You can't have freedom for free
You won't get wise
With the sleep still in your eyes
No matter what your dreams might be
On this first day of February 2012 (2/1/12), I thought I'd offer up a little tribute to Rush and their 2112 album.
As January Goes, So Goes the Year -
January was a pretty special month for the "Risk-on" crowd. The S&P 500 was up 4.61%, this was the best January since 1997, 15 years ago. Developed market international stocks were up 5.27%, and Emerging Market stocks were up 10.78%. The yellow metal, Gold, was up a glittering 11.40%. Most "Risk-off" assets, like US Treasuries were flat, long-term US treasury bonds were up 0.57%. All in all a great way to start the New Year.
There's an old Wall Street adage, "As January goes, so goes the year". Many talking heads have been rolling this out over the last week, and on its face the numbers look impressive. In the 82 years since 1926, this metric worked 70% of the time. But in those 82 years the market was actually up 76% of the time. When January is a down year, however, the probability that the rest of the year is down is just 35%. In fact a statistician will tell you that only 1% of the variation in yearly performance is explained by January's performance.
Don't get me wrong, I love an up market, it makes me look smart. Just don't believe that the rest of the year is clear sailing.
ZIRP May Not Be Good For Stocks -
Another common refrain, is that the Fed's zero interest rate policy (ZIRP), will force investors into higher risk assets, especially dividend paying stocks. While this makes intuitive sense, in the real world it doesn't always work that way. There was a period in the late 1940's and early 1950's when the Fed forced rates to very low levels to try and stimulate the economy. There are some interesting similarities between that time period and today. The Fed was saddled with a very high debt to GDP, which was caused by the cumulative effects of WWI and WWII. Even with an extraordinarily accommodative monetary policy and negative real rates P/E multiples on the S&P 500 fell below 7x. Investors didn't care, they were risk averse. The world was an uncertain place, another war was on the horizon (Korea), and the country was cautious.
Today we have a similar scenario. We are faced with a monstrous mountain of debt (built up by decades of overconsumption), and we are limping out of one financial crisis facing the prospect of more (Europe & Here). The Fed is doing its best to stimulate demand (encourage inflation), but Americans just aren't buying it. As mentioned above, we had the best January in 15 years, but January's volume on the NYSE was down 26% year-over-year, and down a whopping 59% from January of 2008. A Wall Street trader was quoted as saying, "Our desk is dead!"
The Fed is pushing, and pushing hard, to get investors to take on more risk, but maybe investors just aren't that stupid. With total ineptitude in Washington (both parties), a mountain of debt that neither party is addressing, a tenuous global situation (both economic & political), is it any wonder that investors are sitting on their hands channeling Mark Twain ... "It's not the return on my principal, it's the return of my principal."
If interest rates are pegged at zero for six years, its inevitable that the volatility of inflationary expectations will rise (witness gold). If the volatility of inflationary expectations rise P/E multiples decline. Stocks can head higher, just don't believe that it is a given, just because interest rates are at zero.
Below is a graph that shows Price to Earnings multiples over time. By this metric, stocks aren't exactly cheap.
Average holding period for a stock increased 10% last year -
Another interesting factoid. The average holding period for a stock increased by 10% in 2011, from 20 seconds to 22 seconds. Computer generated high frequency trades (HFT) accounted for 70% of all volume!
Life - and Death Proposition -
Please enjoy Bill Gross of PIMCO's recent piece, some excellent food for thought.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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