Climbing the Wall of Worry in Impressive Fashion
Had someone told me a year ago that Greece would be on the verge of default, unemployment in the US would be above 9%, housing would be in a double dip and GDP would be under 2%, I would have said the market would be closing in on 2008 lows, not 2011 highs.
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That’s how the market works folks. It beats the best of them with a stick when they are expecting a carrot and it offers carrots when they look least appealing. Right now many stocks appear to have carrot written all over them, but individual investors just aren’t biting. They’re not “risky” enough. Translated, that means they are not offering the kinds of returns that investors are hoping to gain. Companies in the blue chip sector are looking pretty cheap –Cisco, Hewlett Packard, Microsoft, JP Morgan, Walmart, Teva Pharmaceuticals…all are trading at historically low valuations, some under 10 times earnings, a level not seen except in times of serious recessions. But, just like when investors shunned treasuries when they were paying 15% in the early 80s, so investors now shun dividend paying stalwarts as their average price earnings ratios approach absurdity in comparison to the market in general.
Worse still is the performance of gold stocks. While the metal has performed in stellar fashion, gold miner shares are trading at levels they enjoyed when gold was half the current price. It’s obvious that investors are expecting gold’s rally to be a flash in the pan type of event. Once again the market is offering up opportunity only to see its hand bitten.
Of course, perverse valuations work both ways, just as risk is often NOT rewarded. Let’s look at the latest spate of domestic IPOs like Linked In which traded up to some 150 times projected 2012 earnings before settling back to just 100 times earnings. Risk is in style baby! The recent spate of Chinese and Russian IPO’s are a testament to this trend as well. But, they aren’t enjoying the same rise as their North American counterparts. Seems like someone forgot to inform them about the value of transparency. If you bought, you lost. But, you’re in great company.
Uber fund manager John Paulson recently got his head, and those of many others who invested in his fund, handed to him. Turns out he was the big investor in a Chinese forestry company, based in China and listed in Canada. A couple of months ago the shares were flirting with the $20 mark. Today they trade under $2 as allegations of fraudulent accounting practices are leveled at the company. Paulson sold his entire stake –after the news was released taking a loss of several hundred million according to the difference between high and low prices.
Chinese companies are usually suspect when it comes to transparency. It’s not that they don’t make money…they tend to do so at the expense of shareholders as opposed to for their benefit. Yet, more Chinese IPOs are coming to market in the coming weeks – a scary prospect indeed.
Judging by what investors are saying and what they are actually doing, it seems that they are just as confused as ever. And it also appears that the confusion is biased to risk as opposed to risk aversion. While not a recipe for total disaster, it does drive home the point that greed rules the day while fear is relegated to the back of the bus…for now.
IN the past week, that ugly indicator that I refer to frequently, the VIX or Volatility Index, is positively flying, approaching 25 for the first time in a while, on jitters about the markets and the economy. The VIX is trending higher and that is a bad omen for the market from a historical sense. Yet, even in the face of rising VIX (a sign of complacency), the market wants to push upward. The wall, apparently, is still not high enough to scare off hungry investors looking to make a few bucks.
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