Saturday, December 6, 2008

Bill Gross on Stock Valuations

In his December Investment Outlook ("Dow 5000 Redux"), PIMCO's Bill Gross writes that regulatory and other responses to the current financial crisis will have a 'transgenerational' impact on stock market valuations:

My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.

The chart above, of historic P/E values, comes from Gross's Investment Outlook.


Stockdoc said...

You chose to leave out Gross's Q value table which shows stocks to be quite undervalued.

His conclusion: stocks seem undervalued historically but. with the future not exactly like the past, they might go up, they might go down or they might stay pretty much where they are.

How BOLD of him.

It reminds me of Jersey Dave when he predicted last spring that oil prices would be much higher 5 years from then but that they could drop 50% in the short run.

It was impossible to be wrong on that prediction for years to come just as it would be impossible for Bill Gross to be wrong when he took no stand at all on where the market will be going from here other than to say he didn't see the DJIA 14,000 right away again.

stockdoc said...

Since Mr. Gross readily admits his prediction 8 years ago was off by more than 100% I don't see why we should give his current predictions (or lack thereof) much credibility.

Albert said...

Stockdoc -- are you suggesting that one is not permitted, or should not even try to make any predictive statement about what might happen over the long term? You seem to criticize the fact that Dave predicted oil prices will be MUCH higher in 5 years, even though their prices might have a short term drop. At least he took a position (unlike Gross, who falls within stockdoc's criticisms because stockdoc suggests he is not making any prediction whatever).

Does the accuracy of every statement/prediction have to be determined in the short term, or are people allowed to make guesses as to what the long term will bring.

When Warren Buffett claims that US equity markets will be higher over the long term, do you criticize him because it's "impossible to be wrong on that prediction for years to come"?

DaveinHackensack said...


The reason I included the P/E chart instead of the Q value chart was because it was more relevant to Gross's conclusion in this article. I'll post it separately for you though. To be fair, Gross's conclusion is a little more specific than that: Corporate bonds are a better value now than equities. In his Financial Times column ("The Short View") yesterday, Jonathan Authers came to a similar conclusion:

Two conclusions seem solid. First, credit is more attractive than equity. Credit investors could avoid losing money even if the next few years are as bad as the 1930s. This is not true of equities, which are only slightly cheaper than long-term norms.

A second is that equities will not sustain a meaningful rally (as opposed to the lurches of the past two months, none of which has lasted more than a week), until investors buy credit again.

Regarding my prediction about oil prices likely being significantly higher in 5 years, I stand by that, for the reasons I gave then. If we end up in a deflationary spiral for the next five years, that prediction won't come true, but I think the powers that be will prevent that from happening.

Mberenis said...

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Regardless of what you hear, there is people getting tons of cheap money for personal use, businesses, buy homes, pay off debt, investing, and more. These people have done the research, just like I have. Bailout is for YOU

stockdoc said...

Bill Gross called his older prediction that the DJIA would drop from 8500 to 5000 what it was-clearly wrong.

Oil prices have dropped over 72% since early July. Any investors who bought or held, waiting for the 5-year upmove to come, have been killed.

All the suckers who bought into CGM Focus fund after the June Fortune cover story on Ken Heebner have certainly regretted ever seeing that article. That fund went from up about 35% YTD to down 48% YTD since the story ran.

Whether oil is higher in 5 years or not, investing in oil or other commodities back in June was a horrible thing to do.

Many GuruFocus readers even voiced their intent to get in to commodities for the first time ever back then due to the 'compelling long-term demand' story concerning China and India.

In the words of Marty Zweig...

"It's ok to be wrong. It's not ok to stay wrong."

A prediction that hedges so much it can't be wrong is useless. Bill Gross said afetr his last humbling experience that this time he won't be specific enough on price or date to ever be judged as to validity.

Albert said...

"A prediction that hedges so much it can't be wrong is useless."

This statement is plainly false. If you are investing for the long term, based on a prediction that, say, the price of oil will be much higher in five years, then the fact that you also claim it might drop 50% in the next year is neither relevant, nor sheds any light on whether the prediction is valid.

Put another way, let's say folks DID buy oil stocks in June and July, or even August when prices fell to $100/bbl. If they plan on holding the stock for a few years, and if the price of oil in 2011 is $175/bbl, how is that problematic? If I say, based on Obama's new rebuilding plan, construction companies will likely grow rapid over the next 3-4 years, and as such I purchase stocks of those companies, if the stocks fall 20-30% over the next 6-8 months, is that relevant?

Feel free to criticize Dave (whom I've never met by the way) all you want, but at least try to have your comments rooted in at least a modicum of logic. When you reflexively criticize anything that comes across this blog, you just sound uneducated, and waste everyone's time.

DaveinHackensack said...

"Oil prices have dropped over 72% since early July. Any investors who bought or held, waiting for the 5-year upmove to come, have been killed."

Actually, if you bought XOM around then, as I did, you'd be down now, but down far less than any of the major stock indexes. Pull up a six month chart comparing XOM to the Dow, S&P, and Nasdaq. And I'm still in the black on the two oil company stocks I bought the year before, EGY and BPT (although I'm still down big on my one pure play refiner stock, FTO). $140+ oil was never priced into most oil company stocks.