Richard Russell’s latest letter is something that most investors can probably empathize with to some degree. While it’s clear that the equity markets are in the midst of a bull market, it’s less clear whether now is still a good time to be buying. Russell, while acknowledging that this is certainly a bull market, prefers not to be overweight equities for one single reason – the values just aren’t that good:
“So is it really a bull market? I think it is. Then shouldn’t we be up to our necks in stocks? I choose not to be, mainly because I don’t like the values. Dividend yields are low in my estimate, and I’m in no hurry to rush into the arms of an anxious and waiting Wall Street.
I know that the potential for great and safe profits in the stock market are created when one buys stocks when they’re on the “bargain counter.” When the Dow’s’ dividends are below 3%, then historically the Dow is far away from the bargain counter.
Sure the Dow and stocks can rally from here. But like the batter who is facing a gifted and clever pitcher, I prefer not to swing on this pitch. So be it, I guess I’m just a stubborn old fool who has too much respect for RISK and values.
Today QE2 ends, and supposedly the Fed steps back. The Treasuries are now on their own, and the Fed has stopped buying. The smart boys are sticking to this scenario. With the Fed no longer buying Treasuries, the Treasuries start falling while interest rates rise. This tends to throw the economy into the dumps. The Fed will watch for a while as the edge is taken off inflation. But as the economy worsens, the Fed will be forced to stimulate again. Once stimulation is back, the precious metals will boom. That’s the line and scenario that I hear.
The Russell reaction — It bothers me that it’s all so pat and so widely accepted. So far, the Treasuries are acting according to script and so is gold. The stock market is acting as if something better is riding on the winds of the future. Could something be amiss with the accepted scenario? Could Bennie Bernanke have it right? And why is Treasury Secretary Geithner ready to say “bye” to the administration? What can he see ahead that he doesn’t like? Geithner’s been Obama’s leading economic confidant. Certainly, an unusual time to exit.”
Clearly, this is an argument that is backed by years of data and market practitioners who seem to have made their reputations by remaining prudent through these times when the markets are excessively expensive….Russell is no exception.
Source: Dow Theory Letters
Yeah, I want to follow a senile 90 year old whose last bit of wisdom was to get long stocks in 2008 right before the collapse. In a big spread in Barron’s, he was convinced the market would go up, and managed to just about nail the top, riding it to 50% losses.
And … there isn’t any reason to justify overvaluation. The world just does not look like 1999.
All the baseball metaphors aside, I don’t see how it is particularly prudent to sit out a bull market.
Depends on your age. As an investor, if you’re young, it should always be “risk on”. Being prudent is not a one size fits all strategy.
Nils- stay invested. You will learn prudence and many other things along the way.
Could someone please enlighten me as to why specifically this is a bull market?
Brian,
I think if you accept the usual notion that bull market is 20% then the rally from March 09 certainly qualifies as a bull market. Note it had only sunk about 8% from its May 2 high.
However, my view is it is a bull within the context of a much larger bear market that began in March 2000. This current bull market could be the action that draws in the last suckers before they let the air out of the balloon.
My belief is (based on the tone of your question) is that we are facing a bear market of biblical proportions. This bear for 2 years has just been content to hibernate and eat honey; the next move will be baring its fangs. I won’t believe it’s over till valuations are at drooling levels and nobody on Wall Street wants to own any stocks. Then a new bull market will emerge.
I’ve actually read where we are in a secular bear market.
I tend to avoid those phrases all together. And I avoid looking at Earnings and Unemployment as predictors for the same reason. They are lagging indicators.
I did make some money with Imperial Sugar a couple of years ago from a hint that their earnings were going to be pretty good, but this was a turn around event.
I think many believe we are in a “turn around event” period for the economy and that is the reason for the recent run up. But it is based to some degree on Japan causing the past malaise. How much of that is true I dunno. Inventories are fairly high at car dealers right now. If anyone has any data on other inventories, like Ross Perot said, “I’m all ears”.
He must be thinking with a “buy and hold” longer term mentality. Those days are gone.
But there was a quick note on Bloomberg this morning about Americans closer to being out of debt than previously thought. And the bad news in Europe is stifled for a while. Sure there is still risk and Greece will probably be back like a bad penny and Japan’s debt may also rear its ugly head. God help us if Spain and others start to catch a cold. But I’m looking (hoping)and wishing for all of you a good July. (three weeks anyway)
NOTE: Email on prior post was incorrect.
There is a better way to look at the cash returned by a company that William Priest came up with called “shareholder yield.” It takes not only dividends, but also stock buybacks and debt pay down into account. So Richard Russell might want to take a look at those numbers rather than the outdated “dividend yield.”
http://www.forbes.com/2009/11/20/priest-shareholder-yield-intelligent-investing-cash-flow.html
What has the yield on Berkshire Hathaway stock been since its inception? Zero!
Enjoy your day, David
David B. Durand, MD
Tom H thanks for your comments, this puts it into better perspective as I guess I was becoming miopic to some extent. I look at May 2nd as the end of the bull market and my question is a challenge to find out if anyone thinks differently. Just curious to know how many are in the DOW 14000 camp and how many are in the DOW 10000 camp over the next 6 months…. Or possibly both?
Has Richard Russell ever been bullish??
Geoff, He is a bull on gold from what I have read.
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Richard Russell’s latest letter is something that most investors can probably empathize with to some degree. While it’s clear that the equity markets are in the midst of a bull market, it’s less clear whether now is still a good time to be buying. Russell, while acknowledging that this is certainly a bull market, prefers not to be overweight equities for one single reason – the values just aren’t that good:
“So is it really a bull market? I think it is. Then shouldn’t we be up to our necks in stocks? I choose not to be, mainly because I don’t like the values. Dividend yields are low in my estimate, and I’m in no hurry to rush into the arms of an anxious and waiting Wall Street.
I know that the potential for great and safe profits in the stock market are created when one buys stocks when they’re on the “bargain counter.” When the Dow’s’ dividends are below 3%, then historically the Dow is far away from the bargain counter.
Sure the Dow and stocks can rally from here. But like the batter who is facing a gifted and clever pitcher, I prefer not to swing on this pitch. So be it, I guess I’m just a stubborn old fool who has too much respect for RISK and values.
Today QE2 ends, and supposedly the Fed steps back. The Treasuries are now on their own, and the Fed has stopped buying. The smart boys are sticking to this scenario. With the Fed no longer buying Treasuries, the Treasuries start falling while interest rates rise. This tends to throw the economy into the dumps. The Fed will watch for a while as the edge is taken off inflation. But as the economy worsens, the Fed will be forced to stimulate again. Once stimulation is back, the precious metals will boom. That’s the line and scenario that I hear.
The Russell reaction — It bothers me that it’s all so pat and so widely accepted. So far, the Treasuries are acting according to script and so is gold. The stock market is acting as if something better is riding on the winds of the future. Could something be amiss with the accepted scenario? Could Bennie Bernanke have it right? And why is Treasury Secretary Geithner ready to say “bye” to the administration? What can he see ahead that he doesn’t like? Geithner’s been Obama’s leading economic confidant. Certainly, an unusual time to exit.”
Clearly, this is an argument that is backed by years of data and market practitioners who seem to have made their reputations by remaining prudent through these times when the markets are excessively expensive….Russell is no exception.
Source: Dow Theory Letters
Yeah, I want to follow a senile 90 year old whose last bit of wisdom was to get long stocks in 2008 right before the collapse. In a big spread in Barron’s, he was convinced the market would go up, and managed to just about nail the top, riding it to 50% losses.
And … there isn’t any reason to justify overvaluation. The world just does not look like 1999.
All the baseball metaphors aside, I don’t see how it is particularly prudent to sit out a bull market.
Depends on your age. As an investor, if you’re young, it should always be “risk on”. Being prudent is not a one size fits all strategy.
Nils- stay invested. You will learn prudence and many other things along the way.
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