On the last day of the quarter the S&P 500 index reached an all time high by 3 points surpassing the 1565.15 peak of 2007. In 2000 at 1527.46 index earnings were $67, P/E ratios were 22.8 times. Earnings were $100 in 2012 with companies having half the debt they had 13 years ago. We seem to have broken out into a new uptrend.
Seventeen Wall Street analysts predict a year end close of 1583, with forecast earnings of $110.51. Today’s price level is a still modest Price/Earnings ratio of 14.1 times forward earnings. The dividend yield is over 2% with an earnings yield E/P of 7%. Index return on equity is 21%.
For the month and YTD, S&P 500 was +3.3% and +10% respectively. Except for bank loans at +2.11%, every bond index was down marginally. The aggregate bond index -0.20%, T-bills returned 0%. Commodities returned -1.1%.
Japan's Prime Minister Shinzo Abe declared an end to the era of deflation and embraced aggressive monetary easing policy similar to our own Ben Bernanke. The Nikkei 225 index in Tokyo managed an 11.7 % gain in dollar terms and 21.5 % in Yen terms. This was the best in the developed world.
Emerging stock markets were down 2.2 %, led by Brazil at -7.5%. Losses came about despite negative cash inflows, lower P/E ratios and higher earnings growth expectations than US shares.
The US dollar index has rallied 5.5% from its September 2012 low despite numerous predictions of the currency's demise. This may account for a similar percentage decline in gold prices this quarter.
Europe is still reeling from concerns over their currency union and overleveraged banks. Spain and Italy suffer from very high unemployment and recession while Greece and Cyprus are in Depression with no release valve from currency devaluation. Necessary and traditional currency devaluations are not in the lexicon of the elite Eurocrats.
An ever tightening noose is slowly asphyxiating already weak economies.
It is logical to assume that the sick men of the south will likely die from the prescribed cure called fiscal austerity. Alternatively and ultimately the strong countries like Germany will be forced to guarantee the debt of their weaker brethren or suffer a Euro break up.
Bank deposit confiscations, above 100,000 insured Euros in Cypress are likely to cause every Euro bank depositor to question the safety of their money.
Institutional and individual investors alike are anxious for a return on their savings. With much of the average of the S&P 500 index paying dividend yields exceeding the 10 year US Treasury’s 1.85% many find stocks a reasonable alternative to bonds. In addition, dividend and capital gains are taxed at 20% or less while income is taxed at the higher federal rate of 39.6%.
With the Central Bank’s ultra easy policy assured for 2 more years, uncertain new leadership in China and a weak Euro zone investment choices have narrowed. Our solution is to continue to seek higher yields from lower credit bonds with short durations. Credit defaults remaining low in the US make high yield corporate debt relatively attractive.
Mortgage Backed Securities still look good with housing prices on the rise. Additionally, Master Limited Partnerships provide high yields, tax deferral and a way to participate in essential infrastructure build out.
It is important to note that despite record debt levels the US is moving toward energy independence. With “fracking technology” we are unlocking our domestic shale reserves.
This gradual but steady move away from foreign energy imports improves our current account and budget deficits. Low energy costs due to domestic sourcing will encourage an industrial renaissance in this country.
With gridlock in Washington, a solid housing recovery, historically low interest rates plus emerging energy independence the stage appears set for further share price gains.
Increasingly the US is seen as a haven for foreign assets. It is interesting to note that both the Chinese and Russians are buying our real estate and energy assets.
Consumer confidence may be low but the world's confidence in our financial system appears to be rising.
Douglas Coppola
April 1, 2013
