Most valuable:Apple is once more the world's most valuable company following last week's eye-popping earnings beat. Their market capitalisation ($415 billion) is twice Ireland's GDP, while revenues beat analyst estimates by more than Nicaragua's 2011 GDP.
Quarterly profits ($13.1 billion) were the second-highest of any company and exceeded Google’s entire revenue. Apple generated $17.5 billion in cashflow, almost equal to Nokia’s market cap. Apple’s cash pile – $97 billion – exceeds the valuation of 448 of the companies in the SP 500. More iPhones were sold last year than in 2007, 2008, 2009 and 2010 combined.
In 1997, Michael Dell said Apple should shut itself down and return its money to shareholders. Today, Apple’s valuation is 14 times that of Dell’s.
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Dear America:US equities appear cheap if one looks at one-year price-earnings ratios but P/E ratios that average earnings over the past decade suggest the S&P 500 is no bargain. The latter is a historically sound valuation metric, although its conclusion seems counter-intuitive, given equities have gone nowhere over the last decade.
However, Warren Buffett’s favourite valuation metric – total US market capitalisation as a percentage of GDP – confirms US markets are not cheap. Equities are 103 per cent of US GDP; cheaper than the 125 per cent average over the last 15 years.
However, until October 1996, shortly before Alan Greenspan famously described markets as “irrationally exuberant”, there had never been a reading above 100 per cent. From 1924 to 1996, the average was 63 per cent. Then, however, valuations went skyward, peaking at 180 per cent in 2000 and 144 per cent in 2007.
The current reading does imply the secular bear market that began in 2000 has not yet wrung excess valuation out of the system.
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Hedge funds: Simon Lack is upsetting hedge fund managers with his book, Hedge Fund Mirage. Investors with a 60:40 allocation of stocks and bonds would have outperformed hedge funds every year since 2002, he says. They did very well in the 1990s, and small hedge funds still outperform. However, the growth of the industry from $143 billion in assets in 1998 to $1.69 trillion in 2010 has seen returns rapidly fall.
From 1998-2010, Lack calculates investors netted just 2.1 per cent annually, while managers earned $379 billion in fees, actual investors only earned $70 billion.
Taking into account other fees and statistical biases, investors actually lost $308 billion during this period while the industry collected fees of $324 billion.
British pension funds more than doubled their exposure to hedge funds in the last two years. Perception is everything.
