{"id":38197,"date":"2013-05-10T21:03:47","date_gmt":"2013-05-11T01:03:47","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=38197"},"modified":"2013-05-10T21:03:47","modified_gmt":"2013-05-11T01:03:47","slug":"stock-yield-pigs-let-loose-at-the-trough","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/05\/10\/stock-yield-pigs-let-loose-at-the-trough\/","title":{"rendered":"Stock Yield Pigs Let Loose at the Trough"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

Well, this is interesting. Notable Aussie dollar bull Jim Rickards jumped off the beast this week after the RBA waded into the currency fight and cut the cash rate to a historic low. He\u2019s joined the long line of Australian dollar<\/a> bears.<\/p>\n

Mmm. A falling Aussie changes the valuation metrics for a lot of stocks<\/strong>. So today\u2019s\u00a0Money Weekend\u00a0<\/i>will leave the currency wars behind and focus on value. And we\u2019ll show you where our value man, Greg Canavan, is looking. You might be surprised\u2026<\/p>\n

\u00a0<\/b>A Bubbly Market<\/b><\/h2>\n

Before we get to that, a quick detour. It seems clear that the RBA\u2019s move will continue to drive Aussie investors from term deposits into dividend paying stocks<\/a> in the hunt for a reasonable yield<\/strong>. This would echo the experience over in the US, where stocks are flying high as interest rates stay in lockdown. Take the Dow Jones, for example. It broke through 15,000 points for the first time this week.<\/p>\n

There\u2019s an element of history repeating here. That\u2019s one conclusion we reached after reading value investor Seth Klarman\u2019s\u00a0Margin of Safety\u00a0<\/i>this week. He wrote the book in 1991, but check out this anecdote he gives early on:<\/p>\n

\n

\u00a0\u2018There are countless examples of investor greed in recent financial history. Few, however, were as relentless as the decade-long \u201creach for yield” of the 1980s. Double digit interest rates on U.S. government securities early in the decade whetted investors’ appetites for high nominal returns.<\/i><\/p>\n

\u00a0<\/i>\u2018When interest rates declined to single digits, many investors remained infatuated with the attainment of higher yields and sacrificed credit quality to achieve them either in the bond market or in equities. Known among Wall Streeters as \u2018yield pigs\u2019 (or a number of more derisive names), such individual and institutional investors were susceptible to any investment product that promised a high rate of return\u2026yield seeking investors who rush into stocks when yields are low not only fail to achieve a free lunch, they also tend to buy in at or near a market top.<\/i>\u2019<\/p>\n<\/blockquote>\n

\u00a0<\/i>Klarman was already a successful money manager when he wrote\u00a0Margin of Safety<\/i>. But today he is a billionaire, having clocked near 20% returns every year since the eighties without using leverage and often holding high levels of cash.<\/p>\n

That\u2019s an impressive record. Hence the reason when you fast forward to today and find the out-of-print\u00a0Margin of Safety<\/i>\u00a0selling on Amazon and eBay for sums north of $1000.<\/p>\n

Suffice to say you\u2019re left to wonder what he might think today about the action in the American market and how a value investor would approach it.<\/p>\n

We suspect it would probably be with fear of the downside risk. We certainly doubt he sees value. And if there is one key takeaway from\u00a0Margin of Safety<\/i>, it\u2019s that Klarman is obsessive about risk, not reward. Klarman buys when he sees value and only then. He\u2019s content to sit out of the game if there\u2019s nothing compelling on offer.<\/p>\n

But if the US Fed has inflated stock prices in the USA, the situation is less clear in Australia, because the RBA might have cut the cash rate but it hasn\u2019t outright \u2018printed money\u2019.<\/p>\n

Some of the \u2018official sector liquidity\u2019 from the US and Japan will have leaked into the Aussie market. But are Australian stocks<\/a> trading closer to their fundamentals than their American counterparts? Does that go some way to explaining the \u2018underperformance\u2019 of the Australian stock market compared to the S&P 500 since 2010?<\/p>\n

\u00a0S&P 500 Outperforming the Aussie Market Over Three Years<\/h4>\n

<\/p>\n

Source: BigCharts<\/em><\/h4>\n<\/p>\n

Perhaps. So if you\u2019re looking for value, where do you start?<\/p>\n

\u00a0Be Ready to Buy Cheap Stocks<\/b><\/h2>\n

The financial sector, especially the banks, looks expensive. That\u2019s the opinion of our value investor, Greg Canavan, anyway. That doesn\u2019t mean their share prices can\u2019t go higher. But it does mean the risk\/reward trade-off is not in your favour buying at these levels. Avoid the yield pigs.<\/p>\n

The other big twin of the Australian share market <\/a>is resource stocks. That\u2019s where Greg is turning his attention. If you\u2019re familiar with his writing in\u00a0The Daily Reckoning<\/i>, you\u2019ll know Greg has taken a very bearish stance on China (the number one consumer of commodities) and the price of iron ore. So it sounds strange to hear his strategy shifting to mining. \u2018That\u2019s where the best opportunities will be in 2013,<\/i>\u2019\u00a0<\/i>he says in his latest report to subscribers.<\/p>\n

But this is because markets look forward and discount the future. The selling in the resource sector has been pricing in lower global, especially Chinese, growth. The question is: has the market got it about right?<\/p>\n

If you ask Dr. Alex Cowie, editor of\u00a0Diggers & Drillers<\/i>, he says the selling is done (in fact, overdone) and that resource stocks<\/a> are ready to bounce.<\/p>\n

Greg’s position is less bullish. As he says in his latest report<\/a>, he sees some value beginning to emerge but isn’t ready to buy yet. In the spirit of Seth Klarman, the margin of safety isn’t wide enough at these levels. That’s because Greg thinks the market hasn’t factored in what he considers the very real possibility of a Chinese recession — or worse<\/a>.  <\/p>\n

That would take commodity stocks down in a final capitulation. If that happens, that’s when you’ll get your big ‘margin of safety’ to step in and buy profitable and well-run businesses in the resource industry trading under their intrinsic value. In other words, a value investor’s dream. <\/p>\n

Has he called China correctly? Decide for yourself here<\/a>. <\/p>\n

Callum Newman<\/strong>
\n Editor, Money Weekend<\/em> <\/strong><\/p>\n

PS.<\/strong> Don’t forget if you want to keep track of the latest things we’re reading and brief commentary on events that happen through the day, check out our Google+ page<\/a> and Kris Sayce’s<\/a> as well.<\/p>\n

From the Port Phillip Publishing Library<\/em><\/strong> <\/strong><\/p>\n

Special Report: TORRENT SIGNAL 3<\/a> <\/p>\n

Daily Reckoning:<\/em> Secret Agents Will Destroy Us All<\/a><\/strong><\/p>\n

Money Morning: <\/em>Build Wealth Fast through the Resource Sector<\/a><\/strong><\/p>\n

Pursuit of Happiness:<\/em> What the Latest Interest Rate Cut Could Mean for You<\/a><\/strong><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Well, this is interesting. Notable Aussie dollar bull Jim Rickards jumped off the beast this week after the RBA waded into the currency fight and cut the cash rate to a historic low. He\u2019s joined the long line of Australian dollar bears. Mmm. A falling Aussie changes the valuation metrics for a lot … <\/p>\n

Continue reading “Stock Yield Pigs Let Loose at the Trough”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-38197","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/38197","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=38197"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/38197\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=38197"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=38197"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=38197"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}