Investors have been seeing green as of late—from the summer’s correction (long overdue every seasoned investor agrees) to now the S&P has jumped more than 10% –that’s a fast rebound; too fast? As many faithful readers know I have been in the caution camp (which served my client’s well as we were able to add to our equity positions at the August lows) based largely on the notion that a Zero Interest Rate Policy scenario –when unwound—will show pockets of misallocated capital. That the unwinding of such a massive (globally, still adding fuel to the fire) experiment in monetary stimulus will not go smoothly –that there are certain to be hiccups—maybe even more than just a hiccup—along the way. As a steward I take my fiduciary duty to heart and as such will always look at what could go wrong rather than the rosy-glasses, throw caution-to-the-wind crowd.
Under the heading of reading tea-leaves that suggest the caution trade is not front of mind for investors today I have come across this curious circumstance—it seems that earnings – net income—you know the stuff that companies yield after they pay all of their expenses—well these are no longer important in many investor’s minds today — we have entered into the “adjusted figures” realm. Feels like I have seen this “change in metric” movie before—and the ending was not good. Recall the late 90’s tech boom when analysts were no longer interested in earnings or even revenues—but eye balls or clicks. Or in 2006/07 when housing figures were growing to the moon –without any care of how these mortgages were going to be repaid. Or more recently when the mantra switched to “cash is trash” and the TINA trade (there is no other alternative –but stocks). Each market has its mojo juice—our job as serious investors is to see between the trees and look for value that others are missing.
Case in point—a recent article in the NYT (http://www.nytimes.com/2015/11/01/business/valeant-shows-theperils-of-fantasy-numbers.html?_r=0) highlighted this issue of adjusted numbers rather than good old earnings:
Value Vs Growth
These 2 styles of equity investing are like 2 brothers playing tug-of-war; they go back and forth –sometimes with one winning over the other for years. Thomas J. Lee, managing partner at Fundstrat Global Advisors LLC., expects a transition toward value stocks, or shares that are the cheapest relative to earnings, sales and asset values, and away from shares of faster-growing companies. Value has been out of favor since a bull market peaked in 2007.
“Value over growth” is an emerging theme for 2016, Lee wrote in a Nov. 6 report. The Fed’s first rate increase since 2006 will contribute to the shift, in his view, because the companies in the value-stock category have more to gain from a move. This reflects the dollar’s tendency to weaken after the central bank’s initial moves in the past 50 years, according to an Oct. 30 report from the New York-based strategist.
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