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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Graham Osborn who wrote (57528)

7/12/2016 1:23:47 AM

From: John Pitera

Read Replies (1) | Respond to of 78710

Hi Graham, I am sorry for not getting back to you with my value ideas in equity land... I have several that I would like to mention over the coming week or so... tonight I have 2 posts that are though provoking out of box ideas on what does in fact represent value these days.

In my second post I will advocate that a 30 year swiss franc bond that has a yield of -39 basis points has a very legitimate place in a well deversified deep value portfolio.

and as I say US stock thoughts are on the way...

my best regards,

John

S&P breakout or fake out?
6 Hours Ago
Carter Braxton Worth, Cornerstone Macro, goes to the charts to break down the recent rally in the S&P 500.

Message 30656854

watch the video of the 6 major US asset classes over the past year, their rates of return and the sharpe ratio risk associated with the higher beta of asset classes such as WTIC

http://video.cnbc.com/gallery/?video=3000533348

Carter Braxton Worth with a really excellent synopsis that equities have been outperforming US Fixed income market....... the expert asking Carter a question and stating that we have been in a 5 decade rally in bond prices..... does not even know his markets well enough to understand that we are coming up to the 36 year equilibrium point which encompasses the 36 year period from 1946 until oct 19th 1981 when bond prices fell and interest rate rose and then the more recent season (cycle) where bond prices have had a bigger bull market than equities and interest rates have fallen.

The rate of return of 30 year US bonds

the 20 year returns of

20 year returnsover the past 20 years the S&P 30 year bond return has been 319% and it has outperformed the SPX total return of S&P 500 index by 85%...... the total return has been 219% and when the Sharpe ratio and the much greater beta and draw downs over the last 2 years increases the outperformance of bonds by a doubling of the percentage price outperformance. of course this is looking in the rear view mirror

The SPX has not been able to make a new high in real terms (inflation adjusted) since 2000. There has been no upside since the secular bull market in equities that ran from 1976 to march of 2000 basis the SPX and from 1982 to March 2000 basis the DJIA.

watch Carter's video it is quite compelling.

With Active asset allocation methods and risk management approaches it is possible to create much greater Alpha..... or positiive asset class returns that are greater than the beta returns which are based on the swings (volatility) of the asset class. We have entered a time period where a holistic Global approach has to be used to look at the Different Asset classes that exist and are available to get greater returns from capital invested.

With the Endgame of he EUR almost certainly going to break up over time as the solve northern countries exit, coupled with the Trillions of dollars of Negative yield sovereign debt going to for the major global governments, Sovereign wealth funds, Global Insurance and Re Insurance companies and Governmental and corporate pension funds .... this market set up will ultimately unleash vast changed in the way that a number of the Global asset markets are valued and create significant opportunities as well as risks for individual investors, Global Macro Asset managers and indeed society as a whole.

This is nothing new... The changes in wealth that took place in the 1930's and then the WWII years was at least as momentous as what we are looking at.

JJP

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Message 30656557

To: The Ox who wrote (18323)	7/11/2016 6:18:39 PM
From: John P	5 Recommendations Read Replies (2) of 18328

Hi Ox, my view of the future is a bit more nuanced than you may be perceiving it. In a future environment where interest rates rise substantially..... as they did in the 1970's bond prices will decline in price and the price multiple on equity and indeed all investment will contract. The hurdle rate at which a new plant or business is viable goes higher. However, with bond prices falling, there are vast opportunity to make money shorting bonds, bond products, interest rate derivatives including the multitude of ETF's that now exist. Merril Lynch and several other major firms have calculated that 60 % of the SPX gains since 1980 were due to Price earning multiple expansion due competing rates of return on fixed income declined in a massive fashion. 20% was organic growth of the businesses and 20% came from buy backs, a move away from traditional GAAP accounting and other aspects of financial engineering. Institutional Investors in Japan this year have seen there 30 year JGBbonds appreciate 40 to 50% in 5 months as prices have zoomed higher even as rates are negative. That and the vast appreciation of the currency has made institutional investors fantastic returns this year, in an environment in which many wall street FA's think that everything has been horrible in Japan. The money that has been made in fixed income with the continuous long term capital appreciation along with interest payments earned has not been widely enough appreciated by most of the financial media. The abiliy to make money in bonds and the array of fixed income products by selling them short when rates ultimately reverse will provide vast returns for the minority of smart money of the mind set and able to position themselves for such an environment. In the 1970's investors in inflation recipient asset classes produced tremendous returns.......One of the most interesting things that we learn from the market Wizards Interviews in Jack Schwager's books is that 1981 was a year in which the many of the smartest Hedge fund and Global Macro managers lost big money was due to them not picking up on the sea change from rising interest rates to falling interest rates, After Paul Volcker stopped the runaway inflation mindset by putting the Fed Funds rate up to 19% at he start of 1979....... dropping FF rates all the way down to 9% in the June- July time frame of the year... and then moving Fed Fund rate dramatically higher back to 19.25% by the end of the same calendar year. over the past 20 years the S&P 30 year bond return has been 319% and it has outperformed the SPX total return of S&P 500 index by 85%...... the total return has been 219% I had more written on this but lost it in a made up load.... hope to have more on my thoughts soon. JP btw..... totally agree with your statement below. With today's rates so very low, a 200% to 400% move higher in long bond yields over the next decade should not be underestimated, IMO.