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 [1]) 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 [2] 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 [3]:
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 [4]:
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 [5]:
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 [6] for equities at the market bottom in 2009. He is [ahem – was!] telling clients [7]:
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 [8] to be a sure bet in the short-term, but that’s really the point. As investors, we can:
- Either: Relentlessly drip-feed money into the market (probably via an index tracker) and benefit from its ups and downs [9].
- Or: We can follow valuation to try to buy when the market looks cheap [10], since we know the economic picture is always unpredictable.
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.
From the money blogs
- Is David Swenson lucky or good? – Larry Swedroe [11]
- Three good stocks to buy now – Oblivious Investor [12]
- Dividends: from sapling to fruit tree – Investing Caffeine [13]
- Fire your financial adviser – Five Cent Nickel [14] (by Financial Uproar [15])
- Cameron says ‘get on yer bike’ – Simple Living in Suffolk [16]
- John Kay’s obliquity – The Psy-Fi blog [17]
- Save fuel by driving with your big toe – Consumerism Commentary [18]
- Decluttering and your money – The Simple Dollar [19]
- The debt destroyer system – Deliver Away Debt [20]
- The greatest match in tennis history – Financial Samurai [21]
Newspaper and big website roundup
- Austerity alarm… – The Economist [22]
- …and austerity blues – Buttonwood [23] in The Economist
- Diageo scotches pension hole – The New York Times [24]
- BP, banks, and shareholder neglect – Peston [25] at the BBC
- Economists is hard, whatever bloggers say – Kartik Athreya [26] [Fed wonk]
- Responses by Sumner [27], Yglesias [28], Salmon [29], Evans-Pritchard [30], and Ritholtz [31]
- Investing in wind – FT [32]
- Fixed rate savings bonds drop below 5% – FT [33]
- John Lee sold BP, bought Quartro – FT [34]
- Finding the emerging markets of the future – Telegraph [35]
- Float Network Rail? [Hope over experience!] – Telegraph [36]
- US firms planning UK takeovers [Bit late?] – Independent [37]
- How much longer can the UK avoid a housing crash? – Independent [38]
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