Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Tuesday, May 17, 2011

Vitus Update - Pictures; Homework


Well, putting the lie to my previous dour ravings, the stock market has been on a tear.  12% in six months!

Perhaps I'm too comfortable in my role as your friendly curmudgeon, but I must point out that when you look at the chart since Christmas, 1999, we are still underwater these 11+ years...

The Dow - Large caps - seems to have broken out a bit, but not the broad market.  The S&P 500 is trading at it's long-term average P/E of about 16, down from 19 a year ago, due to reported strong earnings.  Will the economy and earnings continue to increase?  Note that recent earnings are still rebounding from the economy's near-death experience of 2008.  Also, the GDP increase for Q1 of 2011 came in at 1.75% annualized, less than expectations.  Also bull markets typically start when the S&P P/E is at or less than 10 (Katsnelson chart below).   So this market is still guilty until proven innocent, and we are still in a range-bound, aka bear, market.


Today I have as the balance of this missive a homework assignment for you:  Read Jeremy Grantham's recent Q1 Letter part 1 about our natural resource and climate problems.  The latter link takes you to a free subscription page.  For convenience, here is a direct link to the pdf.

Grantham is a highly respected investment guru.  I've quoted him before in the Update.  He's not an ideologue - which I, myself, am trying, somewhat unsuccessfully, to avoid becoming.  Here are some bullett points from a short synopsis I posted to the blog:
  • Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and fl owing in population.
  • From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress...
  • The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water...
  • The fact is that no compound growth is sustainable.  If we maintain our desperate focus on growth, we will run out of everything and crash.  We must substitute qualitative growth for quantitative growth...
  • From now on, price pressure and shortages of resources will be a permanent feature of our lives.  This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.  
  • We all need to develop serious resource plans, particularly energy policies.  There is little time to waste...
So, reading the longish Grantham piece is the homework.  As extra credit, and as an antidote for "The US is fast becoming Zimbabwe" debt-scare mongers, also read the longish Uncle Sam Won't Go Broke: The Misguided Sovereign Debt Hysteria from the Jerome Levy Forecasting Center.  Some things in there I don't 100% agree with, but mostly reasonable stuff.

Grantham likes (continues to like) high-quality (low debt, dividend paying) large-cap US stocks, and, medium to long term, emerging markets.

Rosenberg agrees with the large-cap theme, and adds US investment-grade bonds and long dated Treasuries, which he continues to point out are the most hated asset class.  He also likes gold, but thinks, as I do, that short-term, gold is over-bought. Vitus clients have held 5+% gold the last couple of years, though that has been - perhaps unwisely! - traded out short term.

Many, including Vitus, believe that commodities are long-term going much higher.  See Grantham.

The GDP Q1 growth of 1.75% annual, mentioned in passing above, is terrible.  Housing is improving a hair in some areas but mostly depressing to read about.  Unemployment?  "Initial Jobless Claims above 400k for a 5th straight week and 4 week average now at the highest since Nov." [link].  QE2 is ending in June.  

Because of the latter paragraph, it is Vitus' position that in the short to medium term the market will ease downward around 20% or ~200 S&P points at a minimum.  

I say the above with the understanding that many knowledgeable folks are predicting continued upside from here.  There are a number of themes for that, but suffice to say that the main one is that if the world economy does get worse or even continues to not obviously get better, US markets of various sorts will be the best of a lot of bad choices.

I'd like to report good news - I really would.  And sometimes I do.  But the pickings are slim, and, whatever the market does, the economic scene will very likely remain punk out to mid-decade.

Nevertheless - all best luck to you.  Be well

No comments:

Post a Comment