & moral hazard; I think he is wrong. Allowing the banks to fail would have disrupted society and destroyed wealth like never before - besides the loss of intellect, idle factories and minds are destroyed wealth. I do not see any moral hazard; when you give a kid too much candy he/she eats it; surfeit of sweatness leads to sourness; at least in the tummy. Do you blame the kids or the giver of Candy. Banks created a bubble actively encouraged, even forced, by the Fed; now that time to pay has come, and the price must be paid. While the worst might be over, it is likely that the price will be paid through restrained growth for many years - until inflation and growth (albeit slow) debase the debt now undertaken to a lower level. The option of letting banks fail is inconceivable - the idle managements, scientists, factories would lead to a massive and spiralling destruction of wealth. What the Obama administration is doing is distasteful but exactly right - rescue, then regulate and later unwind. It is a delicate task and one where the outcome is by no means certain. I think Mr. Grantham is missing the point that there are several paths to the same destination; and sometimes an amiable amble is more fun than a vigorous work out.
I also think he is wrong on China. Domestic consumption will rise and rise and rise with no reduction in the savings rate. The consumer rise will come from increased wealth and earnings as opposed to withdrawal from the ATM that is the home. The problem is over consumption and under saving in America NOT under consumption and over saving in Germany/China etc.
My view on the next economic cycle is slower growth (1.75%-2% GDP); higher inflation (3.5%-4%); weakening $; rising risk premiums (5% over earnings yield); rising savings rate (7%-8%). Debt supply will fall below equity. Quality large cap companies with high debt levels (D not more than 50% of E but not less than 20% of E) because I feel these will benefit from ability to raise debt ahead of debasement of debt through inflation will outperform. You can look forward to the next economic cycle delivering earnings of roughly 69 {2% annual growth over the prior cycle average earnings of 60} and multiples of 8X to 18X of the average prior cycle earnings depending on sentiment. Market fair value based on this is 1250; adverse sentiment market bottom is 550. Most likely bottom has been seen at 666.
New bottom lower could be formed in 2014.At this time I think market will do well in 09, not too good in 10 (because impact of stimulus will go and not be fully replaced by private consumers). 2011 / 2012 should be good years presidential cycle will make sure public is happy through growth oriented fiscal and monetary policy); 2013/2014 gets too far out but based on historic comparables, I think these will be difficult years; probably very difficult because the hangover this crisis will leave behind will be monumental.

The Worst Case Scenario (Someone Has to Say It)

What a complete nut. I will never understand what am I doing reading this nonsense!
SP500 will hit 1250 before end of 2010. Growth in US will be subdued perhaps as long as a decade. But higher growth rates outside US will allow several mega caps prosper. Stay with large cap quality US MNC's and watch your portfolio outperform your wildest dreams over the next 5 to 7 years; no doubt there will be ups and downs - that is the nature of the beast and it is what allows people to both make and lose money.

From Russia With Bitterness

Eric - you say "One of my biggest mistakes a few years ago was placing a bet on one of Russia's largest oil companies." & yet you (Sov. Soc.) claim to help people achieve Total Wealth. As an investment advisor you should be ashamed of yourself. People buy the lottery or visit the casino to place bets. Investing, is different; be it a car, a house or a stock, it is bought for the value it represents; not a mindless bet. I guess you lost your shirt because having made a bet, you failed to invest. Nevertheless, as a mindless speculator, I am sure your bet will pay back well; when it does, keep in mind that it was a random bet and not a well reasoned investment decision that got you your returns!

GDP Tumbles, But It Could Have Been Worse

GDP was very encouraging. It points clearly in the direction of rising economic activity at lower price levels during q4 last year. q3 GDP came in at $14,412.8. Average CPI during q3 was 219.28. Average CPI during q4 was 213.11. Restating q3 GDP in q4 $'s would have meant $14,007.32; q4 gdp rung in at 14,264 - this means that economic activity was stimulated by falling prices; a very encouraging sign pointing towards a very real possibility of an end to the recession in q3 this year.

The Ultimate Game Changer: Why 2009 Will Be Worse Than 2008 (Part 2)

I think you will get burned by shorts on a 1 week and 1 year outlook; but may be on to a winner on a 3 month outlook.

Economy Watch: Looking Back and Looking Ahead

What you say is very sensible. Anyone with an ounce of sense can see undervaluation if a long term view is taken. Unfortunately, the market is not presently rational and the depths to which it can descend are not evident.

The market is a bit like a flight - when it takes off the ascent is rapid. Then there is a period of stability - people have a nap, a drink and some grub - baring minor turbulence all is well. Then there is a rapid descent. When people get on the flight and off it, order prevails. So really, it is dis-embarkation we are after.

I think we are near dis-embarkation BUT the feds action yesterday worried me. The first indicator of approaching dis-embarkation is no rapid gear shifting by the pilot. Since the pilot has not approached the runway yet, we may be in for a further decline. If the fed had done nothing more than indicate an accomodative stance for a long period, I would have been much happier. As it stands, it looks like we may have a while to go. Yet, I remain a buyer as in my view much of descent is done for now; its just the bumpy landing and the ride to the terminal to go.

Great Depression Not Imminent, But Inevitable

Silly article. One has to acknowledge that derivatives have serious destructive potential. But policy response is likely to contain the damage. As far as whether "no insurance" will cause a great depression; I wonder why the great depression ever got over; after all derivatives in its present day form are a very recent phenomenon.

Will World Economic Slow-Down Help or Hinder Indian IT Industry?

Another invaluable insight from equitymaster. Their research quality is perhaps the poorest I have ever seen. Look at this article - they state a concern but are too scared to offer their own perspective.

Does anyone know of a good source of research information in India. That is other than equitymaster which I find lacks insight into a company, industry or sector and of course their calls are mediocre at best. I like the macro insight put out by Uday Kotak, but again when you see the quality of their staff its laughable.

Indian Markets: It Can Get More Frightening

kgalli - This is the problem with equitymaster. Their research quality is perhaps the poorest I have ever seen. Look at this article - they state views of well regarded folks but are too scared to offer their own perspective.

Does anyone know of a good source of research information in India. That is other than equitymaster which I find lacks insight into a company, industry or sector and of course their calls are mediocre at best. I like the macro insight put out by Uday Kotak, but again when you see the quality of their staff its laughable.

White House says it's willing to consider use of TARP funds for automaker aid. (Reuters)

quite correct. It should be done. Financial services is hugely overpaid for the dis-service it provides.


On Dec 12 09:45 AM Herbert Hoover wrote:

> Just out of curiosity, if we need to cap the union workers wages,
> why didn't we do that at AIG?

White House says it's willing to consider use of TARP funds for automaker aid. (Reuters)

Yes. If that is customary for the industry it should be denied.


On Dec 12 09:43 AM Niner wrote:

> My question to you is. If the only difference between the US auto
> workers wages and the foriegn autoworkers wages is the retirement
> benefits paid to the retired US autoworkers wages, do you propose
> denying these people their retirements?
>
>
> On Dec 12 09:39 AM Shiv wrote: