Bogleheads

[ddb]

Please note that I am a firm believer that financial markets cannot be accurately predicted, and further note that I am in no way suggesting that I would ever alter my short- or long-term asset allocation based any asset class forecasts that I can come up with. This thread is solely for entertainment purposes.

Having said all that...

What asset classes look attractive today? From a valuation standpoint and/or a reversion-to-the-mean standpoint and/or a yield standpoint, nothing seems to look very good!

US Stocks: valuations don't seem too out-of-line compared to historical norms, however profit margins are at very high levels. All-in-all, this is probably what I view as the least unattractive equity asset class.

Foreign Developed-Market stocks: recent (5 years or so) heavy outperformance compared to US stocks, but outperformance is largely due to the decline of the dollar. What do valuations look like in this market, compared to historical levels? I suspect that the valuation story is similar to US stocks. BUT, with the dollar at such a low level relative to other currencies, the asset class looks a little frightening if you believe that the dollar will rise back to a more "normal" level.

Emerging Market stocks: very strong recent (5 year) performance. Is this market in a bubble, and will the bubble burst?

Commodities: very high recent performance.

REITs: even despite recent downturn, 5-year performance numbers are still huge.

US Gov't Bonds: yields are very low compared to historical norms. If you believe that the expected return of a bond equals its current YTM, then I guess we can expect short-to-intermediate term government bonds to return around 3% per year over the next 10 years.

Inv-Grade Corporate Bonds: nice spreads compared to treasuries. If you think that investment-grade corporates won't default more than usual over the next few years, then it looks much more attractive than government bonds. Consider that the Vanguard Short-Term Corporate Fund (VFSTX) has a yield of around 4.5%, while the Short-Term Treasury Fund (VFISX) has a yield of around 2.26% (per Vanguard website). The two funds have similar durations (2.3 and 2.1, respectively). Treasuries should have lower yields due to lower risk of default and not being state-income taxable, but this spread seems attractive even after considering those issues.

High-Yield Bonds: spreads very attractive. Even the relatively conservative Vanguard High-Yield fund (VWEHX) is yielding around 8.5%, with a duration of 5.1. There's clearly a tremendous amount of uncertainty priced into these securities, which seems to be well-warranted. For various tax, risk, and correlation reasons, I see no compelling reasons to utilize this asset class, even at these high yields.

Cash: can still get 4%-or-more CDs at some places, and money markets can be found at around 4%. Looks attractive relative to government bonds, but not necessarily compared to corporate bonds.

Conclusion? I like investment-grade corporate bonds, cash, and large-cap US stocks as the top performers over the next 1-2 years. But even those three asset classes don't look very interesting to me. Seems weird that there is no asset class out there that looks way undervalued (except maybe investment-grade corporates). We're coming off a five-year period where EVERYTHING has had solid returns.

- DDB
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"There is a moment of sheer panic when I realize that Paul's apartment overlooks the park, and is obviously more expensive than mine. " - PB

[cato]

If I were a betting man.......Some narrow categories I would consider are:

* MLPs -- TPP, BPL, EEP. These offer good tax-deferred yields, which could be good haven if the 15% qualified dividend tax treatment is changed. If you own index funds, this is an asset class you might want to add, since they are omitted from virtually all the indexes.

* Pharmaceuticals -- GSK, PFE, BMY, NVS. These have had the tar beat out of them in the last few years. For example, PFE has a $30billion cash hoard and is yielding nearly 6%. PFE has steadily increased their dividends now for the last 10 years.

* Canroys -- PWE, HTE, ERF, PGH. These have recently rallied, but the average yield for this group is still over 14%.


Do I know something the market doesn't? Probably not. Except maybe that I can borrow money from Fido at 4.25% and buy some stocks that yield a lot more than that.



-cato
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Citigroup delenda est.

[joepvang]

I believe REITs and Large Cap and Small Cap US equities will perform pretty well in the next 2-3 years.
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Time is money. Timing isn't.

[Russell]

OK, I'll bite!

Precious metal equities look pretty nice right now.

Consider the following rather rough measure for valuation: just take the price of these stocks (perhaps measured by the Philadelphia Gold and Silver index: the XAU) divided by the price of gold (GLD). It's pretty close to the low end of the historical range at present....
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The best material model for a cat is another, or preferably the same, cat. - A. Rosenblueth and N. Wiener (1945).

[Unormal]

[bolt]

[removed at request of poster]

[rich]

(I also posted this in another string.)

Developed foreign. Check out 12.73 Trailing P/E and 1.95 P/B on World ex US (which also excludes emerging markets).

http://www.globalindices.stand....rp=returns
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Best regards,
Rich

[Ariel]

Great thread, DDB. For what it's worth, I agree all around with your original analysis.
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Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)

[EmergDoc]

[woof755]

FTSE all world ex- US does include emerging markets. (or did I misunderstand your post?)
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"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise."

--Jason Zweig, quoted in The Bogleheads' Guide to Investing

[bolt]

[removed at request of poster]

[tfb]

[BPet]

[ddb]

[retired at 48]

Please Forgive the John Belushi, ANIMAL HOUSE theme here, as the following was my response post on the M* diehard site posting titled "I am so depressed".

I'm sorry, but I visualize certain diehards sitting around moping, when two of perhaps the greatest opportunities are staring them in the face, but with their melancholy they don't see it. Bad market times are exactly what the doctor ordered...opportunities. Oh, I sensed some movement, a few heads perking up. Oh, one of you had the courage to ask, what is even one of these once in a lifetime opportunities. OK, let's talk.

First, when you drive into any town in the USA, there are two things you always see...a church steeple, and the downtown bank. Right in front of your eyes are one of the greatest bloodbaths underway that will crucify financial stocks, especially banks. Down 50% already, perhaps more to come.

But let's stop and think. Oh, the banks competition, those pesky mortgage financials, are going bankrupt and out of business. Gee, in five years if you want a mortgage, who do you go to...banks, and fully on their terms. I see some more heads perking up! Yes, now you're getting it. Oh, and we have been told to buy "value". Who has very high dividend yields, low price to book, low PE's and yet WILL ABSOLUTELY NOT GO OUT OF BUSINESS; Yes, banks! The US simply will not be run without a banking system. What a better play. Oh, is that more heads I see popping up...not sure. Of course, we may see dividend cuts, more writeoffs, typically the best time to become a "banker" owning stocks. And that pesky inverted yield curve just stays flat, so banks find it difficult to make money. Did you know a good dose of inflation that all you guys are moping about is exactly what is needed to highly slope the yield curve! Yes, banks are the only people whose business of making money is to make money. They will survive any inflation. In five years I visualize the bank managers back to their 3-6-3 plan,. That is, borrow at 3%, loan out at 6% and on the golf course by 3pm!

Come on guys, get fully perked up and monitor this bank meltdown. How can I become a banker, you ask. Follow the ETF's KBE (large banks) and KRE (Small banks), or the broader XLF. . To take full advantage, you may have to deviate a little from diehard philosophies, by:

Consider banks as an asset class. Or, consider you are rebalancing within the S&P 500 asset class!

If you get to making money in bank ETF's, don't asset allocate out for awhile. Rather, stay with it at least five years. If you're right, BE RIGHT BIG!

And when the blue suiters (Merrill Lynches of the world) finally conclude banks are safe to invest in (probably 7 years), then hand your shares back to them, say thanks, and get out! And walk merrily down the street in your banker's tophat. And when you toast the champaign, please think of old diehard, retired at 48.


Now what do you say guys, LET'S GO GET EM!!



Oh, you asked what is the second opportunity of a lifetime staring you in the face...standby for part 2 if this part is viewed positively.

[Rose21]

I'm with you on the financials. Buffet's vulturistic move to cherry-pick the monolines is a revealing commentary on what's just around the corner.

[cato]

[Tramper Al]

[Prokofiev]

I have been buying some high dividend utility stocks as shelter from the storm. Some are near 3-5 yr lows yet can hold up in a recession since demand for their products is pretty inelastic. Also as bond and MM yields continue to fall, the 4.5% to 5.6% yield should look more and more attractive.

I bought some Con Ed (ED) which is yielding 5.5% and has just raised its dividend again.
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Everything should be made as simple as possible, but not simpler - Einstein

[cato]

[Tramper Al]

[BPet]

Regarding the Fidelity Margin Rate:
So, if you open up an account with Fidelity, will they margin positions that are not in "Fidelity Branded" mutual funds. So, if you use the Fidelity account to buy ETFs and other mutual funds...what is the margin ratio, $1M in assets, gets you how much margin?

Also, I'm not familiar with the tax deductability of Margin Interest. It it a direct deduction against income, like mortgage interest?

It seems that at rates like 4.25%, it would be very simple to make a few percent on the margin, especially if you have very long time horizon. I guess the real risk is if interest rates rise before you average compound return is greater than the 4.25%.(Like if you have a bad year or two and interest rates also rise dramatically during that time.)

Thanks for this excellent information!

[rich]

[cato]

[Les]

[retired at 48]

[quote="Les"]

[Tramper Al]

[market timer]

There are other ways to borrow at 4.25% or less. I don't itemize deductions or have $500K in marginable securities, but that doesn't stop me from borrowing at those low, tax deductible interest rates. Futures allow you to borrow at the risk free rate. Since the interest is built into the price, the interest expense is automatically deducted from capital gains. The same is true for options.

[BPet]

[market timer]

[Random Musings]

Rose21 said:

[cato]

[market timer]

[Tramper Al]

[market timer]

[ilan1h]

Come on guys, get fully perked up and monitor this bank meltdown. How can I become a banker, you ask. Follow the ETF's KBE (large banks) and KRE (Small banks), or the broader XLF. . To take full advantage, you may have to deviate a little from diehard philosophies, by:

If you get to making money in bank ETF's, don't asset allocate out for awhile. Rather, stay with it at least five years. If you're right, BE RIGHT BIG!


Strange, I have been thinking exactly along the same lines (almost every single point mentioned). This post makes me a bit nervous because I now realize that I am not the lone genius thinking about this . However, it is absolutely true that many of the asset classes mentioned are still overvalued even after a little market decline. However, the bloodbath that the banks have taken will eventually have to subside. I have already bought $100K worth of Citibank at 30 and watched it plunge to 25 (I'm not worried). I plan on buying another $100K of XLF or KBE and holding it for years. I fully expect the bloodbath to continue for a while but will not sweat it. After all, these companies are not all going out of business.

[retired at 48]

To: ilan1h

There is at least a third who feels this way... Another moderately successful diehard , Warren Buffett, just recently increased his accumulation of a Bank, Wells Fargo. Ref: Yahoo Finance.

Retired at 48

[grok87]

I know I'm getting into this thread late but here are some quick thoughts: