Today there is a very interesting article on http://www.bloomberg.com/news/2012-01-30/longest-s-p-500-valuation-slump-since-nixon-discounting-record-u-s-profit.html showing the immense pessimism priced into US equities, exhibited by the extremely low price/earnings ratios. Markets go from periods of pessimism to periods of exuberance, but what is striking about the last several years is that at no point has the market rallied to a point where stocks were expensively valued on an absolute, or relative basis. As Mark Twain once said “History doesn’t repeat itself, but it does rhyme” we believe that inevitably you will see the markets re-price to more favorable levels.
Even conservatively financed, stable cash flow generating companies, such as Pepsi, P&G, MSFT, CSCO, AAPL, GOOG, INTC, are trading at extremely reasonable valuations. In the case of Pepsi, P&G, MSFT, and INTC, the dividend yield is actually greater than the yield on the 10 year treasury bonds. This means that if you were to buy the 10 year treasury at these levels you are going to be generating less cash than you would assuming those companies just keep their dividends flat over the next 10 years, and you don’t have any upside potential beyond that. You have no protection for inflation whereas in these companies you have substantial pricing power and a tremendous history of growth in earnings, cash flow, and dividends.
For many investors who are still saving for retirement, or for their children’s education, we believe that not being in the markets could be a huge risk as now you have a tremendous combination of low interest rates, and a cheap stock market. Many people will miss the best parts of the next rally in the equity markets just like they did in 2009 when fear hit its climax. This will force them to allocate capital when prices are more dear and when the margin of safety is far less. If we do get substantial inflation or potentially hyper-inflation, not being in the markets will pretty much assure someone of a significant reduction in their financial position.
INVESTING IN THE FINANCIAL MARKETS INVOLVES RISKS. OPTIONS ARE NOT SUITABLE FOR ALL INVESTORS.