Opinion: It is possible to have a cautious outlook on the world and still be bullish on equities says Nathan Field. Your view?

Opinion: It is possible to have a cautious outlook on the world and still be bullish on equities says Nathan Field. Your view?

By Nathan Field*

When stock markets fall, the media is quick to show images of brokers slumped over their desks with their heads in the hands, or graphs of jagged red arrows pointing to an abyss, just to emphasise the ruin and despair being wrought upon the world.

However, when markets rise, we never see brokers high-fiving and back-slapping around the office, or graphs with big green arrows pointing to the moon. A rally might be written up in the business pages, but it's rarely front page news.

This is hardly surprising.

No one wants to see a photo of a grinning broker while they're eating their cornflakes. But as a consequence, the man on the street is often unaware when markets are in good cheer.

Global markets are currently enjoying a strong run. Since the recent lows in September 2011, both the MSCI All Country index and the S&P 500 have risen more than 20 per cent in US dollars.

For local investors, the surging NZ dollar has tempered some of those gains. But regardless of where you are in the world, the rally in equity markets has received minimal coverage.

Financial headlines remain resoundingly negative. The mess in Greece. Bleak prospects for wider European growth. The flimsy US recovery. These facts are generally accepted by bulls and bears alike. So given this backdrop, how can stock markets be rallying? Is it just because central banks are flooding the market with cash?

Well, the liquidity boost certainly isn't hurting. But there are other sound reasons why stocks have been in rally mode.

Firstly, equity markets are forward looking. They're not always right, but they are trying to predict trading conditions 9-12 months down the track, not mirror today's headlines.

That's why the recent improvement in US economic data, however slight, has had such a marked impact on share prices. If investors wait until the global economy is firing on all cylinders, shares will be a lot more expensive, and the smart money will have moved on.

Secondly, sharemarkets are made up of companies, not economies.

The problems facing Europe haven't stopped people buying iPhones, or swiping their Visa cards, or taking Nurofen to soothe their hangovers.

Sure, sluggish economies can dampen earnings in the short term, but if the companies you're buying have healthy balance sheets, and produce goods or services that people want, and are making decent money in a crappy environment, you're less fussed about fluctuations in the economic cycle.

Finally, and this is the biggie, valuations really do matter.

Even after the rally, global equities are trading on a forward earnings multiple of less than 12 times, the lower end of the five-year average range of 11-14 times.

Yes, those valuations will mean nothing if the world collapses, but banking on the sun rising tomorrow has proven to be a smart bet in the past. The relative valuation argument is even more compelling. Plenty of US blue chips trade on free cash flow yields of 5-10 per cent, while US Treasuries yield less than 2 per cent.

The turn in equity markets is getting under the skin of the world's permabears, a group of surly chin-scratchers who believe that the global economy is doomed, and equities are always a rotten investment.

Oddly enough, they manage to pick every market crash and completely miss every rally. The permabears will have their day in the sun again, but at the moment, they're getting burned. And dismissing a 20 per cent gain as a sucker's rally sounds like a case of sour grapes.

If you're one of the suckers who've bought into the rally, don't worry, you're in good company. Warren Buffett, arguably the greatest investor of all time, went on a US$20 billion buying spree in the September 2011 quarter, right when the permabears were screaming that the sky was falling in. Today, Buffett is reaping the rewards of the fear they spread.

Of course, not even Buffett is infallible. He's never professed to be an expert at timing markets, and there are plenty of bumps in the road ahead.

But when Buffett sees value in stocks, given his long-term track record, write him off at your peril.

The lesson to be learned is that it's possible to have a cautious outlook on the world and still be bullish on equities. The fact Buffett has been buying stocks doesn't mean he thinks Europe's problems are overstated, or that the global economy is out of the woods. He just knows a bargain when he sees one.


Nathan Field is a senior equity analyst at Gareth Morgan Investments.
This story was first published in the NZ Herald, and is used with the permission of the GMI.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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The problems facing Europe haven't stopped people buying iPhones, or swiping their Visa cards, or taking Nurofen to soothe their hangovers.
Nathan you have highlighted the absurdity underlying the recent stock market rally without noticing why sane risk fearing investors shy away from such bubblicious action. 
Apple's Market Cap Is Now The Same As The Entire Retail Sector, Bigger Than All The Semis
The same hedge funds noted to have Apple in their portfolio are facing the ominous fact of future liquidation pressure: Pension Fund participation in hedge funds is down from 34 % to 11% as they continue their march back to fixed income . Other investment vehicles will follow.

This is not a load of spin aimed at encouraging punters to send their money to GMI...honest..!

I read a piece this year saying that to minimise possible losses you could get into defensive stocks so you lost little.........my thought was why not get out of stocks and lose nothing, which I have.
Fundimentaly stocks are hugely over-priced...and can fall very fast and probably will....only the crazy play these days IMHO.

Wolly you loinked to this article am today, if retail is that sickm in the USA then the rest of us better get spending to save the world.
The major big box retailers have been reporting their annual results in the last week. The results have been weak and even those whose results are being spun as positive by the mainstream media are performing dreadfully compared to 2007. A few examples are in order:

  • Home Depot was praised for their fantastic 2011 result of $70 billion in sales and $6.7 billion of income. The MSM failed to mention that sales are $7 billion lower than 2007, despite having 18 more stores and profit exceeded $7.2 billion in 2007. Sales per square foot have declined from $335 to $296, a 12% decline in four years.
  • Target made $2.9 billion on revenue of $67 billion in 2011. $953 million of this profit was generated from their credit card this year versus $744 million last year because they reduced their loan loss reserve by $260 million. Target is supposedly a retailer, but 33% of their bottom line comes from a credit card they desperately tried to sell in 2009. They have increased their store count from 1,600 to 1,800 since 2007 and their profit is flat. Sales per square foot have declined from $307 to $280 since 2007.
  • J.C. Penney is a bug in search of a windshield. Their sales have declined from $20 billion in 2007 to $17 billion in 2011 despite increasing their store count from 1,067 to 1,114. Their profits have plunged from $1.1 billion to a loss of $152 million. Their sales per square foot have plunged by 14% since 2007. Turning to a former Apple marketing guru as their new CEO will fail. Everyday low pricing is not going to work on Americans trained like monkeys to salivate at the word SALE.
  • The death spiral of Sears/Kmart is a sight to see. As the anchor in hundreds of dying malls across the land, this retail artifact will be joining Montgomery Ward on the scrap heap of retail history in the next few years. Its eventual bankruptcy and liquidation will leave over 4,000 rotting carcasses to spoil our landscape. The one-time genius and heir to the Warren Buffett mantle – Eddie Lampert – has proven to be as talented at retailing as his buddy Jim Cramer is at picking stocks. He has managed to decrease sales by $10 billion, from $53 billion to $43 billion in the space of four years despite opening 247 new stores. That is not an easy feat to accomplish. At least he was able to reduce profits from $1.5 billion to $133 million and drive the sales per square foot in his stores down by 15%.
  • Widely admired Best Buy has screwed the pooch along with the other foolish retailers that have massively over expanded in the last decade. They have increased their domestic sales from $31 billion to $37 billion, a 19% increase in four years. This increase only required a 444 store expansion, from 873 stores to 1,317 stores. A 51% increase in store count for a 19% increase in sales seems to be a bad trade-off. Their chief competitor – Circuit City – went belly-up during this time frame, making the relative sales increase even more pathetic. The $6 billion increase in sales resulted in a $100 million decline in profits and a 13% decrease in sales per square foot since 2007. It might behoove the geniuses running this company to stop building new stores.
  • The retailer that committed the greatest act of suicide in the last decade is Lowes. Their act of hubris, as Home Depot struggled in the mid 2000’s, is coming home to roost today. They increased their store count from 1,385 to 1,749 over four years. This 26% increase in store count resulted in an increase in sales from $47 billion to $49 billion, a 4% boost. Profitability has plunged from over $3 billion to under $2 billion over this same time frame. They’ve won the efficiency competition by seeing their sales per square feet fall by an astounding 21% over the last four years. I’ve witnessed their ineptitude as they opened four stores within 10 miles of each other in Montgomery County, PA and cannibalized themselves to death. The newest store, three miles from my house, is a pleasure to shop as there is generally more staff than customers even on a Saturday afternoon. This beautiful new store will be vacant rotting hulk within three years.


Of course what spending we have done is based on debt. So we ourselves cant take on more....personally I simply refuse to buy anything on "tick" unless I'd need it desperately and have no other options....All these as above have "grown" base don teh assumption taht debt will be ever increasing....which is plain crazy........
"4,000 rotting carcasses to spoil our landscape"
Just the start.

Wow...and ppl get paid to do a job like this...
LOL....another farmer's field hand in the making....

Anything with a ticker is going up in price atm.  Not just because of the massive amounts of new money gushing out from global Central Banks.  But also because the inherint promise of more, if markets were to actually take a dive.
All financial assets are benfiting from the flood of global liquidity.  Unsuprisingly, silver the most hated asset of all time, is pwning everything.  Anything under $500 is still a bargain.

Crazy......buying when the value of the compnay, ie its done nothing to justify it....
With ultra-fast trading the collapse when it happens will be something to behold.

 I would laugh so hard if we a massive flash crash.
Broken Market: Short Muni ETF Flash Smash +43%
Presented with little comment except absolute incredulity that this is still occurring day-in and day-out with no real discussion beyond our friends at ITG...
SMB just jumped 43% in seconds on a string of 100/200 lot trades cascading up and then disappearing as circuit breakers halted it.
  "All your base are belong to us"---Skynet

Buffet also said "the worst reason to buy stock is because they are going up in price".
He is an insider, and has pretty good market timing, with the exception of the Billion dollars worth of silver he bought for $5oz and sold at $7.
Stocks are trading within their range, with a PE of 12, and this makes them a buy?