Tags: stock markets | bond prices | economy | fundamentals

Today's 'Overpriced' Stocks, Bonds Don't Reflect Real Fundamentals

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Wednesday, 15 April 2015 07:21 AM Current | Bio | Archive


There is a lot of buzz on Wall Street about the letter sent by Larry Fink, chairman and CEO of BlackRock, which with $4.65 trillion of assets under management at the end of 2014 is the world's largest asset manager.

In his letter, dated March 31, 2015, Mr. Fink says: “… the effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy. In the face of these pressures, more and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.
In 2014, dividends and buybacks in the U.S. alone totaled more than $900 billion, according to Standard & Poor's — the highest level on record. With interest rates approaching zero, returning excessive amounts of capital to investors — who will enjoy comparatively meager benefits from it in this environment — sends a discouraging message about a company's ability to use its resources wisely and develop a coherent plan to create value over the longer term…”


Please keep in mind that since the “subprime and Lehman Brothers crisis” that officially ended in 2009, companies in the S&P 500 have spent more than $2 trillion on buybacks, thanks mainly to the Fed's QE programs.

When companies earning a lot of money and generating cash then borrow money at basically zero interest rates (as part of QE) — and then buy back their own shares — the real “return” doesn’t come from growing a business but from buying back shares. Doesn’t that create a misleading perception about real growth and, above all, is that sustainable?

In my opinion, today’s stock markets and bond prices are way over-priced and don’t reflect the real fundamentals.

When that will be “repriced” remains the big unanswered question, so far at least.

That said, it’s also a fact investors cannot overlook “economic growth outlooks,” when considering (realistically, which doesn’t have anything to do with following “trends”) long-term investment decisions.

It’s difficult to negate what IMF Managing Director Christine Lagarde said last week at the Atlantic Council in Washington, D.C.: “Six months ago, I warned about the risk of a ‘new mediocre’— low growth for a long time. Today, we must prevent that new mediocre from becoming the ‘new reality.’”

In the meantime the IMF released its updated World Economic Outlook (WEO).

The U.S. is expected to grow by 3.1 percent in 2015 and in 2016, which are respectively 0.5 percent and 0.2 percent lower than the IMF expected only 3 months ago. Besides that, over a longer horizon, U.S. potential growth is estimated at only about 2.0 percent because of an aging population and weak innovation and productivity growth.

If that’s the case in the U.S., I ask myself what will be the challenges the majority of the other countries will have to face?

The eurozone (EZ) exhibits signs of a pickup and some positive momentum, mostly thanks to lower oil prices and very supportive financial conditions (massive QE), but risks of prolonged low growth and low inflation “overall” are expected to remain in place. The IMF expects the EZ to grow 1.5 percent in 2015 and 1.6 percent in 2016.

China is expected to grow at 6.8 percent for 2015 and 6.3 percent in 2016. Chinese GDP grew 7 percent in Q1, which is its slowest rate since 2009 while, and this very important, the GDP deflator in Q1 fell to negative -1.2 percent, which was only the second time ever that nominal growth at 5.8 percent undershot real growth at 7 percent. I wouldn’t be surprised seeing authorities taking measures while I don't expect massive intervention.

Japan is expected to grow 1.0 percent this year and 1.2 percent in 2016, which demonstrates "Abenomics" is not delivering.

Not stellar growth perspectives. Yet, where is all that growth going to come from? Markets seem already to have priced in such growth.

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HansParisis
Today’s stock markets and bond prices are way overpriced and don’t reflect the real fundamentals.
stock markets, bond prices, economy, fundamentals
668
2015-21-15
Wednesday, 15 April 2015 07:21 AM
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