Jim Tisch, the CEO of Loews, is worried - worried enough that he slashed his firm's share buybacks in 2016 and explained to an anxious analyst crowd during his earnings call that "complacency reigns supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely."
Simply put, Tisch warned that investors who bid up the prices of stocks and bonds aren’t accounting for the risks, given global uncertainties about taxes, regulation and trade.
"I want to start by showing my thoughts on the financial markets, as a backdrop to what guided our approach to capital allocation in 2016. I've been around long enough to have lived through all sorts of markets. I've learned to respect markets, while at the same time being skeptical of conventional wisdom.
I've lived through a bond bear markets and a gargantuan bond bull market. I've seen bond yields above 15% and below 2%. I've seen inflationary spirals, I've seen deflationary threats, I've seen deregulation and reregulation. I've seen the S&P 500 trade as high as 30 times earrings and I've seen the S&P trade as low as seven times earnings.
With all this experience, that comes with age I might add, here is what I'm seeing in the markets today.
In the credit markets, spreads on the high yield securities are approaching historically type levels, while key credit metrics such as leverage and coverage ratios are showing signs of weakening.
The leverage loan market has been overrun by such massive inflows of capital that you could probably get alone to buy a fleet of zeppelins at this point in time.
With respect to rates, the 10-year treasury note is currently trading at around 2.5%, up from the its recent lows, but still well below historic norms. In my view, the mood of these markets is in historic contrast with many unknown from our current economic and political landscape, both here and abroad. For me, it's a major disconnect, and it concerns me. The optimism in the rates and credit markets is likewise reflected in the public equity and merger markets. The S&P 500 is trading at roughly 19 times earnings, three turns times higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more.
The merger market is being driven by large pools of private and corporate buyers, the wave of private capital combined with the abundance of the available leverage at remarkably low rates, has enabled private equity firms to pay big prices for company that haven't already been garbled up by strategic buyers.
To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of fear – of the phase won't go on indefinitely. So why am I sharing these thoughts with you? Because I know that some of you've wondered why we brought back relatively few Loews shares in 2016 or why lower CapEx made in acquisition.
In terms of the first question, looking back over 2016 with a benefit of 2020 hindsight, I wish we had repurchased more stock in the first half of the year, when Loews shares were trading at lower prices, and when the S&P was 20% lower than recent levels. As the equity market climbed to record heights during the second half of 2016, Loews' common stock moved along with it and we became cautious. And we are more comfortable buying shares back when the market is at its lows rather than when it's hitting new highs. While, we remain positive on our shares and see real potential for our subsidiaries, we also know that Loews' stock price is positively correlated to the overall equity markets.
Unlike many other companies, we don't have set quarters for share purchases in a given year. We use our judgment to buyback our stock at the lowest price possible. Sometimes, we look like heroes, like when we bought 9% of our stock in 2015. And there are other times, having not purchase shares may make us look like we are asleep at the switch, but I promise you, we are not. Over the span of time measured in years and decades we're proud of our record and we feel that our share repurchases have created significant value for our shareholders.
... It's a tough market in which to be a disciplined buyer. I assure you that we remain committed to our long-standing philosophy of creating value for all shareholders through prudent capital allocation."
Of course, we should not pay attention to this CEO's comments - based on decades of experience - we should be distracted over here by the pending IPO of Snapchat, the cash-burning, disappearing sexting app.