The View From 10,000 Feet

Many large cap stocks trade at reasonable prices compared to cash flow and earnings. The problem is that the economy is slowing and it is very difficult to forecast how slow the economy will eventually get and what effect that will have on earnings.

Reported earnings are backward looking and forecasts are always way off at economic turning points. In 2007 nearly $100 in S&P 500 earnings was being forecast for 2008. Reported earnings for 2008 ended up being negative. I don't believe that will happen again but I do believe that forecasts could be way off if the economy continues to deteriorate.

There is also the possibility of a tail event due to numerous global imbalances and a slowing global economy. Valuations are not at a point where one does not have to worry about the economy and until we get to that point everything is a trade.

2 comments:

Onlooker said...

Well said. Also, everybody has been conditioned to the rich valuations of the height of the stock market craze in 2000, and then to a lesser degree in 2007.

But as we grind through this secular bear market, history tells us that valuation measurements will continue to be compressed until we see real value that can be "bought and held" again through the new secular bull.

But just as with previous secular bears, investors will buy at these levels thinking they're cheap and won't get cheaper still. We're seeing this regularly, as with a recent article in Barron's about the cheap big cap tech stocks. Odds are that they will be wrong, again.

It takes strong discipline to wait for the true valuation bottom. But buying there is an opportunity to create great wealth. Those with large amounts of cash to do so will be greatly rewarded, needless to say.

Anonymous said...

Chances of conflict with Iran or North Korea are small but meaningful. Imagine how the market would respond to the blockage of the Straits of Hormuz and 20% of total world oil supply.