More so than most issues there was a heavy emphasis on why US stocks are attractive. Repeated a couple of times was the book value argument especially where financials are concerned. Although a reader took me to task a little on this the other day the book values are not reliable for financials. And while the reader in question certainly may feel otherwise the notion of questioning the book value is not something I thought of, I've seen this view expressed by many people far more knowledgeable than I'll ever be.
But there was one point made that seemed like grasping at straws which is as follows;
Knapp looks at the so-called earnings yield on S&P 500, which is the inverse of the price/earnings ratio. It's now at 8% based on 2011 profits and 9% based on forward earnings projections. He compares the earnings yield with the real, or inflation-adjusted, yield, on 10-year Treasuries, which is now about zero. Ten-year TIPS, or Treasury Inflation Protected Securities, now provide yield above inflation. The current spread of about nine points between the forward earnings yield and the real Treasury yield is at its highest level since the early 1980s, which strongly favors stocks.
Stocks are cheaper than bonds now but that does not offer any forward looking help as stocks could stay cheaper than bonds forever. Certainly stocks could start going up from here in some heroic fashion (not my base case) but it makes no sense to me to use two different periods of interest rate analysis to draw the same conclusion when one period featured the highest interest rates of all time and the other period has about the lowest rates ever. This would seem to be beyond upside down.
The other article to point at was about where to find yield now given how low some rates are. In with the various suggestions were closed end funds for a couple of different segments. If you click through and look how these CEFs did on Monday you will see they got crushed. Take Monday as a microcosm as they recovered by the end of the week but these things occasionally get crushed the same as stocks (look at July 2003 and all of 2008). Two of the CEFs mentioned were down more than 8% on Monday. There were also a couple of fund of fund products suggested that own closed end funds one of which was open end and the other closed (read the article if this sentence doesn't make sense) one of which was down 10% on Monday and the other down 6%.
I won't recap every product suggested. I will circle back to a point made often about how important it is to understand what these things are capable of doing. A portfolio of a bunch of CEFs that all go down 6-8% on a day that the stock market goes down 6% or that participate fully in a bear market decline would seem to be a bad idea for income investors.
While it might seem obvious to think well who would put an entire portfolio into these things (or any other high yielding vehicle that can drop a lot), but of course investors get caught holding what turns out to be too much of the wrong thing in every scary event.
A small exposure to this volatile space can make plenty of sense in terms of lifting the yield of the entire mix a little and if the exposure is moderate then a big drop like on Monday is pretty easily absorbed.
One final point is that funds have no par value to return to (hopefully this is not the first time you are reading this fact). A Nuveen closed end fund with symbol JTP was launched in 2002 at $15 per share. It is currently at $7.65. Getting a 7% yield in a zero percent world means taking a lot of risk one way or another.
7 comments:
looking at JTP Equity Comp, total returns from 12/31/2002 is about 8% which is far less than the SPY index but if you look at total returns from 12/31/09 JTP wins 30% to 20% (both comps do not include this month). cef are rocky and not for the bread money but just looking at price and not including a return including reinvested dividends is not a good look, provided you do reinvest dividends
not sure what you mean by JTP Equity Comp but JTP the Nuveen fund is a closed fund that is a fixed income proxy. I personally don't want fixed income products that act like equity products.
The difference between a fixed income portfolio and an equity income portfolio seems to have been lost in the last several months on SA. It's too bad there is no peer review on articles for SA. The site has a great deal of interesting opinions well articulated by some of the authors. Unfortunately, other well articulated opinions will mislead less experienced readers to take unintentional risks.
JTP Equity Comp is cut & paste from bloomberg terminal (i am a programmer with access to bloomberg), total return with reinvested dividends shown on this graph seems to be better than a straight price volume chart. i do like dividends but not very sure about investing in individual preferred stock yet. etf or closed end fund with some leverage looked like a better way to invest a smaller portion of money, for investors willing to take some risk in return for monthly or quarterly dividends as long as you pay attention to nav (premium vs discount)
Roger,
I'm the reader who "took you to task" on the book value issue a couple of days ago. I'm not sure you got my overall point on that. It wasn't so much about the specific issue of book value. My more important point was about oversimplification, which your book value comments seemed to be an example of.
I think there's some kind of a happy medium between the overly complex can't-see-the-forest-for-the-trees type of analysis done by some people (e.g., your favorite analyst, Citigroup's Tobias Levkovich), and the too-simple analysis you seem to favor. Don't mean to sound too harsh here - I have learned a lot from you and your blog, and I am a very long-time reader. But a recurring thought I have while reading your analysis is, "he's oversimplifying".
For exmple, on the issue of financials and their book values, I have no problem if someone like Whitney Tilson does a detailed analysis of MBIA's balance sheet and decides the book value is phony. That's based on detailed work. But I can't agree with zero-work statements like "How can a bank's book value be correct when real-estate prices are still falling?" That reasoning is too simple, and that's what I objected to.
- aagold
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