US markets more expensive


STOCKTAKE:We have often noted that the Shiller price/earnings ratio, which averages earnings over a 10-year period, indicates that most global indices are cheap, excepting the US.

A new report by AQR Capital Management indicates that US markets are more expensive than they have been 80 per cent of the time since 1926.

During prior periods of similar valuations, real returns have averaged just 0.9 per cent over the next decade, AQR cautioned, although returns vary widely.

Unsurprisingly, returns are highest when the Shiller P/E is lowest.

Critics argue earnings have been too low over the last decade to be meaningful, saying the 2008 collapse distorts the figures.

Not so.

AQR found that earnings have been slightly above their long-term trend over the last 10 years, so another poor decade lies in store.

Bulls rise as fear drops

Where’s the fear? Despite US indices recently suffering their worst two-day slide of 2012 and hitting a four-month low, the Vix – the so-called fear index – sits at 18, below its long-term average (21) and nowhere near 2012’s June high of 27.

Ditto in Europe, where the VStoxx (22) is similarly below its long-term average of 26.

Bullish sentiment actually rose to its highest level since August, according to the latest American Association of Individual Investors (AAII) sentiment survey.

Technical indicators show stocks are approaching bottom-fishing levels, however.

Some 23 per cent of SP 500 stocks are trading above their 50-day moving average – a big drop from last month’s 73 per cent reading, and nearing the sub-20 per cent level where many like to nibble (single-digit readings can occur after big selloffs).

Report says fiscal cliff biggest risk to markets

Merrill Lynch’s latest monthly survey of global fund managers has lived up to its contrarian reputation.

Released last week but conducted before recent falls, a net 35 per cent of managers were overweight stocks – a 16-month high – with growing talk of a “great rotation” out of bonds and into equities.

Hedge fund net exposure to stocks has hit a five-year high of 40 per cent, said the survey. Stocks badly underperform over the following month whenever this reading exceeds 35 per cent.

Japan, although cheap, remains unfancied, a net 34 per cent underweight Japanese equities.

The rush into Europe may be ending, however – a net 10 per cent are now overweight Europe, the same figure as for the US.

The previous month, a net 13 per cent were underweight Europe.

The fiscal cliff is easily the biggest tail risk to markets, say managers, and 72 per cent say it is not substantially priced into global equities. (One might question this, if everyone is worrying about it.)

Merrill strategist Hans Mikkelsen has warned that investors are under-appreciating higher oil price risks, however. Just 6 per cent rate oil a major concern, despite “significant” Middle East tensions.

 Apple still a tasty fruit In numbers

Apple’s recent 24 per cent slide has brought its trailing price/earnings ratio down to 12.3 – its lowest since the iPod’s 2001 introduction.

The stock’s forward P/E is just 9.2, although bears note Apple’s P/E ratio has been on a downward trend for years, as is only right – it is the most valuable company in the world, not a young growth stock.

However, the spread between consensus analyst price targets and Apple’s actual share price now stands at -28 per cent.

Going back to 2005, says Bespoke Investment Group, Apple has bounced whenever the spread got to around -30 per cent (excluding the -50 per cent spread amid global panic in late 2008-early 2009).

The holiday season is an obvious near-term share price catalyst, with the new iPhone 5 and iPad mini likely to be flying off the shelves.

Bearish on Apple at $700, hedge fund manager Doug Kass is now a buyer, saying the recent decline has “overly discounted” most of his concerns.

“I never said it was a forbidden fruit,” he quipped.

In Numbers:


The number of 800 million Facebook shares which became eligible for sale last week but short-sellers are losing interest. Facebook short sales have fallen by 40 per cent this month.


The percentage of US firms which mentioned the fiscal cliff in their most recent earnings reports, up from 9 per cent last quarter. Keyword searches show a sharp drop in European concerns.


US indices recently experienced their most boring day since 1989 – the S&P 500, Dow and Nasdaq all finished the day within 0.02 per cent of where they began it.