That is the main question of the moment and I direct readers to two viewpoints on the matter:
Bill Miller is the famous (alledged) value investor who beat the S&P 500 for 15 straight years before falling apart in the last three years. Eric Sprott is a renowned Canadian asset manager with a strong focus on commodities.
With the Dow back above 9000, investors may think this debate is moving decisively toward one direction. But it is dangerous for ordinary investors to place bets based on their macro-economic predictions. That may sound ironic, considering I am starting a new service called Macro Opportunity over at Complete Growth Investor. But I will not be running a global macro style newsletter -- the costs of running such a portfolio are simply beyond our target audience. Instead, we will be using our broad understanding of the big picture to augment our value investment decisions.
My view on this recovery still leans bearish but I also recognize that markets do not necessarily reflect the economy in the short-term. On a number of levels, stocks look expensive relative to the economic environment. The ten-year normalized P/E ratio is near its historical average for the last 20 years, despite some question of our recovery from the worst financial crisis in living memory. On a more fundamental level, I monitor a watchlist with rough free cash flow valuations and as of this week, only two stocks registered as cheap enough for investment consideration.
It strikes me that investors like Miller are pinning their hopes on expectations of growth in the near future -- otherwise, these stock valuations are unjustified. Poker players call this "betting on the come" and unless the odds/payoff ratio is favorable, it is to be avoided.
This does not mean that stocks won't continue to run up. I make no predictions on near-term price movements. However, the challenge will be for companies to maintain earnings level, buoyed at the moment solely by cost cuts (i.e. layoffs). And if the economy is 70% consumer, who is experiencing shrinkage in spending power, how will these companies grow revenues when, at the same time, they are collectively undermining end demand?
So while pundits may celebrate the recent rally, I still view these markets as treacherous, more so than in early March. Buying things when they are cheap is always better than buying something at fair value, even if the former feels scarier. Right now, both the fundamentals and the macro data suggest caution is in order.
--
Davy Bui
http://www.completegrowth.com
http://enlightened-american.com
- Legg Mason's Bill Miller: "The worst is over." (Bloomberg)
- Eric Sprott: "We are now in the early stages of a depression." (HT Zero Hedge)
Bill Miller is the famous (alledged) value investor who beat the S&P 500 for 15 straight years before falling apart in the last three years. Eric Sprott is a renowned Canadian asset manager with a strong focus on commodities.
With the Dow back above 9000, investors may think this debate is moving decisively toward one direction. But it is dangerous for ordinary investors to place bets based on their macro-economic predictions. That may sound ironic, considering I am starting a new service called Macro Opportunity over at Complete Growth Investor. But I will not be running a global macro style newsletter -- the costs of running such a portfolio are simply beyond our target audience. Instead, we will be using our broad understanding of the big picture to augment our value investment decisions.
My view on this recovery still leans bearish but I also recognize that markets do not necessarily reflect the economy in the short-term. On a number of levels, stocks look expensive relative to the economic environment. The ten-year normalized P/E ratio is near its historical average for the last 20 years, despite some question of our recovery from the worst financial crisis in living memory. On a more fundamental level, I monitor a watchlist with rough free cash flow valuations and as of this week, only two stocks registered as cheap enough for investment consideration.
It strikes me that investors like Miller are pinning their hopes on expectations of growth in the near future -- otherwise, these stock valuations are unjustified. Poker players call this "betting on the come" and unless the odds/payoff ratio is favorable, it is to be avoided.
This does not mean that stocks won't continue to run up. I make no predictions on near-term price movements. However, the challenge will be for companies to maintain earnings level, buoyed at the moment solely by cost cuts (i.e. layoffs). And if the economy is 70% consumer, who is experiencing shrinkage in spending power, how will these companies grow revenues when, at the same time, they are collectively undermining end demand?
So while pundits may celebrate the recent rally, I still view these markets as treacherous, more so than in early March. Buying things when they are cheap is always better than buying something at fair value, even if the former feels scarier. Right now, both the fundamentals and the macro data suggest caution is in order.
--
Davy Bui
http://www.completegrowth.com
http://enlightened-american.com
