The thing is the market is not always right in tanking some stocks to low valuations so if you can identify when the market is wrong you can make some big money. So even in the case value doesnt beat growth in the long-run a very good stock picker can beat the averages, its hard to do that in the growth area since they are harder to understand. But I do agree with the main VN that the market doesnt serve free lunches everyday of the week, when the homebuilders started to crash people pilled in saying PE ratios were so low. Same thing happened with financials in 2007, of course then earnings went into a free fall. I just happen to believe every other day of the week there is some kind of free lunch that an astute stock picker can find
This is probably some kind of permant market edge since the when there are dislocations in the vehicles that exploit market inneficiencies such as hedge funds/investment firms that market should be priced incorrecly leaving a few semi-free lunches for those able to take risk
Looks like VN just dramatized the PE ratio situation. It is a valid indicator for predicting long-term stock returns(10 years). And thats straight from his own source's mouth Ken Fisher http://faculty.darden.virginia.edu/boebelr/EquityWeb/sessions/Sess13/Bias JPM01.pdf If that was not the case that would mean that capitalism was broken. When the cost of starting up a new business is lower than its market value, IPOs will pop up, so will capex. The opposite is also true. If PE ratios didnt mean revert eventually they would engage in some kind of random walk or trend, which means we would see ridiculous levels that were beyond economic rationality quite often, instead they only happen sometimes and eventually correct So yes, the PE ratio doesnt work in the short-run but it is a good guide for long-run returns
Chap 13 "In fact, declines in IPOs are highly bullish. Figure 13.3 shows the total number of IPOs in each of the past 20 years contrasted with the S&Pâs performance. Statistically speaking, the correlation between the change in the number of IPOs in one year and the percentage change in the market the next year is −36 percentâa strong negative association that reminds us of the transfers of energy we see in the bounce of a ball or the movements of a roller coaster, something that market participants are all too familiar with these days." Why would other financial assets be different? Given that the laws of supply and demand have not been suspended, it seems that trendfollowing theory is highly flawled given that they claim rising prices are more likely to be followed by rising prices. Economics would tell you its the opposite. Anekdoten routinely claimed that, I have now reasons to believe he is wrong almost beyond the shadow of doubt, how can the man claim to have had 7 losing days in 2007 when he was so wrong about the technicals of the instrument he was trading? One could use the 'expectation' argument and say even though the odds were against you the expectation might not but that was not what anekdoten was claming
As a side note, I remember that IPOs were having the best period since 2007 in the last few weeks. The breadth of the market is also showing divergence, that has happened in almost every top in the S&P500 since the 70's(although the timing was the tricky part). I'm not shorting yet but just watching
"Regrettably, the number of companies paying dividends steadily dwindled from 70 percent in the 1970s to about 20 percent in 2000. U.S. tax policy is partly to blame. Dividends are taxed at the corporate level of 20 percent, and when they reach the investorâs pocket they are taxed again at 40 percent, on average. If the company holds onto the money and invests the money wisely, or buys back its own shares, investors can enjoy capital gains taxed at only 20 percent. Thatâs why the retention ratioâearnings retained versus total dividends paidâhas increased from 30 percent in the 1950s to 70 percent today" The divident yield in the S&P500 probably overstates the level of overvaluation of the stock market
"Dimson, Marsh, and Staunton, the authors of Triumph, examined the performance of the 30 percent of companies with the highest dividend yields at the beginning of each year and compared it to the performance of companies that were in the lowest 30 percent of dividend yield. From 1900 through 2001, companies with the highest yields returned 12.2 percent a year. Companies with the lowest yields showed an annual total return of 10.4 percent. A difference of 2.2 percentage points a year may not seem like much. But over time, it becomes a gigantic differential. Over the 101 years of the study, $1 invested in the highest-yielding companies could have come to $4,948, while $1 invested in the lowest-yielding companies would have grown to a mere $1,502." So there is some evidence buying 'value stocks' tend to beat the averages, its just that is seems it depends on how you measure 'value'
The lastest speculations on the UR http://www.frontlinethoughts.com/pdf/mwo111309.pdf http://globaleconomicanalysis.blogspot.com/2009/11/mish-unemployment-projections-through.html In my view this doesn't necessarily mean the Fed cant raise rates somewhere between now and 2013. I believe bank lending is also very important in this cycle, the thing is at 12-13% UR there will be a wave of bank failures and more nationalizations, more TARP money needed, so lending standards are probably not going into any kind of significant loosening anytime soon. The key is when will inflation expectations rise and antecipate/price in coming inflation. I find it unlikely for that to happen in the next 12 months with disinflation in inflation measures and constant hawkish rethoric from the Fed. Furthermore an exit will probably mean decreasing the monetary base first(reverse repos, selling USTs), not raising rates Its utterly amazing to look at the valuation of bank stocks and fed funds futures, the market couldn't be more wrong
I would just point out that Mish is incorrect in making fun of the Treasury 10.3% UR forecast. That is an average for 2010, not a end year rate like he thinks. I'm not sure what other mistakes he made
If the Treasury assumption is going to be off, it will not be by much. With 2010 likely starting at 10.3% heading to 11%, maybe it will average 10.6% or something. And they made that back in Q1 with much less information