From Grant Williams, author of Things That Make You Go Hmmm,
Over the last five years, there have been so many ‘projections’ from the economic and political glitterati that have failed spectacularly as to be almost unbelievable - from Bernanke's 'subprime is contained' to Rajoy's November promise that 'Spain will stop being a problem and instead form part of the solution'.
Projection was historically the moment when, despite all the work that went into getting to that last point in the program, hope and faith took over as the alchemist found himself having to rely on just a little bit of magic in order to get the outcome he so desperately wished for.
Grant Williams 'projects' that, when QE3 finally arrives (and arrive it will), it will mark the top of the S&P500 for a VERY long time and its positive effects will be far shorter-lived than many - including the Fed - are projecting. Far from an overwhelming rising tide that will float all boats, QE3 will be a dismal failure and the last bullet in the Federal Reserve’s gun will turn out not to be the hollowpoint that many are projecting, but instead simply a ‘bang flag’.
In the course of the conversations I have whilst performing my day-job, I am constantly searching for anybody who is buying and holding stocks as an asset class because they offer tremendous long-term value, but I have yet to find them. Yes, there absolutely are some wonderful companies out there that offer tremendous long-term value. Corporate balance sheets have, by-and-large, never been healthier, companies are sitting on a heap of cash and, at ground level, businesses are doing extremely well. The problem comes with the fact that 99% of the people I speak to and 99% of the commentaries I read are either holding ‘stocks’ per se or recommending doing so for one reason and one reason only; they are terrified of missing out on the projected strong rally that will undoubtedly come once QE3 is unleashed by Ben Bernanke’s Merry Band of Brothers.
That is a terrible, terrible reason to hold stocks and, when the correction comes, those good companies with strong, healthy balance sheets will be sold right alongside all the overpriced, overvalued stocks that take turns as the darlings of the analyst crowd (you know who you are, stocks). The only difference will be that the better companies’ share prices will recover far faster once appetite for value and risk returns.
2008 is still too fresh in the collective minds of investors for there to be any other reaction to another major market swoon and, as the world nears the closest thing we have ever seen to a truly global recession, it’s incredibly hard to see where the growth is coming from to justify buying stocks on 2% yields on multiples in the teens.
The 1982 bull market began with the S&P500 trading on 7x earnings and yielding 6.3% (green dotted line, left). It ended in the tech blow-off at 30x earnings and a 1% yield (red dotted line, left).
As we stand today, the S&P is yielding 2.5% and is trading at roughly 11x earning (blue dotted line, left). Expensive? Maybe not, but hardly the stuff dreams are made of.
As for the full note by Grant Williams, which has much more in it, it can be found below: