Tuesday, July 31, 2012

Trust and the Stock Market


Domestic equity mutual funds have seen outflows for the past five years, and last week saw the largest redemption activity from stock funds so in 2012.

Institutional allocations to publicly traded equities is in many cases at multi-year lows, as investment committees find alternative investments more appealing (despite the relatively poor track record of recent returns from hedge funds and private equity).

Bond funds, meanwhile, are still seeing net inflows despite historically low yields. The fact that the relative valuation of stocks compared to bonds makes little difference, it seems, to most of the investing public.

Investors, it seems, simply don't trust the equity markets to deliver the types of returns that historically has been the case.  Restoring investor trust in the stock market, then, will play an important role not only in the investing world, but economically as well.

Professor John Kay (who also writes for the Financial Times) has produced a report for the UK government addressing the issue of trying to restore trust in the capital markets. It's a very long report totaling more than 100 pages, but fortunately he has also produced a summary.

The interesting part of Professor Kay's thoughts are the fact that he is not calling for any new rules or regulations.  Instead, he is proposing more of a change in the way that investors view their relation with their asset managers, and the time horizon with which they invest.

This is easier said than done, of course.  Most investors claim to have a long term time horizon yet they continue to monitor investment performance on a monthly or quarterly basis.

Part of the problem is the incredible ease with which data can be obtained.  In the "old days" investors would buy a stock based on their view that the company fundamentals were promising, and that the share price would eventually rise to reflect a prospering business.

Today, however, most market participants are buying a stock based on the belief that the stock price will rise.  Here's how Professor Kay describes it:

On top of that, the asset manager is judged, not just on his short term performance, but on his short term performance relative to other asset managers. He is being judged, by reference to the quality of his guess at other asset managers’ assessment of the event. This is, of course, Keynes’ famous beauty contest, in which contestants are speculating, not on which face is most beautiful, but on which face other contestants will think other contestants will think is most beautiful. 

The shorter the performance horizon relative to the value discovery horizon, the more important is the understanding of the psychology of other asset managers, and the less important the understanding of the impact of events on the fundamental value of the company. And that is true for asset managers, for prospective investors and for traders – and for corporate managers who focus on the price of their company’s shares, or are incentivised to do so.


And here's an excerpt from his conclusion:

The central figure in the chain is, and should be, the asset manager. Indeed in my ideal world, the simple chain of intermediation would be one in which the saver places funds with an asset manager in whom he or she has trust and confidence, and the asset manager invested in companies with whom he or she enjoyed a sustained relationship of trust and confidence. I should acknowledge that only a proportion of total equity holdings can, or should, be actively managed in this way – it is likely that passive holdings will constitute a large part of the overall market

Monday, July 30, 2012

Investor Sentiment Remains Sour

Remember the axiom of "Sell in May, and Go Away" that was being repeated last April?  So far, at least, this advice has been not helpful:


Investors are understandably cautious in their approach to the stock market.  Despite historically low levels of interest rates, individual investors continue to flock to bond funds rather than stocks.

Nearly $10 billion left equity funds last week - the largest outflow in 2012.  Bond funds received almost $4 billion during the same period, mostly in high yield and emerging market debt.  This is consistent with the pattern for the last 5 years.

Here's how the Wall Street Journal described current investor sentiment:

Investors, particularly individual investors, haven't been convinced by the 2012 rally. They've bailed out of U.S.-stock mutual funds in droves—withdrawing $71 billion so far this year, according to the Investment Company Institute, the mutual-fund industry's trade group.

Bullish investor sentiment, as measured by the widely followed American Association of Individual Investors survey, was at its lowest in two years in the week ended July 19, before rebounding somewhat last week. Bearishness, meanwhile, is near recent peaks.

"There's this unbelievable disconnect between what the stock market is actually doing and the psychology of investors," says Liz Ann Sonders, chief investment strategist at Charles Schwab.


In another article published by the Journal over the weekend, veteran market strategist Byron Wien commented on investor sentiment:

Today, Mr. Wien says that stock trading has replaced investing, with the average holding period for stocks going from eight years in 1960 to seven months today. "I think the public feels that professionals have taken over the market and the playing field isn't level for them," he says, adding that as a result many investors in recent years have piled into bond funds where they perceive a better deal. "And the only thing that would change that is if the stock market started to perform very well again. Then they would feel that they're missing something. Right now they don't feel they're missing anything."

Yet Mr. Wien believes that they are missing something. He says stocks are likely to outperform bonds, and he thinks that a lot of investors will get over their concerns about the financial system once the market is rising again. Part of his optimism lies in the fact that he isn't sure the system is as rotten as it may seem.


Changing investor sentiment will not be easy, especially in the wake of a steady drumbeat of negative news reports from Europe and our own country.

My best guess is that when interest rates begin to rise, and the risks in bond mutual funds become apparent, investor attitudes will change.

However, given the fragile state of the U.S. recovery, and the very precarious state of the euro, a significant rise in interest rates seems some months away.

Friday, July 27, 2012

The Search For Yield

As I wrote yesterday, the one consistent theme in my recent client meetings is the frustration with today's record low interest rates.

Bond rates are low for a reason - investors are scared to death of events in Europe.  Recent economic data indicating a slowdown in economic growth does not exactly confidence either, nor does the poisonous political environment.

Writing in this morning's New York Times, Paul Krugman points out that many investors have been consistently surprised by the continued march of lower interest rates:

For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits — deficits that are overwhelmingly the result of our ongoing economic crisis. In May 2009, Niall Ferguson of Harvard declared that the “tidal wave of debt issuance” would cause U.S. interest rates to soar. In March 2011, Erskine Bowles, the co-chairman of President Obama’s ill-fated deficit commission, warned that unless action was taken on the deficit soon, “the markets will devastate us,” probably within two years. And so on. 

After noting that the U.S. government can now borrow money more cheaply than any other time in our history, Dr. Krugman explains why so many economists got the direction of interest rates wrong:

So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt.


Low interest rates are causing investor to look for yield anywhere they can.

The Telecom sector of the S&P 500, for example, is the best performing sector of the S&P 500 year (+13.5%) largely because it sports an average dividend yield of 4.8%.

The problem is exacerbated for large investment pools such as pension plans and endowment accounts.  Typically a significant portion of their assets are allocated to fixed income, but with yields so low the bond portion of their accounts are not able to meet their return objectives.

The Financial Times noted earlier this week that low rates are forcing investment committees to look for more risky alternatives to try to meet their investment objectives.  However, the results so far have often not proven to be a panacea either:

Andre Perold, chief investment officer for High-Vista Strategies, a hedge fund, and former professor of banking and finance at Harvard, says that in this environment the only way to hit return targets is through greater risk-taking - for example, through higher allocations to equities and equity-like assets.

But for most institutions, he says that such an approach is a "loser's game".  Calpers {Calfornia Public Employees' Retirement System, the nation's largest public pension plan} is a case in point.  The pension fund has $5.1bn invested in hedge funds, but the five-year annual return from its Absolute Return Strategy is 0.7 per cent - better than its overall portfolio but far worse than that claimed for the average hedge fund and nowhere near its long-term return requirement.


I continue to recommend to clients that dividend-paying stocks not only make investment sense, but are also probably the only way they will be able to meet their own personal financial targets.

But I also point out that it will not be a smooth ride.

Thursday, July 26, 2012

Listening to Clients

I've had a number of interesting client meetings over the last few days.

The common theme is a combination of concern and frustration.  Most clients are understandably concerned with the problems in Europe and the poisonous political climate in Washington. Unemployment remains uncomfortably high, and real income growth for many American has been stagnant for several years.

So the obvious investment solution for a worried investor is to head for the bond market.  But bond investors today are greeted with interest rates at record low levels, and yields are generally below the prevailing rate of inflation.

Which then leads to a discussion of about stocks, especially dividend-paying high quality stocks.  And what I'm finding is a grudging acceptance of the fact that the stock market still offers the best chance of making a reasonable investment return for the next few years.

The problem, of course, is that the rocky markets of 2008-09 remain fresh in everyone's minds.

If you've ever lived through a bear market as an investor, the searing agony that you experience watching a market move relentlessly lower never leaves you.

When markets recover - as they inevitably do - you still are left with the uneasy feeling that the markets are always setting you up for another leg down.

The problem with focusing on the last bear market, however, is that you also tend to miss opportunities.

When I started in the business in 1982, stocks had gone nowhere for 12 years - similar to today.  Money market funds were the rage in the early 1980's, while stocks and bonds were scorned as "vehicles of confiscation".  The next 19 years, of course, provided outsized gains to investors.

It doesn't seem likely that we are going to see a repeat of the bull markets of the last part of the 20th century. Simply put, there's too much debt that needs to be repaid, and growth is likely to be below historic averages for years to come.

On the other hand, when you have today's combination of decent fundamentals, reasonable valuations and widespread bearish sentiment, it is not that unlikely that the stock market could move still higher from current levels.

Markets continue to grind higher.

Ned Davis Research this morning noted that it's not only the U.S. stock market that is trending up; 62% of the 45 markets in the All Country World Index now have rising 200-day moving averages.

Earlier this week Myles Zyblock from RBC Capital Markets noted that while less than 45% of companies reporting this earnings season are reporting postively on revenues, more than 75% of the S&P 500 companies are reporting positively on earnings.

Sales may be sluggish, but earnings are still relatively strong. Corporate America has continued to grow amidst the global economic turmoil, and shows every indication that this trend will continue.

Tuesday, July 24, 2012

Planning For Retirement in an Era of Financial Repression

An article which appeared in last Sunday's New York Times Opinion section titled "Our Ridiculous Approach to Retirement" was very interesting, albeit depressing, reading. 

Here's an excerpt:

Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. The specter of downward mobility in retirement is a looming reality for both middle- and higher-income workers. Almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day. 


The article goes on to suggest that the best solution for most workers in the United States would be to have the government offer a plan that looks very much like a private pension plan:

...The coming retirement income security crisis is a shared problem; it is not caused by a set of isolated individual behaviors. My plan calls for a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities. This is a sensible way to get people to prepare for the future. You don’t like mandates? Get real. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster. 

However, while this might make intellectual sense, my guess is that today's political environment is just too toxic for such a plan to be implemented.

Which means most workers are on their own.

In my experience, many individuals tend to either play it too conservatively (e.g., low yielding bond funds) or "swing for the fences" (e.g., buy highly volatile stocks that offer only the remotest chance of a making a killing) when it comes to retirement planning.

Taking a balanced approach to saving to retirement should produce satisfactory results but also requires patience and a long-term time horizon - traits that are difficult for most of us to master.

In today's market, with interest rates at record lows, it would seem to make sense for retirement accounts to have the majority of their assets in equities.  However, this has not been the case.

Individuals have been fleeing domestic stock funds over the past five years in favor of bonds.  Unless you are very near the point of your life when you will need to start pulling funds out of your retirement account for living expenses, commons stocks should be the main focus of your investing activities.

This is not wild-eyed bullishness, by the way.  Instead, it is based on history going back to 1900, as Jeff Sommer's column in the Times Business section pointed out.

Sommer discussed a recent research piece published by Seth Masters of Bernstein Wealth Management titled "The Case for the 20,000 Dow".  Here's a couple of excerpts:

Over 10-year periods since 1900, stocks have outperformed bonds 75 percent of the time, according to Bernstein’s calculations. But today, bond prices are relatively high — their yields, which move in the opposite direction, are extraordinarily low — and stock prices are relatively low. So the firm sees the chance of stocks beating bonds over the next 10 years at 88 percent.

So is Mr. Masters simply making ridiculous return assumptions?  It didn't sound that way to me:

Precisely because bonds are now extraordinarily overvalued and stocks are undervalued, in his view, stocks are extremely likely to outperform bonds over the next decade or two. The Dow Jones industrial average is likely to reach 20,000 during that time — and probably within the next five to 10 years, he said. 

“Our projected stock returns may sound optimistic,” he writes. “They’re not. They are well below the long-term average for U.S. and global equities and based on conservative assumptions about economic and market conditions. Bonds, on the other hand, are unlikely to outpace inflation, because current yields are extremely low.” 

Monday, July 23, 2012

A Tale of Two Europes

I'm traveling today so my note will be brief.

Europe is obviously facing a number of issues. Safety - not return - is paramount to many investors.

And so last week Germany (presumably the strongest of the euro block nations) was able to sell 4.2 billion euro of bonds with a two year maturity at a negative -0.06% yield.

This is the first time in Germany's long history that its government has been able to sell bonds offering negative yields.

In other words, there was enough demand for safety and liquidity that investors were willing to lock in a loss for two years.

And yet.

The Financial Times reported the following on Saturday (I have added the emphasis):

The FTSE Eurofirst 300 index of European stocks recorded a seventh weekly advance,of its longest run of gains since mid-2005.  The strength came in spite of nagging worries about the eurozone debt crisis - as Spanish government bond yields held near unsustainable levels - and about the outlook for global economic growth.


I still believe that Europe will eventually work through its issues, and side with the equity camp of seeing European markets as offering more opportunity than risk.

But I am still mindful that there is a huge class of investors that sees more peril than I do.

Friday, July 20, 2012

What To Do With Microsoft Stock Now?

Reel your mind back 15 years ago.

Microsoft was dominating the computer world.  The Justice Department had seriously considered trying to break the company up based on its dominance in Windows software. And in a desperate move to try to save his company, returning Apple CEO Steve Jobs announced that Microsoft was investing $150 million in nonvoting Apple stock.

Little could anyone guess at the time that both companies were about to go in different directions.

I won't go through the whole story here - I would recommend Walter Isaacson's excellent biography Steve Jobs for anyone who is interested - but sufficient to say that Microsoft is no longer the feared company that it once was.

Even Vanity Fair has weighed in with its own negative Microsoft story:

Analyzing one of American corporate history’s greatest mysteries—the lost decade of Microsoft—two-time George Polk Award winner (and V.F.’s newest contributing editor) Kurt Eichenwald traces the “astonishingly foolish management decisions” at the company that “could serve as a business-school case study on the pitfalls of success.” Relying on dozens of interviews and internal corporate records—including e-mails between executives at the company’s highest ranks—Eichenwald offers an unprecedented view of life inside Microsoft during the reign of its current chief executive, Steve Ballmer, in the August issue. Today, a single Apple product—the iPhone—generates more revenue than all of Microsoft’s wares combined.


If you had invested $100 five years ago in Microsoft stock, you would have (not counting dividends) about $100 today.  A $100 investment in Apple over the same period would be worth $400:

The market capitalization of Microsoft today is less than half of Apple, and many could argue that is appropriate.

But this may change as corporations move rapidly towards mobile devices.

I am a huge Apple iPad fan.  I love the ease which I can access information, and most of my commuting hours are spent on my iPad. 

But my corporate activities are mostly based on Microsoft products.  My email, web browser, and office software are all Microsoft.  Apple may dominate in the consumer market, but not in the business world, and that may very be where the next leg of growth comes from.

Microsoft is expected to generate nearly $75 billion in revenue in 2012.  Roughly 70% of Microsoft's revenue, and 83% of its operating profit,  comes from the so-called enterprise space - corporations.

If the next evolution of the computer hardware sector will be the tablet, there are several industry analysts that corporate IT departments will be more interested in Microsoft's competition to the iPad (named "Surface") since so much of their IT space is already dedicated to Microsoft products.

Not bad for a company widely viewed as a dinosaur.

Microsoft's top line is expected to grow at roughly +9% per year for the next few years, despite the gradual shift from PC's to tablets.  Microsoft throws off about $30 billion a year in free cash flow, and pays a 2.6% dividend.  And the stock trades at less than 10x expected 2013 earnings.

I don't really like working with Microsoft software - I've been spoiled by Apple - but I suspect that 5 years from now I will still be using Word to write memos, putting data into Excel spreadsheets, and making presentations on Power Point.

So it may very well be that Microsoft, and not Apple, will be the stock to own for the next 5 years.

Thursday, July 19, 2012

Five Reasons to Like Stocks Now


I ran across this piece on the CNBC website.

Courtesy of famed investor Leon Cooperman, I thought it offered five good reasons to be investing in stocks now (I added the emphasis):

Leon Cooperman loves stocks - even if the economy isn't going anywhere - but doesn't hold the same affection for government bonds, though that's where investors have been putting most of their money.

The veteran investing guru and chairman at Omega Advisors believes growth will continue at a modest pace, but stocks will climb because they're underpriced...

"Stocks are cheap against inflation, they're cheap against their own history, they're cheap against interest rates, they're allowing for slower secular growth and they're allowing for lower interest rates," Cooperman said during a presentation at the "Delivering Alpha" conference presented by CNBC and Institutional Investor.


There is an old Wall Street saying that goes something like this:

The difference between an older portfolio manager and a younger one is the older one focuses on downside risk, while younger managers think more about upside possibilities.

However, in today's financial world, this axiom has been turned on its head.

Younger managers - who I would define as those who started in the business less than 15 years ago - are full of reasons why we are heading towards another leg down in stocks.

Older managers such as Leon Cooperman, however, look at today's stock market, and find more possibilities of profits than not.

Here's Cooperman again:

"It might require patience," Cooperman said. "It's very hard for a youthful 69-year-old person to preach patience."

So while Cooperman advises investors to load up on stocks, he thinks they should avoid one asset class: U.S. government debt, despite the strong flows to the group...

"U.S. government bonds are to be avoided," he said. "They are a very unattractive asset class."

The reason for this dichotomy is not hard to fathom:  If you've only experienced choppy or downward stock markets - such as we've had since 1998 - you are naturally only focused on risk rather than reward.

And while there is always the possibility of a correction, the fundamentals would suggest that investors with any sort of longer time frame will find numerous opportunities in the stock market.

Here's noted equity strategist Richard Bernstein thoughts on U.S. stocks in this morning's Financial Times:

Once again, investors focusing on politics may be missing an opportunity.  The Russell 2000 has the fastest projected earnings growth rate of the major equity segments in the world, and the Russell 2000 has outperformed emerging markets since the March 2009 trough.  The U.S. stock market may actually be a "growth" market.

We see many growth-oriented themes in the U.S. The U.S. consumer is directly benefiting from the rest of the world's economic woes.  Real wage growth is positive for the first time in nearly two years thanks to falling petrol and energy prices.  Given a 1.5 per cent Treasury note, it should be no surprise that housing and construction are no longer comatose.


Today's extreme levels of pessimism regarding stocks, and incredibly low level of bond yields throughout the world, is creating an opportunity.

Wednesday, July 18, 2012

About that CalPERS shortfall....

The California Public Employee's Retirement System (CalPERS) reported its investment results for its fiscal year ending June 30, 2012.  Unfortunately, recent results have been disappointing:

With three California cities electing to file for bankruptcy in the past month, in large part due to underfunded pension obligations, the last thing California needs right now is more bad pension news. Which is unfortunate, because the California Public Employees’ Retirement System, the nation’s biggest public pension fund, delivered a jolt of bad news this week when it reported a paltry 1% return on its investments in the fiscal year ended  June 30....

CalPERS’ 1 percent return is well below the fund’s discount rate of 7.5%, a long-term target that CalPERS lowered recently as it re-evaluated its economic assumptions in the current investing environment. Other pension plans have made similar adjustments recently. The rate is significant in that it determines the amount of money such funds need to invest now in order to meet future pension obligation needs.


Now, to be sure, recent markets have been frustrating.  Bond yields are at multi-generational lows.  Stock market returns have been generally positive, but most active managers have underperformed the S&P 500 as gains have been largely limited to just a few sectors.

But still.

I have written several posts over the past few months about decisions made by public pension plans that even at the time time seemed very short-sighted.

For example, CalPERS - a mammoth pension plan whose time horizon should be measured in decades rather than months - decided to reduce their allocation to stock last September:

 The California Public Employees Retirement System is as worried as any investor about the uncertainty in the U.S. and Europe.

That's why Calpers, as it is known, is a "longterm trader" that is playing down equities, Chief Investment Officer Joe Dear told CNBC Wednesday. He indicated the Calpers portfolio is "underweight" equities by about 4 percent from its typical allocation.

"There’s so much uncertainty," said the CIO of the fund covering 1.6 million public employees. "You have massive uncertainty about the ability of political leaders to deliver the tough decisions that have to be made. All the growth forecasts for the developed markets are declining. That is not good for [the] equity outlook." 

With uncertainty and a cut in its stock portfolio, the fund has had to come up with alternatives in order to maintain a target of a 7.75 percent return, he said. 

Since then, the S&P 500 has risen +17%.

So what did they do with the funds?  Mostly CalPERS increased their allocation to alternative investments.

But the track record of alternatives is been mixed at best, as I wrote last December:

For example, this morning's New York Times discusses the increased allocation of public pension plans to private equity investments.

Private equity has an aura about it. The idea that a small group of incredibly savvy investors will be able to invest in the next Apple, Facebook or Google and deliver outsized returns is very attractive after the disappointing returns in the public market over the last decade.

Whether this is truly the case is debatable, but that hasn't stopped billions from flowing into private equity. Here's an excerpt from the article:

At the same time, pension plans everywhere are also desperate for yield. Pension plans are reportedly underfinanced by anywhere from $700 billion to as much as $4 trillion, depending on the calculations. Poor returns over the last few years have not helped. Over the last five years, the average state and local pension fund has returned 4.7 percent, according to Callan Associates.

Pension plans hope to make up these lost years and reach performance targets that in some cases are still set at a hopeful 7 to 8 percent a year. Private equity has traditionally been a high-performing asset class, and shifting more assets into this and other alternative investments like hedge funds is seen as a possible solution. Wilshire & Associates recently found that the average pension fund had increased its allocation to private equity to 8.8 percent in 2010 from 3 percent in 2000.


Finally, I would make four additional points about not only CalPERS but the investment strategy for any public pension plan, as I wrote in an email to a colleague this morning: 

 First, the shift in asset allocation in September was not based on the relative investment attraction of other asset classes. Rather, it was focused on the CALPERS view that stocks were poised to go lower based on events in the U.S. and Europe i.e. market timing; 

Second,  if anyone should take a long term view, it should be a massive pension fund.  Worrying about events in the next couple of months, when your liability stream is 20 or 30 years, at least, seems wrong;

3   Third, their decision has a real impact on the taxpayer.  Pension shortfalls are, of course, killing municipalities, and poor investment decisions mean that eventually the taxpayer will have to either pay more or other services reduced;

4   And, fourth, the expected rate of return for most other asset classes will not come close to the 7.75% actuarial rate, especially when looking at bonds.  It seems to me that if anything should be cut it should be fixed income not because rates couldn’t go lower, but rather that the math makes it basically impossible to meet the investment hurdle.

Tuesday, July 17, 2012

Barton Biggs and the Art of Writing About Investing

 “As investors, we also always have to be aware of our innate and very human tendency to be fighting the last war. We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different ways.”

Barton Biggs,  from 2012 note entitled “It’s Never Easy,” via Doug Kass

Legendary investor Barton Biggs died last weekend at age 79.  Biggs was widely known and followed in the financial world, and he will be missed.

Here's an excerpt from one tribute to Biggs that appeared on the Wall Street Journal's Market Pulse blog:

Barton Biggs’s death marks the passing not just of a man but of an entire profession: the market guru.

For years at the end of the 20th century, Mr. Biggs typified a class of Wall Street investment strategists who seemed smarter, wittier and more creative than anyone else in the room.

He won renown as an investment strategist for Morgan Stanley and after retiring from that firm founded and ran a $1.5 billion hedge fund called Traxis Partners. He died on July 14, Morgan Stanley announced....
Mr. Biggs’s pronouncements, and those of highly paid contemporaries such as Abby Joseph Cohen, Byron Wien, Elaine Garzarelli and Edward Kerschner, moved markets and electrified faithful investors, who waited eagerly for their weekly commentaries in the 1980s and 1990s. Their essays were printed in booklets and mailed throughout the nation in the days before email became commonplace.


Biggs was not only a great investor, but he was a terrific writer as well.

Writing about finance - and making it interesting - is a difficult task.

Too many financial articles that I read these days are notable for the fact that they all sound alike.

The same complaints, the same dire forecasts, and the exasperated tone of the authors who can't understand why the world is not bending to their point of view makes them all but unreadable.

Not so with Barton Biggs.

Biggs had a writing style that seemed effortless, and almost conversational in tone.  I always looked forward to his weekly research comments when he was chief investment strategist for Morgan Stanley, and almost always came away with an insight or two that proved helpful in my investing activities.

Not every piece Biggs wrote was strictly about the markets.  Biggs was an avid outdoorsman, and occasionally he would use his weekly piece to talk about a trip he had taken.

For example, one summer Biggs had gone hiking in Sun Valley. He talked about the hot summer walks through the mountain passes, and the welcome ache in his legs at the end of a great day on the trails.  Later, after supper had ended, he and his friends sat on a covered porch at night drinking cold beer watching the lightning bolts over the mountains.  I carried this article in my briefcase for months.

Biggs and other investors of his generation were not always negative or bearish, as so many strategists are today.  He recognized that while markets could occasionally get overvalued (as he famously warned in 1999), more often there was opportunities to be had to investors that were willing to look beyond the obvious and focus on what could go right.

Here's a brief summary of some of his market thoughts, courtesy of Bloomberg:
The New York native predicted the bull market in U.S. stocks that began in 1982 and warned investors away from Japanese shares in 1989 before they collapsed. He sealed his fame telling investors to sell technology companies as they soared in the late 1990s, a judgment dismissed by the press and other investors until the dot-com bubble burst....

After retiring from Morgan Stanley in 2003 at age 70, Biggs started Traxis Partners, a hedge fund, with two other Morgan Stanley (MS) alumni. While he was blindsided by the credit crisis that sent the Standard & Poor’s 500 Index in 2008 to its biggest annual decline since 1937, he correctly called the bottom in U.S. stocks in March 2009, and Traxis’s flagship fund returned three times the industry average in 2009. 


Monday, July 16, 2012

Ackman to P&G: Youi're Not A Utility

Last month I wrote a post about Procter & Gamble.

After being a growth stock for much of the 1990's, the stock of P&G has lately acted more like a regulated utility stock than a global consumer products company.

For example, over the last 5 years, while P&G's stock has been essentially flat-lined (blue line below), Colgate Palmolive (red line) is up more than +50%:

Here's what I wrote last month:

But here's where I think that P&G comes out more favorably than utilities:  The relative valuation of utility stocks versus the S&P is at its historic high.  The group trades at a +20% premium to the market which seems to be to be pretty aggressive given the nature of the utility business.

P&G, on the other hand, is trading below its historic valuation versus the broader market over the past 10 years.  True, it traded lower - in 2009 - but for the most part investors were historically willing to pay a higher premium for P&G's combination of high dividends and consistent (albeit slowing) business results.

The chart I have posted above suggests that if we are truly in a low market growth environment - which seems likely - that high dividend, low expectation stocks like P&G are worth a look.


Turns out that activist investor Bill Ackman of Pershing Square Capital Management is not content to let P&G languish.

Last week Ackman made a $2 billion investment in P&G, calling on management to either make good on its promises to reduce costs and increase growth rates, or consider more radical changes

The maker of Tide, Pampers and Crest is under pressure from investors frustrated after Chief Executive Officer Robert McDonald reduced P&G’s profit forecasts three times this year. Investor Bill Ackman last week bought into the company with what he called his biggest initial stake ever and is likely to push for a management change and large asset sales, said another person familiar with the matter. 


It will be interesting to see how this all plays out.  The market capitalization of P&G popped by $11 billion last week, thanks to Ackman's investment, and now stands at $188 billion.  Normally companies this size are largely immune to outside pressure, but apparently not so in this case.

And, yes, I would still be a buyer of P&G stock for conservative portfolios.