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Lots of Cash on the Sideline
Current stock market is no bargain, but it’s no bubble either, according to The Wall Street Journal (source: finance.yahoo.com/retirement/article/107…;The market might be forced higher as more people come off the sidelines—most likely at the worst possible moment. Institutional as well as retail investors have been too cautious through the rally of the last six months.
Current Rally is Only 50% Through
Ken Fisher, best-selling author and CEO of Fisher Investments, which manages about $35 billion, says that based on past history of bear markets, the current rally is only about 50% done in terms of duration, although the steepest part of the advance has probably already occurred.
Fisher believes in the V-shaped recovery for the stock market: the rate of descent on the downside actually gives you the rate of ascent on the upside. It’s an almost perfect V and that ‘V’ runs for fully a year, always.
Government Spending Could Lead to Potential Assets Bubble
According to Nouriel Roubini, professor of economics at New York University’s Stern School of Business, there’s a general consensus that the massive monetary easing, fiscal stimulus and support of the financial system undertaken by governments and central banks around the world prevented the deep recession of 2008-2009 from devolving into the Second Great Depression. If not reversed, this combination of very loose fiscal and monetary policy will lead to a fiscal crisis and runaway inflation, together with another dangerous asset and credit bubble.
The temptation for governments to use inflation to reduce the real value of public and private debts may become overwhelming. Even though inflation might affect companies’ earnings, it makes equity more attractive than cash or bonds.
S&P 500 is Attractive than 10-Year-Bond
Comparing to 10 year Treasury bond, S&P 500 is still attractive. Following chart shows the ratio of S&P 500 P/E vs. 10 Year Bond’s “P/E” (1 / yield) over the last 27 years. Now S&P 500 P/E is 15.2, while 10 Year Bond’s is 1 / 3.5%=28.6. The ratio is 0.53, which is in the historical low range. In other words, 10 year bond needs to yield 6.5% to allure investors away from equity.
Source: S&P 500 Historical P/E is from Standard and Poors ( www2.standardandpoors.com/spf/xls/index/sp500pe_ratio.xls), while 10 Yr Bond(%) is from Yahoo Finance.
Following table shows the top 10 holdings of SPDRs (SPY):
Symbol P/E Forward P/E Yield
Apple Inc. AAPL 32.1 26.7
AT&T INC. T 13.3 12.1 6.1%
CHEVRON CORP CVX 8.9 9.8 3.7%
EXXON MOBIL CP XOM 11.1 11.7 2.4%
GEN ELECTRIC CO GE 13.1 18.4 2.4%
INTL BUS. MACH IBM 13.0 11.4 1.8%
JOHNSON AND JOHNS JNJ 13.4 12.4 3.2%
JP MORGAN CHASE JPM 49.6 14.9 0.4%
Microsoft Corporation MSFT 15.6 13.2 2.1%
PROCTER GAMBLE PG 13.4 14.2 3.1%
SPY Average 15.2 2.4%
Source: http://finance.yahoo.com/ as of Sep 21, 2009.
On Oct0ber 17, 2008, Warren Buffett published “Buy American. I Am” article ( source: www.nytimes.com/2008/10/17/opinion/17buf…) on The New York Times. If you have a long time horizon, such as 5, 10 and 20 years, it is still a good time to buy stocks. However, IMHO, if you already have 60% or more of your portfolio in stocks, I don’t recommend adding more equity now.
Cheap, immediate information and falling brokerage commissions have produced a generation of active investors. In the meantime, excessive trading lead to poorer investing results, according to an article in September/October 2009 issue of CFA Institute Magazine. Market inefficiency forces real estate investors into long holding periods, therefore improving their performance. A strategy of “self-binding” can temper trading urges and may improve performance. For example, self-limit to trade maximal of once a month might prevent “buy high, sell low” activities.
Disclose: I have long position on SPY. The Wall Street Journal, Fisher Investment and The New York Times are my company’s clients. Follow me at http://seekingalpha.com/author/hao-jin/articles
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