Blog Moved ContrarianEdge.com
posted by Vitaliy N. Katsenelson, CFA at 1/26/2007 10:33:00 PM
Friday, January 26, 2007
About Me
- Name: Vitaliy N. Katsenelson, CFA
- Location: Denver, Colorado, United States
Vitaliy Katsenelson, CFA is a vice president/portfolio manager with a Denver based Investment Management Associates, Inc. His writing is a byproduct of his research and not the other way around. He loves investing and the only thing that he loves more than investing (aside from spending time with his family, reading and listening to classical music) is discussing investments and the analytical process. He writes for Financial Times, The Motley Fool and Minyanville. Being in need for a captive audience, he teaches graduate investment class at the University of Colorado at Denver. Currently he is working on a book that will be published sometime in 2007 by Wiley & Sons on investment strategy in range bound markets.
Previous Posts
- US Bancorp’s Glass Is Half Full
- Need I say more?
- Vitaliy Katsenelson : Oil, diapers and US economy
- Don't Hit the Panic Button Just Yet
- Brilliant!
- Russian Thievery
- Reaction to Toll
- Mr. Toll at "It" Again
- China Redux
- The Best of: Dell, Not Yet?
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- Investment Management Associates, Inc.
- Vitaliy on FT
- Minyanville
- Vitaliy on Seeking Alpha
- Cody Willardâs blog
- John Rayâs blog
- Adam Warnerâs Option Report
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5 Comments:
I read your article in Saturday's RMN Business Section. And I must admit, I too had those "feel stupid" moments myself. Too many of them.
But take it from a guy who managed very large corporate pension funds of Fortune 500 companies, we are in more than just a "cyclical" bull market as you suggest. A lot of smart guys I know think that this market is a continuation of "secular" bull market that began in the mid-1970s or early-1980. So if you feel bad about your BDX hitting the high-70s after you sold it in the low-70s, then you are going to feel a lot worse when it breaks 100.
As you know, BDX enjoys positive price momentum with a rising price above a rising 50-day moving average which, in turn, sits above a rising 200-day moving average. But that's only a small part of it. The relative yield on the 10- year Treasury note comapred to the earnings yield on the foreward projected earnings of the S&P 500 suggests stocks are undervalued by some 25% compared to bonds--severe undervaluation last seen over 25 years ago. This model (which accurately suggested 65% overvaluation in 1999-2000) may not tell you "when," but it accurately tells you for "how much" you are playing the game. That translates into a DJIA solidly north of 15000. For investors, the upside clearly outweighs the downside.
So may I suggest that you put those backward-looking annual reports down. Althoug interesting to read, that information has been dicsounted by a foreward looking market some 6-9 months prior to their publication dates. So, the next time that BDX kisses its 50-day moving average (and it will), buy it!
Good luck.
And by the way, the "E" in P/E is worth a lot more under conditions of low inflation expectations versus periods of high inflation expectations. A historical average (or mean) is an apples-to oranges-comparison that includes both periods of low AND high inflation. You can't have both at the same time. Per the historically low yield (some 70% determined by inflation expectations) on the 10-year Treasury, we are in a low inflationary environment. The only comparable P/E was accompanied by a low inflationary environment. Bottom line: we have room for some P/E expansion per the low 4.7% yield on the 10-year T.
And just because earnings growth may be slowing, it doesn't mean that those still rising earnings are worth less. Historically, they can be worth more is accompanied by lower inflation. All things equal, a 5% earnings gain gets you 5% more P. And if those earnings are worth (valued) more because of lower inflation, you can get an even higher P, say 10 or 15% higher.
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