INVESTMENT COMMENT

 

Individual Stocks  (2/6/2012)

I’ve been receiving some calls about individual stocks over the weekend and today.

Mostly people have expressed an interest in the Facebook initial public offering. An initial public offering (IPO) is when a previously private company issues stock which is then publicly traded.

To me, the pending Facebook IPO is in general a positive sign. It means that people are beginning to have lofty expectations again. They are thinking more about the future and less about the present. That’s all good. IPO hype requires that people expect more of a new stock than simply sinking like a rock in a pond. So what the Facebook IPO tells me is that we’re beginning to forget 2008. That’s good news.

Right now the talk is that the IPO will be as high as $100 billion, based on sales in 2011 of $3.8 billion. The current sizzle on this deal is that it’s priced at a level which is 3 times more expensive than Google’s IPO. This is bubble material.

In other words, as is so often the case, Facebook is a society-changing technology. I use it myself 5 times a day. But that doesn’t necessarily make Facebook stock a good investment.

It’s a genuine good news-bad news situation. I’m very happy we’re in mutual funds. Good mutual fund managers should hunt down good deals. And if one of those is Facebook, that’s fine with me.

Good Things May Happen  (1/24/2012)

Today, veteran market watcher Mark Hulbert reported that venerable investment author Norman Fosback  considers the stock market to be at 20 year bargain levels.

Read article

I began my investment career in the 1980’s after a stint as an officer in the US Marine Corps. Norman G. Fosback’s 1976 book “Stock Market Logic” was a core investment bible. The mantra in USMC intelligence analysis at the time was, “Focus on capability, not intent.” Certainly Fosback’s book fully applied that concept to the stock market. In 1986 his analysis techniques began to indicate that the stock market was overvalued, and subject to a correction. I began moving a bit of my clients’ money into cash. By the time the stock market crashed in 1987, two things had happened.

  1. Due to my refusal to keep buying stocks, my commission payout had fallen to such a low level that I was unable to stay on as a stockbroker. Was I fired? No, my wonderful manager was too nice for that. Let’s just say that I was gently shown the door.
  2. I had saved my clients a LOT of money and was thus able to successfully launch my own business as a fee-only money manager.

So when Norm Fosback proffers an opinion about stock market valuation, he has my full attention. And now he’s saying that the stock market is at seldom-seen bargain levels.  

He might be correct.

It’s interesting to note that valuation methodologies are as affected by styles and fads as anything else. When everyone wanted to believe that the tech bubble would go up forever, many people embraced the concept of “Forward P/E”, in which P/E was determined using expected future profits. Since tech stock future profits were assumed to be limitless, we were able to boost stocks up to stunning overvaluations, sometimes as high as 500 current P/E’s. The historical norm is about 15. But when you want to dream, you can justify anything.  

As Mark Hulbert points out in his column, the current valuation craze is “CAPE” which stands for “Cyclically Adjusted Price Earnings.” This statistic was invented or at least refined by very successful financial author Robert Shiller, PhD. It’s been very successful at explaining the financial panic of 2008. In his bestselling book, “Irrational Exuberance,” Dr. Shiller makes a compelling case. And the CAPE statistic says that the stock market is overvalued, and suggests that a perma-bear point of view is justified.

So who is right? 

I lean a bit towards Fosback’s opinion, if only because his methodologies have been tested in the real world for decades. But the reality is that we don’t know. The world is changing. Perhaps CAPE is a good predictor of the future. Or perhaps it is simply another statistical artifact, which we are using to justify our current pessimism.

With this discontinuity in mind, I’m advocating a slight tilt towards equities and extreme diversification. We’re sure to find out what works, aren’t we?

 
Bullish (1/10/2012)

During the last quarter of 2011, investors pulled $65.8 billion more than they invested in equity funds. Mutual fund flow is a time-proven contrarian indicator. In other words, the market tends to do the opposite of individual investors. So this statistic is BULLISH.

The November issue of the Value Line 600 indicates that the P/E of all analyzed stocks with earnings is 13.7. MILDLY BULLISH

The same issue states that the median yield of all dividend paying stocks under review is 2.4%. MILDLY BULLISH.

And the estimated median appreciation potential of all 1,700 analyzed stocks in 3-5 years is 85%. BULLISH.

Last week’s US employment numbers were also very attractive, indicating that the US economic engine is growing.

My take is that we are continuing our slow slog of recovery from the Financial Panic of 2008. Barring any cataclysmic news from the global economy, we’re actually doing rather well. At this point, stocks seem to be much more attractive than bonds.