Stocktake

Nobel prize a ‘farce’

Nobel Prize winner Eugene Fama

Nobel Prize winner Eugene Fama

Tue, Nov 26, 2013, 01:03

Renowned value investor Jeremy Grantham has harsh words for Alan Greenspan, Ben Bernanke and incoming Federal Reserve chief Janet Yellen in his latest letter, describing them as little more than bubble blowers. His real wrath, however, is reserved for efficient market theorists such as Eugene Fama (pictured above).

The recent decision to jointly award the Nobel prize in economics to Fama and Robert Shiller, who have diametrically opposed views, was a “farce”, says Grantham. Fama and his “laughable” efficient market hypothesis says bubbles do not and cannot occur, even though the last 25 years have seen four of the biggest bubbles in history.

The bubble in Japanese stocks burst in 1989, when stocks peaked at 65 times earnings, having never previously exceeded 25 times earnings; the Japanese land bubble was “probably the biggest bubble in history” and “far worse than the tulip bubble and the South Sea bubble”; the dotcom bubble burst in 2000 before the “first truly global bubble” peaked in 2007.


Markets overvalued but no bubble - yet
“Breaking News! US Equity Market Overvalued!”

That’s the tongue-in-cheek headline of the latest quarterly letter from influential asset management firm GMO, which has been warning for years of US overvaluation.

GMO, which manages $112 billion and is headed by renowned value investor Jeremy Grantham, says the S&P 500’s fair value is around 40 per cent below today’s levels.

After inflation, US equities are priced to return -1.3 per cent over the next seven years, although Grantham says there are “few signs yet of a traditional bubble”.

GMO’s Ben Inker says the only way the firm could be badly wrong is if the US enters a “golden age” of investment and economic growth.

More likely, today’s valuation problem will be resolved by a “relatively quick bear market or a longer period of more or less flat returns – as the last 13 years, for all of their periodic excitement, have turned out to be”.

Globally, nothing is screaming to be bought, says Inker, although there is a “hoarse whisper of ‘buy me’ coming from European and emerging equities” and a “polite cough for attention” from US high-quality large caps.


Sluggish earnings on both sides of the Atlantic
Share buybacks increase earnings per share, of course, so any diminution in repurchases could hit stocks. Buybacks peaked at $508 billion in the second quarter of 2012, compared to $345 billion in the second quarter of 2013.

Even with buybacks, earnings have been sluggish. Just 58.6 per cent of US stocks beat estimates, Bespoke Investment Group found – the second-lowest figure since the bull market began in March 2009. For the ninth quarter in a row, more companies lowered guidance than raised guidance.

Europe is even worse. Roughly half of companies missed earnings estimates, compared to 42 per cent in the previous quarter, while two-thirds have missed on revenues.


Beware of bouncy bitcoin
The price action in virtual currency bitcoin is getting crazier by the week. It went from $13.50 in January to $266 in April before quickly losing more than 80 per cent of its value. Hovering around $100 in early October, it then surged past $300 in early November, hit $900 just two weeks later, before almost halving in less than a day.

Cameron and Tyler Winklevoss, the twins famous for their legal feud with Facebook’s Mark Zuckerberg, plan to launch a bitcoin fund. A developer in Shanghai has even announced he is accepting payments in bitcoins (a bubbly currency used to buy into a bubbly property market – it can’t get much worse than that).

Some may be sceptical of bitcoin’s value and still tempted to make a momentum play. Caution is merited on other grounds, however. A recent study found that, over the last three years, 18 of 40 bitcoin trading platforms shut down. Thirteen did so without warning; no money was paid back on four occasions.

Caveat emptor.


Focus on firms buying back shares for returns
Goldman Sachs last week unveiled 10 market themes to look out for in 2014.

Such forecasts are 10 a penny, but one prediction – that investors can outperform by focusing on companies buying back shares – is backed up by recent evidence.

A recent Goldman report found companies involved in large buybacks outperformed the S&P 500 by 5.3 per cent a year over the last two decades.

Investors keen on the idea can buy into the S&P 500 Buyback Index, which tracks the 100 companies with the highest buyback ratios in the S&P 500.

It has more than tripled since 2000, compared to a mere 20 per cent return for the S&P 500.

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