(PUB) Investing 2016

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4 • Fund Family Shareholder Association
earnings (the price you pay for a
stock is a call on the earnings and
cash flow from the company issuing
the shares) and interest rates (since
bonds, with their virtually guaranteed
payouts, are strong competition for
investor dollars).
We won’t know just how compa-
nies fared in 2015 until the books are
closed and financials are massaged to
meet, beat or retreat from expectations.
But through the third quarter of 2015,
after-tax profits, which are probably
the best and broadest measure of how
companies big and small have done
this year, have fallen 8.2% compared to
the third quarter of 2014 (which was, I
should note, the peak earnings period in
this long, drawn-out expansion we’ve
been in).
Earnings comparisons probably
won’t be too pretty in Q4, but they
might surprise in Q1 2016 when com-
pared to the wintry slowdown of 2015,
though we won’t know that until well
into May or June.
So you might think I’m pretty neg-
ative on the idea of earnings prop-
ping up stocks. But let’s look at the
interest-rate side of the ledger. With
their fairly punk yields, bonds aren’t
exactly providing steep competition.
The 10-year Treasury’s yield ended
2015 at 2.27%, up just 10 basis points,
or 0.10%, from the end of 2014. It’s
not surprising, then, that the total
return on the 10-year was only 1.0%,
which was just shy of the 1.2% gain
for 500 Index, for example.
One way to look at the competition
for investor dollars from stocks and
bonds is to compare bond yields with
the stock market’s “earnings yield,”
which is the level of earnings being
produced for each dollar of stock value.
(For those who want the specifics, this
is the inverse of the market’s price-
earnings, or p-e, multiple.)
The trend in the size of the gap
between the market’s earnings yield
and the Treasury yield gives some
indication of whether stocks are losing
their advantage over bonds or not. You
can see that in the late 1990s: When
stocks, led by the techs, moved into
bubble-pricing territory, the market’s
p-e was so high, and its earnings yield
was so low, that bond yields actually
looked super attractive. What we now
know is that bonds ended up being a
great place to put your money, because
when that bubble burst, stocks cratered.
The market’s earnings yield fell
below the bond yield in Q2 1999. By
the time it had gotten more than a frac-
tion over the bond yield in Q3 2001,
the stock market had dropped 21.5%,
while the bond market was up 21.7%.
Of course, the stock market didn’t
hit bottom until late in 2002, but the
fact is that while the earnings yield to
Treasury yield gap isn’t a market-tim-
ing barometer, it does give some sense
OUTLOOK FROM PAGE 1 >
PUNDITS
Ear-Plug Approved
“With over 50 foreign cars already on sale here, the Japanese auto
industry isn’t likely to carve out a big slice of the U.S. market.”
—Business Week, August 2, 1968
OVER THE YEARS, I’ve tried to give you an honest take on where my
year-ago thinking was right and where it was flawed. This year, you
can find it in the box on page 12. Yes, I get some things wrong, and I
fess up to them. On the other hand, I don’t make wild or speculative
predictions, because I’ve learned a very good lesson from watching how
wrong some of Wall Street’s biggest mouthpieces are year after year
after year.
Let’s start with my annual Roubini Award, named for the playboy
economist who, as I’ve said, has called more recessions than the Boston
Red Sox have won World Series, in a much shorter period of time. Last
year, I handed the award to the collective of Wall Street analysts predict-
ing ever-higher interest rates, which failed to come to pass.
This year, I think JP Morgan Private Bank’s Richard Madigan deserves
the Roubini Award for his hedged bets in the article “Possible Market
Surprises for 2015,” published in Barron’s. In that piece, he said that
“possible doesn’t mean probable,” which I take to mean he’s willing to
predict stuff just so he can say, “I told you so,” if he’s right, but still has
an out if he’s wrong.
As it turns out, Madigan’s predictions were way, way off the mark.
Right off the top, Madigan said U.S. growth would stall and pull back to
1.5% growth (wrong—the 12-month gain through Q3 was 2.2%), that
10-year Treasury yields would drop below 2% again (half wrong—they
were there for a nanosecond in October) and the dollar would weaken
(way wrong; see page 3). He had plenty of other predictions, and virtually
all of them were wrong, but his calls that “Brazil and Argentina [would
be] the best performing emerging markets” and that “a military coup in
North Korea [would lead] to civil war” were almost laughable.
It’s not as if last year’s winners, the Wall Street herd, didn’t deserve a
follow-up award. At the end of 2014, Barron’s asked 10 of “Wall Street’s
top strategists,” who hailed from places like JP Morgan Chase, Goldman
Sachs and BlackRock, their predictions for 2015. Their targets for the
S&P 500, for instance, ranged from 2100 to 2350, which, given when
they made the forecasts, translated into gains of 5% to 18%. As you
know by now, the S&P index fell 0.7%. Oops.
Morgan Stanley’s Jorge Kuri, director of equity research for Latin
America, was a lot closer to being on the money, calling for 10%
declines on a dollar basis for Latin America and saying his firm was
underweight to Brazil (a smart move).
Byron Wien, a former Morgan Stanley strategist who still gets ink
with his predictions each year, said the S&P 500 would rise 15%. He
also said Vladimir Putin would resign as lower oil prices deepened
problems in Russia. I don’t have to tell you why he’s a former strate-
gist.
And I always like to reserve space for the 2013 Roubini Award winner,
A. Gary Shilling, who is so consistently wrong that I can’t figure out how
he keeps getting people to write up his musings. In late 2014, he asked