Burton Malkiel on Stock Valuations in the US and in Emerging Markets

Prof Burtom Malkiel author of the investment classic Random Walks Down Wall Street has a column in the WSJ on stock valuations

On the US

There is a disagreement about the sustainability of current lofty stock market valuations.

One camp argues that the market is dangerously overvalued. The so-called CAPE ratio—the price-earnings multiple for the market based on cyclically adjusted earnings averaged over the past 10 years—stands at over 25, well above its long-run average of about 15. Today's CAPE has been exceeded only during the market peaks of 1929 and early 2000 and 2007.....

Another group of forecasters are convinced that stocks are reasonably valued. The main competitors for stocks in individual and institutional portfolios are bonds. And yields on fixed-income securities are at all-time lows. ...

While continued low rates can justify high stock prices, the CAPE followers are correct as well. Long-run equity returns from today's price levels are likely to be considerably lower than their 10% long-run average.......

On Emerging Markets

All equity portfolios should include emerging markets. Emerging markets, accessible through broadly diversified, low-cost, emerging-market exchange traded funds, represent half of global economic activity. ....

Emerging equity markets also have far more attractive valuations. CAPEs for emerging markets at less than 15 are little more than half the levels in the U.S., and they stand at ratios close to their all-time lows. Just as CAPEs do reasonably well predicting long-run returns in the U.S., so they are also effective predictors in emerging markets,

Interesting Charts

Year to Date:
GMF emerging asia
IEMG total emergind markets
SPY Sp 5OO

But the 10 year chart looks like this:

The US Stock Market Looks Expensive..What About Markets Around the World ?

The  US stock market continues to rise and despite good reported earnings for the second quarter valuations seem stretched.

Here is the earnings growth of the sp/500 which at 14.99% is well below the long term mean of 28%

All charts from multpl.com

http://www.multpl.com/shiller-pe/

And the S+P 500 p/e ratio which at 19.85 is 28% above its long term median of  15.5:

Since august of last year the S+P 500 total return is up 22% but earnings rose 15% that means that over 1/3 of the appreciation in the stock market was driven by P/E expansion (higher valuations) rather than earnings growth,

I have written before about Robert Shillers CAPE ration (his recent nyt article is here   ) in the article he argues the US stock market as very highly valued

As shown in the  chart. at 26.48  the current value is well above its long term mean value of 16.55

How does the Us market valuation based on CAPE compare to other markets around the world. A useful  i article over at seeking alpha gives some interesting data in this table of comparable CAPE ratios around the world (table below text)

Although many of these markets certainly deserve a healthy discount to the US due to political and other sovereign risk the US stlll stands out as one of the three markets in the world with the highest CAPE trading at  a very large premium to some of the world's major stock markets.

Two Charts of Interest

3 month chart ETF HYG  Intermediate Term High Yield Bonds

Note the volume spike at the low

And HYS Short Term High Yield Bond ETF

Bloomberg on German Stocks

German Stocks Tarred by War Find Buyers at Record Value
  Aug 25, 2014 10:11 AM GMT+0300

German stocks, punished for the nation’s trade ties to Russia and Ukraine, have gotten too cheap to turn down for some of Europe’s biggest investors.

Raiffeisen Capital Management is adding to holdings, with earnings at DAX Index companies poised to rise 21 percent in 2014, according to more than 1,000 analyst estimates compiled by Bloomberg. JPMorgan Chase & Co. and ABN Amro Bank NV say valuations are compelling after the Ukraine crisis sent Germany’s benchmark gauge to 13.2 times projected profits, close to the cheapest level relative to Europe since at least 2005.By Namitha Jagadeesh,,,,,,,,,

After almost tripling between March 2009 and July 2014, the DAX retreated 10 percent in about a month, meeting the definition of a market correction. Escalating conflict between Ukraine andRussia, along with data signaling a slowdown in Germany’s economy, has erased nearly $180 billion from equity values. The DAX lost 0.7 percent on Aug. 22, paring a weekly gain, after Ukraine said Russia was invading the country under the cover of an aid convoy. It rose 1.2 percent at 9:09 a.m. in Frankfurt today.

Relative Valuation

Selling pushed the DAX’s valuation more than 2 percentage points below that of the Stoxx 600, the widest gap since at least 2005, according to data compiled by Bloomberg. Germany’s biggest companies will boost earnings by 21 percent in 2014, compared with increases of 9.6 percent in the European gauge and 10 percent for the Standard & Poor’s 500 Index, estimates compiled by Bloomberg show.

Large Flows Into A Lesser Known Passive Fund Manager: Dimensional Fund Advisors (DFA)

Dimensional Fund Advisors a pioneer in value tlted" passive funds is less known to the gerneral public. It's funds are available to retail investors either through a limited number of advisors, some annuities and some 401k plans.

from the WSJ 

Alongside Vanguard, Dimensional Is Getting Inflows Too

While the mutual fund giant Vanguard Group is nabbing the lion’s share of investor money pouring into “passively-managed” products like index funds, it’s not the only company benefiting.

Little talked-about Dimensional Fund Advisors, an Austin, Texas-based money manager with $380 billion in assets under management, happened to rank among the top five companies experiencing the highest inflows into passively managed products through July this year, according to the research firm Morningstar Inc.

The asset manager has long run a series of proprietary mutual funds that operate like index funds because they are highly diversified – sometimes investing in thousands of stocks, for example – and therefore spread risk, unlike a traditional mutual fund operated by a star manager, Morningstar says. They also have low turnover in their investments and are low cost

Here are numbers for the flows into passive ETFs and funds

Passive Fund Net Flows ($Millions)

Name	1-Mo	YTD	1-Yr
Vanguard	16.781	102.723	157.807
iShares/Blackrock	3.322	29.387	48.653
Dimensional Fund Advisors	2.296	16.771	25.932
First Trust	398	6.222	10.649
Guggenheim Investments	260	4.567	8.846
Fidelity Investments	838	9.023	8.516
Schwab ETFs	663	4.103	6.609
ProShares	614	2.873	4.837
TIAA-CREF Mutual Funds	267	1.635	2.589

Retail Investors Fleeing European Stocks: Performance Chasing and Selling Low ?

From the Financial Times


US investors cut their European exposure

By Ralph Atkins in LondonAuthor alerts

US investors scaled back significantly their exposure to Europe as the continent’s economic prospects waned and tensions escalated over Ukraine, according to data on exchange traded funds.

US-listed ETFs exposed to Europe including the UK have seen net outflows of almost $4bn in the past six weeks, reported Markit, the financial data company..

The outflows highlighted a sharp shift in global investor sentiment towards Europe.

There were strong inflows into European bonds and equities at the start of the year as economic data improved and the eurozone returned to stability after its debt crisis years.

According to Morningstar here are some valuation measures

     

	Germany (EWG)	S+P 5oo	Eurozone (FEZ)
P/e	14.2	17	14.9
price to book	1.54	2.35	1.38
Price to Sales	0.72	1.66	0.79
Price to cash flow	6.3	7.4	7.09

  

Looking at the top holdings in these 2 ETFs  as well as the top 10 holdings in the S+P 500

it seems questionable whether the valuation discounts relative to the US are justifies

Here are the top holdings in EWG

Name	Weight (%)
BAYER AG	9.21
SIEMENS AG	8.3
BASF SE	7.88
DAIMLER AG	6.64
ALLIANZ SE	6.55
SAP ORD	6.04
DEUTSCHE TELEKOM AG	3.91
DEUTSCHE BANK AG	3.85
BAYERISCHE MOTORENWERKE AG BMW	3.3
VOLKSWAGEN AG (PFD NON-VTG)	3.14
LINDE AG	3.14

 And Here are the top holdings in FEZ

Name	Weight
Total SA	5.96
Sanofi	4.96
Banco Santander S.A.	4.48
Bayer AG	4.25
Siemens AG	4.01
BASF SE	3.64
Anheuser-Busch InBev SA	3.3
Daimler AG	3.13
Allianz SE	2.99
SAP SE	2.87
BNP Paribas SA Class A	2.84
Banco Bilbao Vizcaya Argentaria S.A.	2.71
Eni S.p.A.	2.56
Unilever NV Cert. of shs	2.53
Telefonica SA	2.44
ING Groep NV Cert. of Shs	2.02
AXA SA	1.94
Schneider Electric SE	1.9
LVMH Moet Hennessy Louis Vuitton SA	1.8
Deutsche Telekom AG	1.76

And here are the top 10 holdings in the S+P 500

Apple Inc.	AAPL	3.36
Exxon Mobil Corporation Common	XOM	2.47
Microsoft Corporation	MSFT	1.89
Johnson & Johnson Common Stock	JNJ	1.65
General Electric Company Common	GE	1.47
Chevron Corporation Common Stoc	CVX	1.43
Wells Fargo & Company Common St	WFC	1.42
Berkshire Hathaway Inc Class B	BRK.B	1.31
JP Morgan Chase & Co. Common St	JPM	1.27
Procter & Gamble Company (The)	PG	1.22

The Money Keeps Flowing Into Index Funds and ETFs

WSJ today reports on the explosive growth in assets at Vanguard--as well as Dimensional Fund Adviors, ishare(Blackrock) s and spdr (State Street) ETFs

Investors Pour Into Vanguard, Eschewing Stock Pickers

Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren't run by stock pickers or star managers....

he surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners. Other firms, such as New York behemoth BlackRockInc. BLK +0.18% and Texas-based Dimensional Fund Advisors, are also enjoying an influx of cash.....

It is "a trend that I see continuing on, probably forever," said David Barse, chief executive officer at New York-based Third Avenue Management, which manages $13.5 billion. He said the challenge for active managers, like his firm, is to identify overlooked investments that don't merely track the broad market.

But he acknowledged that is increasingly a tougher sell, particularly to retail investors.

Investors poured a net $336 billion into passively managed stock and bond funds in 2013, handily beating the $53 billion invested in traditional mutual funds of the same type, according to Morningstar. So far this year through July, investors put a net $177 billion into those passive funds, compared with $74 billion in actively managed funds

Vanguard isn't the only company benefiting from the wave of money flowing into passive products. BlackRock, the world's largest asset manager, with about $4.6 trillion in assets under management, has seen $53 billion pour into its iShares' ETF business globally this year through Aug. 18, the largest amount of any fund company, according to the company.

BlackRock is the largest ETF provider. A spokeswoman for the company declined to comment. Vanguard, however, the third-largest provider behind State StreetSTT +0.37% Global Advisors, has seen more investor inflows in the U.S

More Signs Of High Yield Bond Buying by Institutional Investors

via Bloomberg

Pacific Investment Management Co. (PCARX) has been snapping up some of the higher-rated junk bonds dumped by speculative-grade debt managers amid the recent exodus from funds.

In their rush to meet redemptions, high-yield money managers picked the wrong assets to sell and created pricing that’s “quite attractive” for some instruments rated just below investment grade,Mark Kiesel, Pimco’s global head of corporate bond portfolio management, said at a media briefing in Sydney today.

“High-yield managers have been selling, in our opinion, what they shouldn’t be selling,” said Kiesel, who’s also a deputy chief investment officer at the Newport Beach, California-based company. “They’ve been selling the safest part of the high-yield market, the BBs. We’ve been cherry picking many of these assets over the last couple of weeks and buying them because they’re trading at significant discounts to where we think fundamental value is.”

Record withdrawals from junk-bond funds helped push average U.S. speculative-grade yields to 6.3 percent on Aug. 1, the highest in almost six months, according to a Bank of America Merrill Lynch index. The market has since rebounded, with yields easing back to 5.97 percent yesterday. Monthly losses in July were the worst in more than a year.

Update on The Israeli Shekel...From Strength to Weakness

The Israel Shekel has experience a very large drop vs the US $ and the Euro. Several factors seem to be at work (see chart below) from a trend of late of strengthening it is now down 15% for the year

·         Large scale intervention by the Bank of Israel $1.4 billion in July of which $290 million was part

of a program to offset the impact of investment in the natural gas exploration project.

·         Interest rate cut by the Bank of Israel to .5% a reversal of concerns over inflation.

·         Pessimism for the Israeli economy at least in the short run as an impact of the current security situation.

·         Because of slowing economic growth increased likelihood of further cuts in interest rates or certainly now increases due to fears of inflation.

·         Bank of Israel intervention also seen as an effort to increase exports or exporters’ profits.

·         Doubtless there has been a massive reversal of leveraged currency positions by speculators.

·         Exporters and foreign investors with the need to purchase shekels accelerating their purchases.

Many analysts don’t expect the shekel to weaken beyond 3.600—although many said the same about the 3.50 level. Merrill Lynch analysts expect continue intervention in the market reversing central bank statements that they would not intervene in an effort to help exporters

In any event there has been a sharp change in the direction of the exchange rate and the seeming “consensus of analysts” speaking now of 3.600 a opposed to the forecast of 3.200 just a couple of months ago.

This is another indication of how difficult exchange rates around the world are to forecast. And the leveraged trading and size of the currency markets mean that when trends reverse the moves can be large and swift.

Interactive chart can be found here 

Update August 25
Haaretz

The Bank of Israel lowered its benchmark interest rate to an all-time low of 0.25 percent from a previous 0.5 percent on Monday, its second straight monthly reduction aimed at boosting economic growth.

All 10 economists polled by Reuters had forecast no move, which came amid a seven-year low in the inflation rate and data showing Israel's economy was weakening.

Growth is forecast at 2.9 percent in 2014 but the central bank has said the Israel-Hamas war could shave a half point off of that figure. 

WSJ on High Yield Bond Market

No sooner did I post my analysis of the high yield market than this article came up in the WSJ. I worked on and off for a week on my piece..time to get things done and posted more promptly

Big Investors Snap Up Junk Bonds

Institutions Take Advantage of a Recent Slide in High-Yield Bonds' Price Triggered by Small Investors' Selling

Large institutions are snapping up U.S. junk bonds, taking advantage of a price slide triggered by an exodus of individual investors.

Many big money managers say they remain bullish on these risky corporate bonds despite concerns that the market is overheated and worries that geopolitical unrest could fuel a rush to safer assets.

Their interest stands in contrast to a wave of selling by retail investors, who sucked almost $13 billion out of junk-bond mutual funds and exchange-traded funds in the four weeks ended Aug. 6.

Analysts said upheaval in Ukraine, Iraq and Israel unsettled some investors, and concerns that prices were already too high drove some smaller investors to sell. They worried that the multiyear record-breaking run of junk bonds might be near an end.

That presented a buying opportunity for larger investors, who say the $1.6 trillion U.S. junk-bond market remains healthy and note that many bonds are now cheaper than before.

Gershon Distenfeld, who oversees $35 billion in junk bonds as director of high yield forAllianceBernstein ...

"Investors who panic in these selloffs—it's the wrong thing to do," Mr. Distenfeld said.

While there are no hard data to show hedge funds and large asset managers moving into junk bonds, a rise in prices last week suggested some big firms were buying, analysts said. U.S. high-yield bonds returned 1.02% this month through Friday, according to Barclays PLC, pushing year-to-date returns to 5.112% as of Friday from 3.498% as of Aug. 1

"There really is no good reason why high yield sold off in the first place" this summer, said David Mazza, head of research in the ETF unit at State Street Global Advisors, which oversees $413 billion in assets. "Nothing changed in the outlook for defaults."...

Standard & Poor's predicts the U.S. corporate high-yield default rate will rise to 2.7% by June 2015 from 1.5% this past June. Those rates are well below the average of 4.4% over three decades...

There were signs last week that some small investors were rethinking their retreat. U.S. junk-bond mutual and exchange-traded funds took in $680 million in the week ended Aug. 13, ending four weeks of outflows. The streak included a $7.1 billion weekly decline that was the biggest ever, fund tracker Lipper said.

Notes from around the markets and te web

Financial Times Aug 16 

Europe stocks firm as mood improves

Wsj page one same day

Euro Zone's Economy Fails to Grow

I wrote a few weeks ago in an optimistic tone on Europe and Germany perhaps a bit optimistically. The Germany ETF (EWG) is down  year to date. The reason most cited for the declione is the Ukraine crisis. Export to the Ukraine make up 1.3% of German GDP and major German companies are more dependent on Asia than exports ot the rest of Europe.

With such large declines in German stocks it might be time for long term investors to take a look

Data for he week ending August 6 reported record outfolow from high yield bond ETFs

.WSJ August 16 http://online.wsj.com/articles/investors-pour-680-million-into-u-s-junk-bonds-in-latest-reporting-week-1408052063

Investors Pour $680 Million Into U.S. Junk Bonds in Latest Week Latest Inflows Snap Four Weeks of Declines

Investors poured $680 million into funds dedicated to low-rated corporate debt in the week ended on Wednesday, according to fund tracker Lipper, snapping four weeks of declines that included the previous week's record $7.1 billion weekly outflow.

Observers pointed to a change in sentiment in early August for so-called junk bonds, as institutional buyers stepped in hunting for bargains. U.S. high-yield bonds lost 1.33% in July, but

Past Three Months High Yield ETFs Last Three Months Total Return

Short Term

HYLD 1.0%
HYS     .1%
SJNK   -.1%

Intermediate Term

HYG 1.1%

JNK . 9%

HYG 3 Months Price Only

Risk Off Trades Change Their Character A Bit

Generally markets concerned with political uncertainty go into risk off” mode selling lower credit bonds and buying government bonds and selling emerging market stocks.

This time is a bit different

Over the Last 3 months

Emerging markets etf IEMG +6.1%

Emerging Asia (GMF) +12.1%

SP 500 +5.0%

US Govt (GOV) unchanged 

Two Interesting Articles from the NYT

Two Interesting Ones From the WebT

Robert Shiller Nobel Prize Winner in Economic in the NYT

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TheMystery of Lofty Stock Market Elevations

AUG. 16, 2014

The United States stock market looks very expensive right now. The CAPE ratio, a stock-price measure I helped develop — is hovering at a worrisome level....

But Does It Really Matter How You Invest a Lump Sum

This NYT article argues no

Hesitating on the High Board of Investing

AUG. 16, 2014

You’ve got some big decisions ahead if you’re lucky enough to have some cash to invest. Say you’ve decided to put it into the stock market. Should you plunge in immediately, investing your entire stash, or start slowly and move your money into long-term holdings very gradually?

Academics and investment practitioners have studied this question extensively. And based on statistical analysis of past performance — which, of course, is no guarantee of future returns — there is a very simple answer.

“If you’re going to make a long-term investment in stocks, you’re generally better off putting all of your money into a diversified portfolio as soon as you can,” said Paul Bosse, a principal in the investment strategy group at Vanguard. That’s because the long-term direction of the stock market has been upward, and, most of the time, the sooner you are in the market the better off you’re likely to be.

Of course, the market doesn’t always rise. And if you can avoid investing at a market peak, you are better off. But that significant

caveat aside, delaying investment has usually meant missing out on market gains.

But

None of which is to say that riding out those big losses would have been pleasant or that the environment has been ideal. And the markets may well become more volatile. After the gains of recent years, stock and bond markets may be overvalued — as Robert J. Shiller suggests in his Economic View column this week — and returns over the next decade may be less than those of the past. There is also no assurance that the patterns of the past will prevail again.