Please purchase a hard copy of Barron’s for the complete story and more, or go to Barrons.com. Below are just some notes that I found of interest.
UP & DOWN WALL STREET
US-Russian relations turned further south as the rhetoric heated up between the two powers ahead of the Sunday referendum on whether Crimea will secede from Ukraine. Both sides threaten severe economic sanctions against the other. In the middle, $200b of treasury bonds held by the Russians. The Russian market has been clobbered and the spillover hit the US markets this week.
Economic conditions remain stable to up in the US as illustrated by the Cleveland Fed Financial Stress Index. “Stress” levels have declined from early February and are below normal.
BALANCING ACT
Is it overvalued or undervalued? Ben Levisohn ran through several interpretations of the current value of the market. Here are some:
The Shiller p/e is at 24.9 versus a post 1960 average of 19.6. The trailing 12-month p/e is 18.9 compared to a historical average of 16.6. Accounting for changes in dividend payments, David Bianco of Deutsche Bank calculated the Shiller p/e at 17 against a 15.6 average. That is “expensive” but “fair”.
Jason Trennert of Strategas Research Partners says the p/e on forward earnings is 15.6 and can rise to 18 or more. That would be 12.4% from here. But this would mean that interest rates remain low for the next couple of years. Bianco also says that the 10-year yield can rise but has to remain less than 10%. Tobias Levkovich says valuations will rise with profits at this point.
Lori Calvasina of Credit Suisse says the Russell 2000 is trading at 19x future earnings which generally has meant a small decline over the next year. But the price to sales ratio looks more dangerous, trading at 1.6, which historically means a double-digit decline.
Some overpriced stocks – ICPT, ITMN, SGMO.
REVIEW
Dow 16065.67 -387.05 10-Yr T Bonds 2.65, -0.14
WHERE THE STOCK MARKET BARGAINS ARE
Banks, insurers and oil drillers. “Buying stocks with depressed earnings multiples and low price/book ratios historically has proven successful, partly because they provide a margin of safety.” (Some names listed we are long in include RIG, MET, GM., AIG and C).
WHY MATSON COULD HIT A SQUALL
MATX may be overvalued. Selling at 18.4x but 10-11x might be more fair.
HOW TO BEAT BUFFET FOR A BILLION
You can try to be perfect at picking every winner in the NCAA tournament, or (1) save and invest $1,000 per month and earn a return of 17% (like Buffet has) and in 60 years you will be a billionaire. Or in 170 years at 5%. Or (2) launch a dot.com or social media company!
TOP BANANA STRIKES A FRUITFUL DEAL
Merger between Chiquita and Fyffe’s might create some synergies. And FDP might be undervalued on an asset basis by about $5 per share.
MUNICIPAL BOND FUNDS WORTH A LOOK
FHIGF and FTABX and for lower quality PRFHX and VWAHX.
AN INTERVIEW WITH JEREMY GRANTHAM
Runs the Wells Fargo Advantage Absolute Return (WARAX) fund (among others) which aims for a 5% real return over a market cycle. Grantham says we are between one and two standard deviations above normal distributions of valuations. This is not bubble territory yet. But two standard deviations would be and that would mean the SP500 would be at 2350.
“By the end of a real bubble, individuals are gung-ho, and they are not gung-ho yet. That says a lot.”
“Obviously, the housing bubble was the absolute direct result of the Fed’s bailout techniques, which included incredibly lower interest rates, and then there was eventually some help from the ridiculous financial instruments that were sold, along with very low standards for getting a mortgage.”
Grantham says there is a big problem because all of the hedge fund guys are putting tremendous faith in the Greenspan-Bernanke-Yellen put. What might be different in the next crisis is that now governments are maxed out on credit instead of individuals or business.
“…the market, over a seven-year horizon, is mean-reverting, and it really does pay to avoid the particularly overpriced asset classes. But on a shorter-time horizon, you can get whacked around the head, as we have been frequently.”
Some areas that are reasonable are emerging markets, European value stocks and high-quality US stocks.
Bond are way overpriced.