Sunday Morning Coffee

A couple of items from Barron’s to chew on. First is an article titled The Worst of Times to Buy Stocks? which features analysis from a couple of people including John Hussman. People who read Hussman at least occasionally will find his comments familiar. He notes the following current concerns with US equities; • the Standard & Poor’s 500 trading at more than 8% above its 52-week exponential moving average • the S&P 500 up more than 50% from its four-year low • the “Shiller P/E,” based on the cyclically adjusted trailing 10-year earnings, developed by Yale economist Robert Shiller, greater than 18; it’s currently 22 • the 10-year Treasury yield higher than six months earlier • the Investors Intelligence’s bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears Hussman says these indicators add today to a list of “A Who’s Who of Awful Times to Invest” similar to past times where the market has gone on to do poorly. However he also concedes that these factors can persist for weeks or even months before the market starts to roll over. I’ve been writing about Hussman for many years as I have taken a little bit of process from him to create my own process. One difference with this part of the process is preferring to take a “defensive posture” when index price levels indicate there is a problem. An observation like the one offered by Hussman is, in my opinion, a reason to become more skeptical but not yet make portfolio changes. The indicators notwithstanding, the...

Sunday Morning Coffee

A couple of items from Barron’s to chew on. First is an article titled The Worst of Times to Buy Stocks? which features analysis from a couple of people including John Hussman. People who read Hussman at least occasionally will find his comments familiar. He notes the following current concerns with US equities; • the Standard & Poor’s 500 trading at more than 8% above its 52-week exponential moving average • the S&P 500 up more than 50% from its four-year low • the “Shiller P/E,” based on the cyclically adjusted trailing 10-year earnings, developed by Yale economist Robert Shiller, greater than 18; it’s currently 22 • the 10-year Treasury yield higher than six months earlier • the Investors Intelligence’s bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears Hussman says these indicators add today to a list of “A Who’s Who of Awful Times to Invest” similar to past times where the market has gone on to do poorly. However he also concedes that these factors can persist for weeks or even months before the market starts to roll over. I’ve been writing about Hussman for many years as I have taken a little bit of process from him to create my own process. One difference with this part of the process is preferring to take a “defensive posture” when index price levels indicate there is a problem. An observation like the one offered by Hussman is, in my opinion, a reason to become more skeptical but not yet make portfolio changes. The indicators notwithstanding, the...

The Big Picture for the Week of November 20, 2011

What is the proper allocation to foreign markets? Within that decision is the question of how much should go into a single country. The catalyst for this post is the following comment I saw in an article deconstructing a thematic ETF; Global exposure can be a great thing, but in the context of a diversified portfolio of stocks, too much of a good thing can increase risk. There could be a couple of different ways to interpret the comment but the way I read it, the author is lumping together all foreign exposure as if it was one thing which is the wrong way to look at it. As we’ve talked about countless times each country has its own attributes as an investment destination. The attributes of a given country might be similar to the attributes of some other countries but it will not have the same attributes as every other investment destination. Which countries having banking crises and which do not? Which countries have resources in the ground that the world must have and which do not? Which countries have problems with aging populations and which do not? There are more differences of course and obviously the answers to every question are not all that cut and dried so for anyone inclined to spend the time it would be easy to construct a portfolio of different countries that takes in various types of fundamental attributes. The importance here is that countries with different attributes are likely to be at different points in their respective economic cycles which gives them a chance to be at different points in their...

The Big Picture for the Week of November 20, 2011

What is the proper allocation to foreign markets? Within that decision is the question of how much should go into a single country. The catalyst for this post is the following comment I saw in an article deconstructing a thematic ETF; Global exposure can be a great thing, but in the context of a diversified portfolio of stocks, too much of a good thing can increase risk. There could be a couple of different ways to interpret the comment but the way I read it, the author is lumping together all foreign exposure as if it was one thing which is the wrong way to look at it. As we’ve talked about countless times each country has its own attributes as an investment destination. The attributes of a given country might be similar to the attributes of some other countries but it will not have the same attributes as every other investment destination. Which countries having banking crises and which do not? Which countries have resources in the ground that the world must have and which do not? Which countries have problems with aging populations and which do not? There are more differences of course and obviously the answers to every question are not all that cut and dried so for anyone inclined to spend the time it would be easy to construct a portfolio of different countries that takes in various types of fundamental attributes. The importance here is that countries with different attributes are likely to be at different points in their respective economic cycles which gives them a chance to be at different points in their...

Sunday Morning Coffee

Sorry for not posting for the last couple of days I’ve got a lot going on that I’ll mention in subsequent posts. But for now there was a very instructive passage in this week’s Barron’s that I think underscores a point I have tried to make over the years; Shouldn’t Europe cost less [meaning have lower valuations], given the news backdrop? Enthusiasts for the continent say no. First, because many “European” companies are really global companies that happen to have their roots and headquarters in Europe. From luxury goods to heavy machinery, pharmaceuticals to telecom equipment, iconic Europe-run corporations get most of their sales, and certainly most of their expansion, elsewhere. “The days of looking at where a company is based to assess its growth opportunities are way in the past,” says George Evans, chief of equities at Oppenheimer Funds. Obviously the context is multinational corporations based in Europe, usually conversations like this in print or on TV are about US multinationals. Many people believe that multinationals are proxies for foreign markets because they generate some portion of their revenue from foreign markets. My contention has always been that multinationals are beneficiaries of foreign markets not proxies for foreign markets. Embedded in the passage seems to be a sense of disbelief or a feigned lack of understanding as to why European multinationals have not performed better. Obviously any stock can do any thing in any type of market but I believe it is very unlikely that a relative mega cap (so it will be a large component of the benchmark index) from some country will go up 20% in...

Sunday Morning Coffee

Sorry for not posting for the last couple of days I’ve got a lot going on that I’ll mention in subsequent posts. But for now there was a very instructive passage in this week’s Barron’s that I think underscores a point I have tried to make over the years; Shouldn’t Europe cost less [meaning have lower valuations], given the news backdrop? Enthusiasts for the continent say no. First, because many “European” companies are really global companies that happen to have their roots and headquarters in Europe. From luxury goods to heavy machinery, pharmaceuticals to telecom equipment, iconic Europe-run corporations get most of their sales, and certainly most of their expansion, elsewhere. “The days of looking at where a company is based to assess its growth opportunities are way in the past,” says George Evans, chief of equities at Oppenheimer Funds. Obviously the context is multinational corporations based in Europe, usually conversations like this in print or on TV are about US multinationals. Many people believe that multinationals are proxies for foreign markets because they generate some portion of their revenue from foreign markets. My contention has always been that multinationals are beneficiaries of foreign markets not proxies for foreign markets. Embedded in the passage seems to be a sense of disbelief or a feigned lack of understanding as to why European multinationals have not performed better. Obviously any stock can do any thing in any type of market but I believe it is very unlikely that a relative mega cap (so it will be a large component of the benchmark index) from some country will go up 20% in...