If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
I’m Not Seeing Enough Fear to Spark the Next Rally
08/22/2011 12:36 pm EST
Those of us trying to keep our powder dry until we’re near the bottom—acknowledging that we’re not going to catch the bottom—are asking, when is the fear intense enough?
It certainly got very intense last week. The yield on a two-year Treasury note fell to 0.19%. The ten-year Treasury closed the week at 2.06%. That was slightly above the 1.97% low set on Thursday, which itself was the lowest level since 1950.
And that for the bonds of a country downgraded from AAA to AA by Standard and Poor’s. But the Treasury market is incredibly deep and liquid, and big investors know they can get in and out without roiling prices.
Nobody wants to buy equities—at least until what I’m calling the Jackson Hole bounce today. The dividend yield on the S&P 500 sits at 2.25% as of Friday’s close—that’s the first time since 2008 that the stocks in this index have paid more than the ten-year Treasury.
The S&P 500 now trades at a price-to-earnings ratio of 12.5—that’s down from 15 at the end of 2010. But US stocks are at giddy heights compared to their European counterparts in the Stoxx 600, which now sell at 10.3 times earnings. That’s down from 13.3 times earnings at the end of 2010.
Developing markets aren’t faring any better. The S&P 500 fell by 1.5% on Friday, but Hong Kong’s Hang Seng fell 3.1%. Markets from Shanghai to Sao Paulo are either in bear markets, or close to them.
This rout has cut $6 trillion from the value of global equities in the last month.
But the market still doesn’t strike me as scared and pessimistic enough. I hear too much talk from individual investors and from Wall Street about the opportunity to pick up bargains. At a bottom, nobody is taking like that. I think we need one more rally and then another rout to smash hope even further.
The hardest thing to figure out right now, though, is the scale of this downturn. Should I be looking for a bounce in the next few days, followed by a rout in September, and then a rally to end the year that ushers in a new upward-trending market?
Or should I be looking at a larger scale, and thinking that a buying opportunity on any low in the fall will be followed by an end-of-year rally…which is just the setup for a decline in 2012 that will be the hope-crushing turn that results in a real bottom?
At this point I don’t know. Really.
I’m inclined to hedge my bets by buying high-dividend stocks with solid cash flows whenever we reach what looks like a bottom this fall. That way I still get paid—and quite handsomely too—if an end-of-year rally turns into another disappointment.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.
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