You are invited to play "Guess the Pundit."
This is inspired by an old game show called "Name that Tune." While the format changed a bit over the years, the idea was that you would hear a few notes and then guess the tune. In some variations contestants could say...."I'll name that tune in X notes...," the fewer the better.
The Current Pronouncement
As stocks move higher, there are more pundits seeing the advance as an opportunity to call the top. With this in mind, here is a statement taken right from the news:
"My main call is about the multiple you pay for earnings.... Why should I pay a higher multiple for earnings produced where you have massive fiscal stimulus, incredibly accomodative monetary policy, by a government whose debt to revenue is worse than Greece? Why should I pay more for those earnings?"
I have some thoughts about this observation, but first a small quiz. Who is the source of this quotation:
- A leading blogger of the bearish persuasion.
- A leading hedge fund manager, talking his book.
- A leading sell-side firm, behind the curve.
- A leading bond fund manager, explaining why stocks are still inferior to bonds.
- A leading political leader, with any of several motives.
The answer is below, but first a few thoughts.
Choosing the Right Multiple
I am astonished at the wrong-headed analysis in the cited quotation.
When I pick a stock, I focus on the current and future business of the company. I look at earnings, cash flow, the balance sheet, the dividend, stock buybacks, and the earnings growth rate. I am interested in the business model and future prospects of the company.
And finally, I compare each investment choice to the available alternatives. I often find myself in complete disagreement with the top Wall Street pundits, something that has worked well for me for many years.
There are currently many stocks that are very attractive according to this method.
I accept the reality of government policy--and so should you. In democratic societies the leaders do not stand back and watch the economy fail without taking any action. Fed policy -- whether stimulating or restricting -- is just part of the economic landscape. So is fiscal policy.
I change my price targets based upon new information, as I described here.
The idea that a professional would discount earnings because he disagrees with government policy -- or thinks it might not work -- is abdicating his role as objective analyst.
And the winner is......
Any reader who guessed the "sell side" firm. The quotation is not from Tyler Durden, John Hussman, Bill Gross, John Mauldin, or even Newt! Here is the commentary from Adam Parker, Chief Equity Strategist from Morgan Stanley.
Parker and a team of fellow PhD's have taken over the forecasting at Morgan Stanley and have a price target for the S&P 500 of 1157. That is their story, and they are sticking to it!
I have no objection to PhD's; some have been known to make valuable contributions. When it comes to investment analysis I like to see representation from various disciplines. The Morgan Stanley team is overloaded with stat guys. They need more balance, including policy specialists, and most importantly, experts in research design. I see too much focus on being clever with numbers and finding correlations without good theoretical foundations.
They are not alone.
One after another, those claiming expertise in the objective analysis of data are falling into excuses laced with political rhetoric. Watch for the telltale signs from those who used to talk data. Do they now complain about "printing money?" About bailouts? Are these surprises? Things that have never happened before?
Understanding, predicting, and explaining government actions is part of making accurate market forecasts. Learn this or lose.