Some interesting trend
changes appear to have occurred in May. The most important were yields on
10-year US Treasury Notes went from 1.67% to 2.16%. The end of the 30 plus year
bull market in bonds was declared by Bill Gross of Pimco. Utility stocks lost
9.1% of their value in May while Telecoms , REIT's MLP's and the majority of
bond categories all had losses.
Investors pushed up stocks
for the seventh month in a row as the S&P 500 finished at 1630.74, up 14.3%
year to date. Speculation as to when the FED will begin tapering it's bond
buying binge is a hot topic which seems to cause stocks to sell off.
Valuation levels in slow
growth/ high yielding stocks had reached levels not seen in some time relative
to the market averages hence the sudden run for exits in this most successful
investment category for the past year.
"Once everyone knows how
to play the game they change all the rules" is a common Wall Street adage.
One of my fellow market
observers Steve Reynolds of Craig Drill Capital L.P. has drawn attention to a
recent Vanguard Group survey citing 86 years of market data which concludes the
major predictor of stock market performance is valuation not GDP growth,
dividend levels, earnings or interest rates. Economists and Wall Street
forecasters focus on all these other issues but most recommend staying fully
invested regardless of valuation.
Rational people buy when
things are cheap and sell when things are dear. Warren Buffet is the richest
example of such an investor who buys low and when he does sell, it is normally
for high prices. Human psychology seemingly keeps rational people from doing
the same as we move from phases of fear to greed and back again often
overlooking valuation.
At 1630 the S&P 500 is
trading at 15 times the $108 consensus estimate for this market index whose
yield rivals that of the 10-year Treasury note. Stocks while not dirt cheap are
cheap relative to bonds and their own historical averages.
Common sense indicates that
bonds are far from cheap and likely very dear as rates have finally begun to
rise as the global economy remains in growth mode. Stocks in the middle of
their historic PE range of 7x - 22x are well off their March 2009 panic lows
but have not approached valuations at previous market peaks.
In the short run numerous
factors affect market prices around the world today: including timing the next
Fed move, Japanese monetary policy, and global unrest.
We will continue to focus on
generating returns given our assessment of where value lies.
Douglas Coppola
Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.
