Redux

Bill Gross wrote an honest investment outlook for the future that provides plenty of good data and some worries about the future. See http://www.pimco.com/TopNav/Home/Default.htm and click on his investment outlook link.

The Good News

The chart on the long term trend [1952 to now] of market values compared to replacement cost of corporate assets is quite interesting. It shows that equity values are very low and that a normal "reversion to the mean" could bring a 100% increase in stock values. A chart of P/E ratios from 1871 [!!] to now shows similar "cheap" valuation. In the past those were "screaming buy" situations and huge bull markets followed.

The Worries

Corporate taxes are very low based on his chart of the ratio of tax payments to profits before taxes. And Mr. Gross worries about "a world where the government fist is being substituted for the invisible hand". Demographics are a worry, too, except in the emerging markets (other than Russia and China). In other places I've seems charts of corporate profit margins being quite high historically, too.

Counter-Worries

His worry about the loss of entrepreneurial risk taking seems misplaced, though, as he cites the exit of clowns like Chuck Prince as examples of that loss. He also cites the loss of golden parachutes, options, executive compensation, etc. But to me, those are "counter-worries" aka positives.

For almost 15 years, the CEO, CFO and the executive suite has looted untold billions from the foolish stockholders who approved compensation plans and directors in the club who rubber-stamped idiotic levels of compensation. That loos of shareholder value might be gone for our lifetime - let's hope.

My memory tells me that CEO compensation alone was amounting to 10% of corporate profits. Toss in the rest of the executive suite and all those stock options and I suspect they looted about 20% of stockholders' profits "EBH" - i. e., profits before hogs.

I read in FT that the median CFO got around $2.9 million in total compensation last year. And many did not even know enough to fund long term assets with long term debt, not commercial paper. Elsewhere, I see they were rather more pre-occupied with corporate tax shelters than productive investments or stable financing. So they deserve a huge pay cut for sheer stupidity as a class.

Conclusions

Mr. Gross concludes that corporate bonds are an excellent opportunity, which I agree is true provided one looks to absolute levels of yield and ignores the false signal of credit spreads when US Treasuries are at foolish levels due to hedging mortgage prepayments.

But the counter-worries seems to balance the worries, leaving the data showing that corporate stocks are a "screaming buy" for long term investors. Remember to use time diversification if you act on this.

Word of the Day

"Fusty" - adjective [$10]
Fusty means 1. stale, smelling, mustly, moldy; 2. stuffy, close; 3. antiquated, old-fashioned.
Sentence: Will Obama and the Democratic Congress provide new ideas and energy, or just a fusty, recycled mash of new left, statist policies from the 1970s ?