bmichaud

Hoisington lays out the "investment" case for long bonds unite nicely in their latest letter. Basically low nominal growth and low inflation warrant a 2% 30 year bond.

Good overview of various valuation metrics here by Cullen Roche: http://pragcap.com/the-shiller-cape-isnt-the-only-metric-showing-a-severely-overvalued-market

Makes sense!

Agree with all of that - that's why I'd be interested to hear Moore's side... I just don't see why BAC would get crushed in a rising rate environment.

It would be interesting to see how BAC would fare in an earnings and interest rate mean reverting environment. How sensitive will BAC be to a 4% 10 year? I believe Moore Capital is rather bearish on BAC due to rising rates. Would be interesting to hear from him.

I get to the 11x PE because I'm using the erroneous unadjusted eps figure of $100. My FV estimate of 1123 is 17.2x the GMO-calculated normalized eps of $65....for a true earnings yield of around 6% at fair value. At 1700 the earnings yield is 3.8%.

Just in time for the gold/silver/miner market to put in a rock solid bottom!! Love it.

But they are not being used for buybacks - they are being reinvested to barely keep real growth above 3% real in this depressed environment. Arguably growth is more like 2 let alone 4.

If normal nominal growth is depressed due to no inflation, then the question is what kind of real growth can companies get in aggregate? With a 2% dividend yield and a required 6% real return, the market is currently pricing in, if 1,685 is "fair value", 4% real growth. With a long-term average nominal growth rate of 6% and 2% long run inflation, the long-term averag real growth rate is around 4% real. But wait - don't low bond yields imply low inflation, which in turn implies a depressed real growth environment? If so, then one cannot simultaneously say that low bond yields = higher PEs while low bond yields = depressed real growth. So likely the market would be more appropriately valued assuming perhaps 3% real growth + a 3% dividend to arrive at the fair value real required return of 6%, or.....$1,123 on the S&P 500.....which by pure accident almost gets me to the 11.76 "fair value" PE, or 11.23X the ridiculous $100 operating EPS number that the "Street" has been using since 2007....

Depending on inflation, 6% or 7% earnings yields could be just as good as getting 15% earnings yields. PE of 20 is a 5% yield and PE of 15 is a 6.7% yield. So a 170 bps movement in inflation can make a large difference to market levels (a 33% increase) without having any impact whatsoever on real earnings yields. Sorry I did not see this follow-up the other day. Even I look at my statement through the "real" cost of equity prism, it still stands that the market is currently implying a lower-than-historical-average cost of "real" equity. So assuming $100 operating EPS for the S&P and a $1,700 price, the PE is 17X and the EY is 5.88%. Assuming average inflation of 2.5%, the "real" EY is 3.38%, which is significantly lower than the GMO-calculated historical average of 6% real. A 6% real required return + 2.5% inflation implies a "fair value" PE of 11.76X, or $1,176 on the S&P 500. For the current market level to be considered "fair value" while maintaining a 6% real required return, then the market is implying 0% inflation in perpetuity. GMO_7y_Projections_July_2013.pdf

Even if labor costs and interest rates are not set to rise anytime soon, I would argue that growth will continue to be subdued since high ROIC opportunities are unavailable as you point out. As such, I would argue that PE multiples should currently be below average versus above average - so assuming current profit margins are sustainable for the foreseeable future, and run-rate S&P 500 EPS is say $95, fair value would be 1,425 at a 15X PE. Given the low-growth environment, would a 12.5X PE not be more appropriate, or 1,188 on the S&P? I have no idea. Perhaps the cost of equity has now permanently dropped, and all the market will require going forward is an all-in return of 6 to 7%....

Eric - Attached is an excellent piece by Ned Davis himself on corporate profitability. Perhaps a good springboard for discussion on the topic... NDR_Focus_on_Profits.pdf

Kind of like how the Nikkei PE has expanded downward with interest rates over the past 20 years?

Great article in the Economist this week debunking the "low yields = higher PE" nonsense. Buttonwood__A_misleading_model___The_Economist.pdf

Kraven, You seem to have the quintessential diversified bottoms up approach - thus it may instructive to hear what your returns were from the 2007 top to the 2009 bottom. Would you care to share?

Sanjeev - ur entire post is as prescient as that Buffett quote!!

so the bull market is not 4.5 years old already? it's just "the beginning?" hmmm. Party on Garth. Game on!! 8)

Sharper, Since when have central bankers ever nailed the turn in an economic cycle? They have undershot growth for the last four years - why would they be right now? Al, What data would you point to that would indicate we have exited or are about to exit the deleveraging cycle? Debt to income levels have come down globally and here in the US but nowhere near where they were at the beginning of the 30-year debt cycle. It's pretty well documented that growth is stimied when sent levels are where they are - I don't see where the growth is going to come from. Regardless, markets are pricing in above average growth let alone sub par growth, if one still believes in the mean reverting nature of profit margins.

http://www.hoisingtonmgt.com/pdf/HIM2013Q2NP.pdf Phenomenal commentary by the long-time treasury bulls. Several good investment guys lately have been highlighting the good value to be found in Treasurys - Cullen Roche, David Kotok, Lance Roberts, Jeff Gundlach and Hoisington. With PMs,PM miners and Treasurys all crushed over the past 6 months, a basket of these assets may not be a bad place to hide in an overvalued market environment. 8)

Thanks for posting!

And Simons and Soros? :) Thanks for the link. Should have said "value investors" 8)

http://video.cnbc.com/gallery/?video=3000183755&play=1 Great interview. All great investors make everything appear so simple and easy - Sanjeev, TWA and Eric have that ability - and Icahn has it in spades.

Has anyone looked at this? I realize it has run up some, but it appears rather cheap relative to NYT and GCI. Likely the discount is due to market unfamiliarity, but I may be missing something. Curious if anyone has any thoughts.

Ill look for myself but id be curious to see what their liabilities look like and what other reserves they have. Plus are these reserves that may or may not be mined actually developed and ready to be produced or are they prospective? Interesting stuff!

Oddball - I'm legitimately curious how you are valuing the coal company....spot price or valuation multiple?