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Weekend reading: Some other fools who think the market is cheap

Weekend reading

My weekly musings, plus some other good reads.

For the past few weeks I’ve been saying shares are cheap. The FTSE 100 is pricing in another recession, but double-dip recessions are very rare.

It’s true we might stand on the edge of a depression (as Krugman argues this week in The New York Times) but then, we always might. The important point is whether the price you’re paying to bet that we don’t is a good one or not. Economic cycles have never run like clockwork.

Besides, I wouldn’t bank on an economist’s forecast. It might be right, but so might a coin toss. Economists are like bad haircuts – best kept in the past.

If I’m going to be wrong, I may as well be wrong in company. You have to look pretty hard, but there are a handful of us idiots out there.

Here’s Neil Hume in today’s FT:

Valuations are increasingly reflecting a slowdown in economic growth. The 2011 price/earnings ratio for the FTSE 100 is around 8.3 and the prospective dividend yield is 4.57 per cent. That compares very favourably with a 10-year gilt yield of 3.34 per cent.

Analysts are putting through more downgrades than upgrades, which is a reason to be wary of PE ratios – previous collapses in corporate profitability have been preceded by negative earnings revisions.

However, they have also been accompanied by inverted government bond yield curves – where 10-year notes yield less than short rates – and high levels of inventories. Neither are present at the moment.

Here’s David Cumming, head of equities at Standard Life Investments, in CityWire:

Cumming believes the panic triggered by the collapse in Greece has been overdone. ‘The EU has bailed out Greece and that has thrown enough liquidity in the market. Our view is there is enough liquidity in the system. Not so much confidence – but eventually this will come back.’

While he is not hugely optimistic about the prospects for this year’s market, he remains part of a band of specialists, including UBS and Morgan Stanley, that believes the FTSE will jump to around 6,000 points by the close of 2010. ‘That is not being wildly bullish, just based on the assumption we won’t suffer a double-dip recession,’ he said.

Malcolm Wheatley puts the negativity nicely on The Motley Fool:

Early on in my consulting career, I learned to watch out for the ‘blockers’.

Blockers, in short, are people who resist change by pointing out all the reasons why something might not work, and isn’t a good idea — rather than thinking about the reasons why something should work, and is a good idea.

And with the FTSE 100 index now down just over a thousand points since mid-April, the blockers are certainly out in force. I expect to meet at least one in my local this evening, shaking his head and pointing out the folly of investing in anything other than nice, safe deposit bank accounts.

(Update: 14:47 Thanks to the commentators below who’ve pointed out the next comment from Alan Steel is from early June, NOT July. I blame the vino (or rather the after effects!) For what it’s worth, the Baltic Dry is a volatile index).

Here’s Alan Steel, a rare financial adviser who was bullish about the next decade for equities at the market bottom in 2009. He is [ahem – was!] telling clients:

Instead of getting our knickers in a twist over headlines about Dubai collapsing (remember that?), or Greece’s debt triggering a global depression (it constitutes 0.6% of the World’s income), we should pay more attention to the fact the Baltic Dry Index, a function of rising World trade, is up 32% in 6 weeks.

And there are 3.5 billion consumers in Emerging Markets desperate to be better off. That’s a heady combination of high demand, low debt and fast growth.

So our message is still the same. We expected the Summer to be bumpy and that’s why we introduced caution to your portfolios. But by late September, we would expect to be fully invested again in growth assets with the main focus overseas.

Shares are too volatile to be a sure bet in the short-term, but that’s really the point. As investors, we can:

Or we can do a bit of both. Either way, logically you’d buy shares today.

What we shouldn’t attempt is wholesale market timing based on media bearishness and in ignorance of valuation. That way lies terrible returns.

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{ 9 comments… add one }
  • 1 RetirementInvestingToday July 3, 2010, 12:32 pm

    I’ve stepped back into the market moving 2% of net worth from cash into the ASx200 as the first step. In my very Average Joe opinion using the cyclically adjusted PE ratio this index could be at about fair value.

    Sure it can all continue to slide but that’s when I’ll be pound cost averaging and not just into the ASX200.
    .-= RetirementInvestingToday on: UK Mortgage Rates and Mortgage Approvals – June 2010 Update =-.

  • 2 Chris @ Bristol July 3, 2010, 1:45 pm

    I enjoy your blog, a great counter to some. However, your comment from Alan Steel about the Baltic Dry Index is seriously out-of-date:


    Keep up the good work


  • 3 Financial Samurai July 3, 2010, 1:58 pm

    I’m an equity buyer now in my 401K. I don’t pick stocks, just asset allocate.
    .-= Financial Samurai on: The Katana- Switching Gears For The Summer =-.

  • 4 Faustus July 3, 2010, 2:00 pm

    Alan Steel doesn’t inspire confidence with a comment like that.

    The Baltic Dry Index is actually down 40% in a month, one of its worst slides in recent history. That said, I’m not sure it’s a terribly good tool for economic forecasting, given how reliant it is on the vagaries of Chinese steelmaking and policy. The index fall is also partly attributed to a glut of new shipbuilding held over from the 2008 crash.

    That said, I agree that there’s good reason to be cautiously optimistic based on current company fundamentals. Like others, I’ve been waiting almost a year for the FTSE 100 to present opportunities again below 5000, so can’t complain!

  • 5 The Investor July 3, 2010, 2:49 pm

    Oops – Thanks for pointing out that Alan Steel’s letter was from early June, not early July. I’ve updated the article above to reflect this.

  • 6 The Investor July 3, 2010, 8:18 pm

    P.S. I’ve added a couple more comments to make up for the Alan Steel tardyness. 😉

  • 7 Len Penzo July 7, 2010, 1:25 am

    Nice post, Investor! I for one think the markets – esp. in the US – are in for some very rough sailing through 2011.

    From Wheatley: “Blockers, in short, are people who resist change by pointing out all the reasons why something might not work, and isn’t a good idea — rather than thinking about the reasons why something should work, and is a good idea.”

    Hmmm. I wonder if Wheatley was also calling those who of us who were warning of the impending housing bubble in the US a couple of years ahead of time as “blockers” too? 😉


    Len Penzo dot Com
    .-= Len Penzo on: A Frugal Fact- The 6 Most Valuable Grocery Store Products Known to Man =-.

  • 8 The Investor July 8, 2010, 1:17 pm

    Time will tell, Len. 🙂 I’ve considered the past few months a second chance saloon for those who listened to the bears the first time around.

    I think we’ll look back on 2009 and 2010 as a chance in a lifetime for the average person to invest for big returns in 10-20 years, but we’ll see.

  • 9 alexandru January 24, 2012, 8:39 am

    Hello, I have found your blog on google and read some articles. I like what you write and i have added a bookmark.
    Keep up writing and i will keep up reading.

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