Jeremy Siegel: Don't Put Faith in Shiller PE Ratio

[Packer16]

What about mutual fund flows over the past 10 years anbe especially since 2008?  These are the ultimate institutions responding to lack of enthusiasm for stock.  If flows had been upward for a long period of time I would agree but the opposite appears to be the case.  What about institutional low allocations to stocks (per H. Marks comments)?  I don't see the data supporting the case institutions are all in.  Once these guys figure out alternative assets mean lower returns and higher fee they may re-discover stocks.

 

 

Packer

[boilermaker75]

I think the 2008 decline are once in a decade or even every 25 year decline

The 2000-2002 decline was not too far from the 2008 decline.

 

 

Assuming the average time between these events is 10 years doesn't they will always be separated by something close to 10 years. You could have 5 years between events following by 20 years between events. It is probabilistic, just like IV! I'm kidding, I'm kidding I don't want to restart the IV discussion!

[bmichaud]

Here's a good overview of asset allocation based on flow of funds data.

 

Conclusion, nobody is underweight stocks....

Flow_of_Funds_Asset_Allocation

[Packer16]

Private pension funds are.  This must be what Marks is talking about.  The data implies that insurance company asset allocation is 39% to stocks.  This appears strange as I have never seen a most insurance cos with more the 5 to 10% in equities. 

 

Packer

[TwoCitiesCapital]

I am not saying go all in for stocks but buy what is cheap enough to meet your criteria and ignore the macro because sentiment is not euphoric.  Sentiment is what drives the majority of the pricing of securities (that is why value investing works) and as long as it is negative/neutral if there is a decline there is not much air to come out of the ballon.

 

As to cash and bond portfolios, this would have gotten killed this year.  Most bond funds are down considerably. So the only way to play this is with a pure cash portfolio.  The other question has there been a major decline with negative/neutral sentiment? None that I can find in history.

 

Packer

 

The bond fund I'm in is largely stable, yields 4-5%, and is only down for a loss of 1% this year after delivering 10% last year. I'm quite happy with these results. 

 

Fixed income CEFs are now high yielders with many trading at discounts of 6-8% to NAV. Doesnt look so bad for all fixed income

[Packer16]

You are correct that a more typical bond fund (PIMCO Total Return) has only had modest declines (a few percentage) points versus LT Treasury Funds (like Wastach-Hoisington).  PIMCO does have a lower yield of about 1.64% per year.

 

Packer

[Guest wellmont]

pimco "bond" etf is down 5% on a share basis this year. that's a massive drop for a fund that prides itself on stability. And I know for a fact shareholders are not pleased.

[bmichaud]

Page 1 of the attached PDF is the flow of funds balance sheet data for households and non-profits, including hedge funds and pension funds. Here is how the data shakes out as of 1Q13:

 

Corporate Equities: $11,243B - 43%

Credit Market Instruments: 5,465 - 21%

Deposits: 9,150 - 35%

Total: $25,858

 

Here is the same data for FYE 2007:

 

Corporate Equities: $10,448 - 46%

Credit Market Instruments: 4,865 - 21%

Deposits: 7,495 - 33%

Total: $22,808

 

FYE 1999:

 

Corporate Equities: $9,763 - 59%

Credit Market Instruments: 2,672 - 16%

Deposits: 4,111 - 25%

Total: $16,546

 

FYE 1968:

 

Corporate Equities: $815 - 54%

Credit Market Instruments: 204 - 14%

Deposits: 485 - 32%

Total: $1,504

 

FYE 1972:

 

Corporate Equities: $921 - 50%

Credit Market Instruments: 230 - 12%

Deposits: 709 - 38%

Total: $1,860

 

FYE 1974:

 

Corporate Equities: $445 - 28%

Credit Market Instruments: 300 - 19%

Deposits: 841 - 53%

Total: $1,586

 

FYE 2002:

 

Corporate Equities: $5,164 - 40%

Credit Market Instruments: 2,631 - 20%

Deposits: 5,226 - 40%

Total: $13,021

 

FYE 2008:

 

Corporate Equities: $5,954 - 31%

Credit Market Instruments: 5,204 - 11%

Deposits: 8,106 - 42%

Total: $19,264

 

 

At 43%, the current equity allocation is only 3% lower than at the peak in 2007. One could have made the case in 2007 that stocks were not as over-allocated to as they were at the 1968, 1973 and 2000 equity peaks.

 

 

To be fair, I am beginning to question the validity of the Schiller PE calculation in that....if David Tepper is correct, and we are JUST NOW at the beginning of an economic expansion - i.e. the past 4 years has not been the typical post-war business cycle, and that it has just been one long recessionary deleveraging environment - then perhaps we are about to have well above-average revenue growth over the next 5 to 7 years, and even if margins correct, the actual level of earnings will remain at or slightly above current levels. In other words, if the gap between current and potential GDP closed immediately, but earnings stayed the same, then margins would "normalize"....and at 1,700, the S&P would be trading at roughly 15.5X EPS of $110, which is around fair value.

Flow_of_Funds_Households__Non-Profit_B:S

[Guest wellmont]

I believe pension funds and individual investors just started getting invested this year. And I don't think either is all in yet.