Insane Policymakers Make Investing More Difficult

In recent meetings with clients, we have debated several topics, including the apparently depressed forward P/E ratio for the S&P 500 (we take issue with the word "depressed") as well as relative value models that compare equity vs. bonds through dividend and nominal bond yields. Unfortunately, though, one topic continues to dominate our meetings much to the chagrin of clients; the importance of policymakers in the current environment. At the end of most meetings, we point out to clients that while we would like to spend most of the time debating the academic issues outlined above, the fact remains that our meetings are dominated by discussion of Angela Merkel, Zhou Xiaochuan, Barack Obama and George Papandreou. On the one hand and in a secular sense, environments in which policymakers dominate headlines are not environments in which investors feel comfortable bidding up stocks. Simply put, P/E ratios do not expand in this type of environment, leaving organic earnings growth to drive price appreciation (more on 2012 earnings expectations another time). Secondarily, and today's action is a perfect illustration, policymakers ultimately and unfortunately drive price action, and while this helped at the end of the day -- news that China was interested in Italian bonds or Italy was interested in China buying its debt drove a significant end of day rally -- the fact remains that investing is made all that more difficult when returns come at the whim of those without a profit motive. -- Dan Greenhaus, BTIG