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GMO Quarterly Review: "U.S. Small Cap Stocks Are Now As Expensive As We Have Ever Seen Them"

Tyler Durden's picture




 

From GMO's latest quarterly review:

From a strategic perspective, the current overpriced environment makes asset allocation decisions neither simple nor comfortable. Having established that we are once again in a world of narrow risk premiums, it is not hard to look back at history and pinpoint times where current valuations led to steep falls in prices. The problem, of course, is that we can also find previous episodes where markets continued to rally, albeit still delivering poor longer-term returns. This stark choice is made even more bleak by the dearth of safe assets offering reasonable returns to hold while sitting out the ongoing stock market levitation. As a result, we are forced to hold more equities than we would prefer at these absolute valuations for the simple reason that we could be in for a long sideways grind where growth eventually closes the valuation gap. In that scenario, real equity returns will likely be meager, but at least positive. One group that we refuse to hold, however, is global small cap stocks and, in particular, U.S. small caps. On our data, U.S. small cap stocks are now as expensive as we have ever seen them. Perhaps more surprising still is the deafening silence about this distinctly frothy group. Although the S&P 500 price index is still some way below its all-time high, U.S. small caps are within spitting distance of theirs: a high that was last reached with a booming global economy, strong employment, and a debt-driven consumption binge in full swing.

All this and much more in the full thing:

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Fri, 04/29/2011 - 16:15 | 1221965 SheepDog-One
SheepDog-One's picture

Dont BTF small cap D.

Fri, 04/29/2011 - 16:22 | 1221994 Cash_is_Trash
Cash_is_Trash's picture

Come on silver!!!

Give me a dip to $45 'cause you're going to $60 after that without looking back.

BTFD on silver not small cap crap.

Fri, 04/29/2011 - 16:16 | 1221967 kengland
kengland's picture

And they weren't in 09? News?

Fri, 04/29/2011 - 16:14 | 1221969 Racer
Racer's picture

And what exactly bumped the market up so much in the last 20 mins??

Fri, 04/29/2011 - 16:15 | 1221972 SheepDog-One
SheepDog-One's picture

Bernank's finger?

Fri, 04/29/2011 - 17:01 | 1222091 slewie the pi-rat
slewie the pi-rat's picture

would you believe: ...short covering...?

Fri, 04/29/2011 - 16:17 | 1221981 alien-IQ
alien-IQ's picture

the usual combination of hopium and fraud with a dash or larceny tossed in for flavor.

Fri, 04/29/2011 - 16:15 | 1221970 alien-IQ
alien-IQ's picture

just imagine how expensive those small caps will be when the $DXY breaks below 70...which at the current pace should be sometime next week.

but then again...everything will be far more expensive...

Fri, 04/29/2011 - 16:17 | 1221971 kengland
kengland's picture

What ever happened to Nic Lenoir? Is he under a bridge these days?

Fri, 04/29/2011 - 16:18 | 1221977 6 String
6 String's picture

Chairsatan 2000, bitchez. There is no other explanation. I wonder when it surpasses its all time high, any day now, if CNBC will carry on about it hitting "new records" and "Bubble" speak, etc.

I suppose we shouldn't hold our breath, eh?

Fri, 04/29/2011 - 16:16 | 1221978 gkm
gkm's picture

In hyperinflation, small cap should outperform.  No cash to discount.  High debt to equity ratios.  High beta.  This is in fact the area you want to hold.

Fri, 04/29/2011 - 16:20 | 1221986 Racer
Racer's picture

Ahh... debt is king... yeah...

Fri, 04/29/2011 - 16:21 | 1221990 SheepDog-One
SheepDog-One's picture

You can hold them all you like, Im not sitting on the pile of high explosive stock markets myself, PM's, guns ammo etc for me.

Fri, 04/29/2011 - 16:41 | 1222040 disabledvet
disabledvet's picture

you are one of the best market timers i have ever read.  and i'm being serious when i say that.

Fri, 04/29/2011 - 16:56 | 1222074 long juan silver
long juan silver's picture

What's the point of buying a gun if you ain't gonna shoot it? And I'm serious.

Fri, 04/29/2011 - 17:10 | 1222112 slewie the pi-rat
slewie the pi-rat's picture

get your affairs in order, write a short note, and go point it at some cops?  & i'm not serious.

Fri, 04/29/2011 - 18:59 | 1222508 long juan silver
long juan silver's picture

Go pro bono w your defense too.

What's the point of buying gold if you plan to sell it?

Fri, 04/29/2011 - 20:21 | 1222757 Re-Discovery
Re-Discovery's picture

You building a gold-plated coffin?

Everyone sells . . .eventually.

Fri, 04/29/2011 - 16:21 | 1221995 alien-IQ
alien-IQ's picture

yes clearly small cap companies should most easily be able the deal with astronomically rising costs? Really?

Fri, 04/29/2011 - 17:14 | 1222147 A Man without Q...
A Man without Qualities's picture


"In hyperinflation, small cap should outperform.  No cash to discount.  High debt to equity ratios.  High beta.  This is in fact the area you want to hold."

This is total bollocks.  In hyperinflation, small caps get screwed by the big guys delaying payment or asking for quicker settlement of bills.  Add to this, banks deny credit to smaller firms.  Please look at real examples of hyperinflation to see what happens, rather than going with the theories of corporate finance...

Fri, 04/29/2011 - 16:17 | 1221985 SheepDog-One
SheepDog-One's picture

Look at this disgusting fraud, DOW almost breaking over 13,000, while the country wallows in the mire....cant anyone stop these maniacs? I guess at the end its all the same as before, millions, or billions this time, must die to protect the vast riches of a very few.

Fri, 04/29/2011 - 16:19 | 1221992 Racer
Racer's picture

The leeches will just laugh at the piles of bodies of starving poor and pensioners

Fri, 04/29/2011 - 16:29 | 1222009 alien-IQ
alien-IQ's picture

did you catch that nifty little hat trick just after the bell? /ES spiked for a 4 point gain to a new HOD while Silver got shanked to a new LOD. Nothing to see here people...move along...

Fri, 04/29/2011 - 16:33 | 1222030 the not so migh...
the not so mighty maximiza's picture

Its beyond fraud more like genocide now Dog...  i still love silver for some reason though

Fri, 04/29/2011 - 16:47 | 1222055 disabledvet
disabledvet's picture

and we will know Monday if the "rumor of another margin rate increase in silver" is true.  My question is "does the head of the CFTC actually know how much silver is in the vaults?"  and my follow up question to all of you is "if you have tons of silver do you raise margin rates or keep them at say 10%" and in the obverse "if you have onces silver do you raise margin rates to 100% or just 90?"

Fri, 04/29/2011 - 16:56 | 1222059 long juan silver
long juan silver's picture

Sour grapes. He bet a mountain of large cap crap. Fucking loser. I don't give a shit how "elegant" he thinks he writes either.

The public knows that large caps are run by criminals like Immelt and Dimon and that the big cap game is rigged for the insiders. Huge bailouts for the inner circle thank you. No transparancy from these scumbags that nearly brought down modern society.

Fri, 04/29/2011 - 17:50 | 1222279 AldousHuxley
AldousHuxley's picture

value is relative. expensive compared to what? surely not against gold/silver/oil.

Fri, 04/29/2011 - 18:28 | 1222420 americanspirit
americanspirit's picture

TZA

Fri, 04/29/2011 - 19:13 | 1222549 ghostfaceinvestah
ghostfaceinvestah's picture

just wait until June, that is going to take off like a rocket.

Fri, 04/29/2011 - 19:12 | 1222546 ghostfaceinvestah
ghostfaceinvestah's picture

RWN is one of my top picks for when Bernanke stops the printing presses in June, even if it is temporary, these stocks are going to crater.

Fri, 04/29/2011 - 23:53 | 1223212 Yen Cross
Yen Cross's picture

The new yield curve. Large Cap/vs Small Cap!!!!

Sun, 05/01/2011 - 12:31 | 1225567 Hephasteus
Hephasteus's picture

Micro cap/ vs nano cap.

Sat, 04/30/2011 - 02:30 | 1223382 Ben Fleeced
Ben Fleeced's picture

Want you to love me one day

I know I'm a peasant dressed as a princess

That doesn't mean you have to take my clothes away.

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