In the flood of news, it is easy to miss the very best stories. In my regular Weighing the Week Ahead series I include plenty of links to great sources. Sometimes there are other items that deserve special attention. This weekend I recommend that you settle back with some popcorn and enjoy these three videos.
In each case you will get some very solid stock ideas from a great source. You will also learn a common theme, understood only by a few market experts. Let us take the stories one by one, and summarize the theme in the conclusion.
John runs the (very) largest investment firm in Naperville, our town. His office -- now a building -- is a few blocks down the street from ours, and his assets a few zeroes higher. I take a special interest in following his commentary. I sometimes think that viewers might be giving him short shrift when compared to the slick guys from New York. Someone told me that we midwesterners have an accent! Really? It sounds normal to me, and you should not let it deceive you. John's success comes from a great team and good stock selection.
He has great ideas for stocks that will benefit from rising rates, including some technology ideas! Watch the interview for more.
CNBC's Squawk Box featured an extended interview with one of the leading fund managers and stock pickers, Ron Baron.
This interview is loaded with help for the individual investor, including great ideas about which companies have enduring business models. Here are some key bullet points:
- Very few succeed by trading the news!
- The average person who invests in mutual funds makes 3% compounded. The average mutual fund makes 7% compounded. People think they are George Soros. So wrong.
- The stock market has been through a difficult 14-year period of time. It is up 1-2% a year since 1999 while earnings have doubled. It started at very over-valued levels.
- Stocks are currently trading at median P/E ratios when interest rates have never been lower.
- Responding to a challenge from Doug Kass via email -- Given the secular headwinds to economic growth, why should stock multiples hold up?
6.8% a year since 1960 is the growth rate of the economy. For the last 14 years it has been 4.4% and it is accelerating. People talk about 2% growth but you have to consider inflation. When you had stocks at 15 times earnings for 100 years you did not have interest rates at zero. Look at the comparison. Businesses are growing and growing faster. Money is cheap. Businesses are attractively valued. When the economy grew at 6.8% stocks were growing by 6.1% plus you have to add dividends which makes it about 8%. That's for 120 years. Will it keep up at that rate? Maybe it will be a little less. We are using 7%. That means a double in 10 years -- 30K in ten years and 60K in 20 years.
Robbins is described by CNBC as a "hedge fund titan" who rarely does interviews. Since I regularly hear misleading information from managers with high AUM's, I prefer to decide for myself when it comes to credentials.
Robbins demonstrated a special insight in the health and health management fields. This is a great sector to study with plenty of cross-currents. We have the demographic effects from an aging population and also the influence of ObamaCare. We still do not know how the new policies will be implemented or which states will participate.
His interview includes several stock ideas in the health care field.
The Common Theme
All three sources demonstrated a very sophisticated understanding of the relationship between stocks and interest rates. They all note that stock market multiples are actually strongest when interest rates are in the range of four percent.
- Baron emphasizes the importance of stocks in fighting inflation.
- Robbins notes the multiple, stating "When interest rates are between 3 and 7 percent, the long-term history of the market is to trade between 17 and 18 times earnings. With our portfolio trading at 10 1/2, we'll take our chances."
- Calamos notes, "...if you go back even 50,60 years, when the 10-year bondwas 4% to 6%, p/es were 20,which means it's a much moregrowth environment.so i think we have to, you know,re-educate investors that, youknow, going back to normal ratesis not a bad thing."
Most traders and pundits, as usual, have an overly simplistic rule linking interest rates and stocks. Higher rates are worse. The loudest voices telling stock investors to worry about ten-year yields moving higher from two percent said the opposite when rates were moving down to two percent. On the way down, it was a sign of economic weakness. And now, on the way up.....?
For those who prefer data to speculation, please check out my "Scared Witless" (TM OldProf euphemism) post. I describe a "final destination" where a four percent ten-year yield is something of a sweet spot for stocks.
At the start of the week we saw the knee-jerk reaction to higher interest rates. Eventually, the normal relationships will return. It provides an opportunity for those in the know.