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Advisor Perspectives
Insights into the world of high- and ultra-high net worth investing
November 18, 2008- Vol 2, Issue 47
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Wharton Professor Jeremy Siegel says
stocks are "dirt cheap" based on current P/E
ratios. He discredits "normalized" P/E analysis that is
based on 10-year averages of earnings data, because it does not take into
account changes in dividend payout ratios that have taken place over the
last two decades. Siegel also provides his thoughts on bailing out
the automobile industry and why he turned down an offer to serve as a
Federal Reserve Governor.
Return on equity is the most reliable
yardstick for determining future stock performance, according to
a white paper published by Jensen Investment Management. We welcome
them as a new sponsor.
For most of the last century, the equity risk premium was about 9% - the
excess return equity investors enjoyed, as compared to the risk-free
rate. That premium is gone, as virtually
all sectors the fixed income markets are now promising equity-like returns.
Representative Barney Frank may
be the most powerful man in Congress. We analyze his remarks at a
recent luncheon in Boston, along with his legislative track record, to assess
whether he has the leadership
capabilities to rescue the financial system.
We have three guest contributions:
Norman Jones, CEO of WealthTouch, discusses how ultra-high net worth investors (those
with more than $30 million in
investable assets) are navigating through
the credit crisis. Jones addresses asset allocation and
operational issues - specifically how wealthy families are diversifying
holdings over a broader range of custodians.
Author and fund manager Vitaliy Katsenelson assesses the severity of the global recession in
both developed and developing economies. He focuses on what he calls
the "stuff" stocks -
energy, materials, and industrials - and says the market is still overvaluing these sectors.
No market has suffered more of late than the Russian equity market.
Fund manager John Connor, who just spent 10 days in Russia, says the pendulum swung too far, and now Russian equities are undervalued.
Lastly, we update our story last week on consumer spending and highlight some
recent Advisor Market Commentaries.
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Jeremy Siegel on why Equities are
"Dirt Cheap"
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Equity investors should expect a 20% return over the next 12 months,
according to Wharton Professor Jeremy Siegel. Siegel explains why he
believes the methodology used by Robert Shiller, Jeremy Grantham and others
is flawed, and the importance of the dividend payout ratio in determined
whether the market is under- or over-valued.
Read the article
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Searching
for Superstar Companies
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Jensen Investment
Management has devoted twenty years to selecting quality growth companies
from a select pool of companies, as defined by high Returns on
Equity. The experience it has gained from consistently
employing this disciplined investment strategy through both up
and down markets has reaffirmed its belief that high
ROE companies can be an attractive resource for selecting stocks.
Jensen discusses its investment strategy and looks at the results
of a historical performance study prepared for it by Clarifi, a
financial consulting firm, on the type of quality growth, high ROE
companies in which the firm invests.
Read the article
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The
Disappearance of the Equity Risk Premium
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Spreads on investment grade, high yield, mortgage-backed, and municipal
bonds are all record levels. Investors are now offered healthy double-digit
yields - returns which used to be achievable only with equities. A
lack of liquidity in the fixed income markets is one reason the equity risk
premium has disappeared.
Read the article
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Barney
Frank: Leadership versus Partisanship
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Barney Frank (D-MA), as Chairman of the House Financial Services Committee,
will oversee sweeping changes to regulation in the financial services
industry. We look at his track record - especially with regard to GSE
oversight - and his recent comments on how markets should be regulated to
assess whether he can provide the objective leadership needed for proper
reforms.
Read the article
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How
the Ultra-Wealthy are Responding to the Current Market
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By continuing to diversify existing investment portfolios, along with custodians,
while maintaining strong cash positions the ultra-wealthy have
significantly mitigated their downside risks today. At the same time, they
have evidenced a patient investment eye directed toward the longer term and
are taking deliberative steps to position themselves for significant upside
returns tomorrow.
Read the Article
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Energy
Stocks, Industrials, and Materials Remain Overvalued
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The global economy will not stabilize until developing economies do, and
their destabilization journey has just started. Investors need to sub-normalize
earnings of companies that have benefited tremendously from the global boom
- the "stuff" stocks: materials, industrials and energy stocks.
Though many of them look cheap based on trailing earnings, in many cases
those earnings are an aberration. They were inflated by tremendous growth
in the developing world and won't be revisited for a long time.
Read the Article
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Out
of the Red: Russian Markets Poised for Recovery
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Fund manager John T. Connor says that over time, markets with strong fundamentals
and low valuations, such as Russia,
generally recover after corrections. The hysterical forced-selling in
September could be the harbinger that the market's true bottom is
approaching.
Read the Article
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Follow-up
on Consumer Spending and Highlights from Advisor Market Commentaries
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Our interview last week with Craig Johnson, CEO of
Customer Growth Partners, was followed-up by the release of a dismal report
on consumer spending. Yet, it is worth noting that, once you strip
away the decreased spending on gas (most of which was due to the lower price
of gas), consumer spending decreased by approximately 1.5% over the prior
month. This is exactly the same percentage that Johnson estimates
home equity withdrawals contributed to consumer spending. Johnson
also points out that the personal savings rate jumped up markedly - to
about 2% - over the last six months, versus approximately 0.5% in recent
years. Johnson also looks at year-over-year changes in retail spending, ex
autos and gas, and there the number is +1.3% for October, which he says is
historically low but still slightly positive, indicating that "true
retail is dismal but not disastrous." According to Johnson,
"this will be the worst Christmas in many years, but Christmas will
still come on December 25."
We highlight recent submissions to Advisor Market Commentaries:
Two commentaries address the subject of consumer spending:
Charles Lieberman of Advisors
Capital Management discusses the "Power of Lower Gas Prices"
Doug MacKay of Broadleaf discusses
"Unemployment, The Consumer and the Faith of Ancients"
John Mauldin also comments on consumer spending, along with unemployment,
the GM bailout, and whether we can "muddle through" the next year
or so. He also says there is a potential for a market rally early
next year.
Read the Commentary
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Advisor
Perspectives
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