Here's a couple of very interesting bits of news regarding the latest rallies in equity markets for you guys. There's loads more, but instead of posting a massive regurgitation, go
here- stuff on the current rallies, Chinese possible gold/silver export ban and the Barclays/Protium SIV-type thing!
(I do seem to post a lot of alphaville stuff on here, but it's a brilliant resource as it pulls its own stuff from so many other places- ft articles, other finance blogs, research and newspapers; it's a one-stop shop to keep upto date with everything going on so I think it's great
).
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http://ftalphaville.ft.com/blog/2009/09/18/72646/the-anaemic-equity-rally/
That’s a chart of net flows into European equity funds from Citi. You can see that while investors rushed to pull out money in the latter half of 2008 — by record amounts — they haven’t exactly enthusiastically returned — yet. As the Citi analysts explain:
As William Shakespeare would have written, “Oh flows, flows, wherefore art thou?” Equity markets have rallied hard from March lows, up 40-50% in the UK and across Europe. But, this has been achieved with anaemic levels of net flows into equities. With returns from cash at record lows and with government bonds priced aggressively, is the stage set for money to return to risk assets, including equities? Historically it is flows (and earnings) that drive the second leg of market recoveries. Material flows can create that rare beast, the bull market. Despite strong returns already from risk assets this year, can investors afford to back the risk-free trade from here? With the bear exiting stage left, could the bull be entering stage right?
In this note, we check the euphoria levels in UK & European equities. We find little to shout about. The butchers, bakers, candle-stick makers and taxi drivers do not appear to be buying equities, yet. But, at least the sellers appear to have retreated to the shadows and there are some signs of returning confidence and investor risk appetite.
Investor euphoria remains hard to find in UK and European equities. The sellers have retreated, but the buyers are still largely absent. But, for how long can investors avoid equities? For some, such as Insurance companies, regulatory and solvency rules may keep equities out of bounds for some time. For retail investors, despite being burnt twice in the past decade, there are some early signs in the UK of recovering risk appetite amongst retail investors. We find it hard to argue in favour of low-return risk-free assets given the prospects for economic and corporate profit recovery and the modest valuations of UK and European equities.
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And an even more interesting:
http://ftalphaville.ft.com/blog/2009/09/18/72776/this-overvalued-overbought-overextended-market/Here’s some more from Gluskin Sheff’s David Rosenberg, because his latest “Breakfast with Dave” note is just so good.
He is NOT buying this stock market - remember, bear market rallies “are to be rented; never owned…”
Imagine that six months after the depressed lows we have a situation where:
• The trailing price-earnings ratio on operating EPS is 26.5x. At the October 2007 highs, it was 18.8x. In addition, when the S&P 500 is trading north of a 26x P/E multiple on trailing operating earnings, history shows that at these high valuation levels, the market declines in the coming year 60% of the time.
• The trailing price-earnings ratio on reported EPS is 184.2x. At the October 2007 highs, it was 23.4x. In fact, just prior to the October 1987 crash, the P/E ratio was 20.3x (not intended to scare anyone).
• The price-to-dividend ratio is 53x, where it was at the 2007 highs. Again, the market is trading as it if were at a peak for the cycle, not any longer near a trough. Once again, and we don’t intend to sound alarmist, the price-to-dividend ratio just prior to the 1987 crash was 12x, and at the time, the S&P 500 was viewed in many circles to be at an extended extreme.
Bullish analysts like to dismiss the actual earnings because they are “depressed” and include too many writeoffs, which of course will never occur again. Fine, on one-year forward (operating) earning estimates, the P/E ratio is now 15.7x, the highest it has been in nearly five years. At the peak of the S&P 500 in the last cycle — October 2007 — the forward P/E was 14.3x, and the highest it ever got in the last cycle was 15.4x. So hello? In just six short months, we have managed to take the multiple above the peak of the last cycle when the economic expansion was five years old, not five weeks old (and we may be a tad charitable on that assessment). As an aside, the forward multiple on the eve of the 1987 stock market collapse was 14x and one of the explanations for the steep correction was that equities were so overvalued and overbought that it was vulnerable to any shock (in that case, it came out of the U.S. dollar market). It certainly was not the economy because that sharp 30% slide took place even with an economy that was humming along at a 4.5% clip.
In other words, valuation may not be the best timing device, but it still matters. If the S&P 500 was in a 700-750 range, de facto pricing in zero to 1% real GDP growth, we would certainly be interested in boosting our allocations towards equities. But at 1,060 and over 4.0% GDP growth effectively being discounted, we will be spectators as opposed to participants, understanding that the key to success is to NOT buy at the peaks. So the strategy is to sit on the sidelines, be selective in our equity choices, and wait for the correction to come or for the fundamentals to catch up with this overvalued, overbought, overextended market. Remember, the reason why the tortoise won the race was because the hare got tired.
One more thing, when people look back at this period, they are very likely going to ask themselves why it was that they never paid attention to the volume data, which, like the bond and money market, never confirmed the veracity of this very flashy bear market rally. We reiterate, Japan enjoyed four of these 50% power surges in the context of a market that is still down over 70% from its highs of two decades ago. So remember, rallies in a bear market are to be rented; never owned. For those that never took the opportunity to get out at the lows today have this glorious chance to do so at much better prices, but the question is whether greed has overtaken their long-term resolve, especially now that Gordon Gekko is making a return to the big screen.
