Short-term Numbers. (Think Beyond)

Just as in every boom the bulls proclaim that “this time is different” — that the markets are fundamentally more stable than ever before — so in every slump, the pessimists insist that the world faces unprecedented disaster and that, just this time, the recession will not be followed by recovery as it always has before.

The cause of the current economic misery is an unprecedented credit crunch. But against these deflationary pressures there are equally unprecedented expansionary forces: the lowest interest rates in history; the fastest-ever fall in oil and commodity prices; the biggest-ever peace-time public works programmes; and, most importantly, a willingness and ability by governments and central banks to support their financial systems.

This crisis has therefore become a tug-of-war between two extraordinary forces. So what can we say about the outcome of this elemental battle?

We can only say one thing for certain: that no economist will accurately forecast the numerical result. However a reading of the major economic thinkers — Schumpeter, Hayek, Keynes, etc. — can remind us that in one way or another, the profit motive will ultimately triumph.

Bottom Line.....

(1987 VS. Present)



You will regret not owning equities over your investment lifetime. You will regret even more if you miss this wonderful opportunity to acquire companies at fire-sale prices.

In the coming weeks I will be referring to old adages from Mr. Nick Murray. I find that his words of wisdom on markets and investing are the most clear and concise argument in the face of media driven adversity. There are no shades of grey, just precedence and fact... Markets always go up.

Stocks are inexpensive VS. Bonds!



Growth Stocks now are priced equally to Value Stocks!



I can't think of a more prudent arguement for investing in equities at present. Please feel free to counter this statement. Cheers.

Signs for Optimism. (Happy Birthday Bro.)

Following a strong start to 2009, equities had a disappointing showing last week, and given everyone’s painful 2008 memories, most investors were probably quick to conclude: “Oh no! here we go again”… But does this reaction make sense? As mentioned in the past, investment returns typically depend on four very important variables:

* Where do we stand on the valuation front? Buying overvalued assets can work in the short term during rising markets, but is hardly a long-term recipe for getting rich. The good news is that today, almost all assets (bar OECD government bonds) are at the very least fairly valued—and many remain very undervalued.

* Where do we stand on the sentiment front? When sentiment is buoyant, company managers are prone to over-reach, take on too much leverage, and jeopardize the long term health of their businesses. At the same time, as the past year has shown, buying assets alongside people who are over-extended can prove highly detrimental… in that forced selling hardly begets rising prices. The good news today is that a lot of the excess leverage has been wrung out of the system—there can hardly be any “weak hands” left. The bad news is that “strong hands” remain hard to identify.

* Where do we stand in the inflation cycle? Changes in prices are a key determinant to asset valuations. In a positive environment, prices remain stable, allowing companies to focus on their core businesses. When prices rise too fast, or decline precipitously, companies worry about their level of inventories, about the ability of their suppliers to continuing delivering, etc… Thus rapidly accelerating inflation, or collapsing prices, typically lead to serious contractions in P/Es (with inflation actually being worse for P/Es than deflation). The bad news today is that we are entering into an overtly deflationary phase, with consumer and producer prices collapsing in almost all major economies. The good news is that this trend may come to a halt sooner than most investors realize as a) central banks are pushing an unprecedented amount of money into the system, and b) the velocity of money, after an 18 month long pull-back, may finally be creeping back into positive territory.

* Where do we stand in the economic cycle? The three measures above combine to form the “P” in the P/E equation. But of course, valuations also depend on the “E”, and earnings are driven first and foremost by the economic cycle. And on this front, the news continues to remain bleak. Whether it be record job losses in the US, contracting retail sales in Germany, or shocking industrial production numbers out of France, there is little on which to hang one’s hat. In fact, the only piece of positive economic news we could rake up is the turnaround in the diffusion index of Asian leading indicators.

So where does all this leave us? On the positive side, most equity markets today are extremely undervalued and “weak hands” and other over-levered investors must have been shaken out by now. This good news is mitigated however by the fact that equity investors, having taken such a beating over the past year, now have little tolerance for pain of any kind. And with the visibility on both prices and economic growth still very limited, and unlikely to get better in the very near term, it is hard to think that equity markets will not remain choppy over the coming quarters. However, if investors do buy into the belief that the combination of an unprecedented monetary loosening, fiscal easing and low oil prices will help the US and Asian economies recover by the second half of 2009, then any significant dip in equity markets over the coming months should be seen as a buying opportunity.

(Courtessy of GaveKal Research)

Back To The Grind...

Ahhh the holidays. Nothing is better than to recharge the battery's and look into the New Year thoughtfully, aggressively, meaningfully, and maybe a bit timidly...

Most of the time, being a financial advisor ranks among the very best careers around. Once you’re over the hump of building an initial client base, few jobs offer the unique combination of being able to make a positive impact on so many lives, the freedom to take lots of time off and an above average income. (in some cases way above average)

And then there are periods like 2008. Your response to those market events was the ultimate measure of discipline and fortitude - as the old cliché goes, it’s periods like 2008 that separate winners from losers.

So now what? The value side of the market, like much of the bond market, is priced for a depression. The growth side of the market is priced for recession. With dividend and other income vehicles yielding in some cases 15% to 20%, and a possible ballooning of the Government fixed-income market(bonds, T-bills, etc.), it seems that applying appropriate risk and re-establishing a long equity position seems justified. (If you have not already done so.)

From their lows, most stocks recovered nicely in December. Yet again proving that accumulating during weakness beats buying into strength, and that market timing is not an intelligent practice. I won't go into company specifics, as you can just as easily open any finance paper and see the performance up till now. It is not industry/sector specific either, however...

Almost everybody, retail investors and institutional investors alike, invests with their eyes in the rear view mirror, favoring what has worked best in the past. But there is a very powerful pattern of mean-reversion in the markets. What has done spectacularly well often takes a rest or it takes a bear market to get back to normal. So the notion of looking at markets and asking what has been hit really hard and, as a consequence, may be priced at really attractive levels is alien to most investors. That goes for highly sophisticated institutional investors as well. This temptation to buy what has done well is the single greatest pitfall in investing, and it is the single reason that a disciplined approach to asset allocation can actually work very, very well.

Something to consider.