More from his summer round up from Jeremy Grantham of Grantham, Mayo, Otterloo, fund managers;
“High quality stocks were left very much behind in the great rally last year, the biggest and most speculative since 1932. More surprisingly, they have underperformed this year. But unlike small caps, they have been cheap for almost five years and, given the uncertainties around today, this is unusual. “There are surely additional reasons, other than the low rates, why the great companies have persistently sold at a discount. Why didn’t quality stocks at least become expensive, and risky stocks become cheap on a relative basis, when we were at the deepest point in the crisis? Most risky fixed income securities certainly became very cheap then. I understand the general direction of performance of quality stocks: down in 2005, 2006, and 2007, which were speculative years; up a lot in 2008, the year of anti-risk panic; and down in 2009 and 2010, which were also very speculative. But, I’m puzzled by the general value level around which they have been moving. It’s as if there is an extra and unusual force working against them. This type of mispricing always has a reason. I have no certain answer, but I’ll offer a couple of candidates.
“One is the population profi le: there are more new retirees per new worker than there used to be. Retirees are selling stocks to pay the bills and to buy more conservative fi xed income investments. And what stocks are they selling? By the time they retire, they probably own blue chips, having sold down most of their speculative stocks in the decade before. This is just a guess; I have no good data to prove it. But it does seem reasonable.
A second candidate, accompanied by stronger circumstantial evidence, is the ‘Let’s all look like Yale’ syndrome. In the last 10 years, institutions and even ultra-rich individuals have, in general, been increasing the share of their portfolios that is invested in private equity and hedge funds, commodities, and real estate. They have been increasing their share of foreign equities, including emerging markets and small caps. At the second derivative level, hedge funds may feel that they do not get paid to buy Coca-Cola, and private equity firms, particularly now, do not go after many of the great franchise companies. So what is being liquidated to buy all of this new stuff? Old-fashioned blue chip U.S. stocks and U.S. government bonds that used to completely dominate even sophisticated institutional accounts and now no longer do. In the case of U.S. bonds, we have the noble Chinese to step into the breach for a powerful reason: they have no alternative if they want to run trade surpluses. But blue chip stocks are on their own, without any natural offsetting buyers.”
Subscriber Gen. Joe Shaefer of Stanford Wealth Management emailed in reply to yesterday’s issue:
“ Very clever, young lady! If your younger readers know what a bull in a China shop is, they’ll get it and smile as I did.
“I too am a current bear in the China shop. There is much to marvel at there, but the air pollution, water pollution, lack of enough potable water (occasional floods notwithstanding), failure to regulate, failure to know if the distant reporting is accurate, climate of fear if plans are not met, increasing ethnic unrest, and a population that, like all before them, will increasingly expect real wages for real work, all conspire to create an economy that will grow, but in fits and starts. I say they’re ready for a fit…”
Vivian the Panda replied: It’s interesting that I have to quote s British fund manager about how China is a load of crockery. The Chinese stock market is already in a fit. There are a couple of reasons not to be a bear all the same:
1) the Clipper Ship memory (which neither of us are old enough to remember), the idea that sailing to China and trading there will make your fortune. That lures all the corporations in to manufacturing there until they discover as did GE’s current CEO Jeff Imelt that all the Chinese want is to steal the technology.
2) The aspirin analogy. if you can sell one aspirin to every single Chinese you will make your fortune.
3) The fact that China owns all those T-bonds and are piling them up some more. We American analysts have to step carefully.
Another reason for China is suggested by The Mad Hedge Fund Trader, my former Economist colleague John Thomas, who started with a list of savings rates he stumbled upon in Google:
Australia – 2.5%; Japan – 2.8%; USA – 3.9%; Brazil – 6.8%; Britain – 7.0%; Germany – 11.7%; Ireland – 12.3%; Switzerland – 14.3%; Turkey – 19.5%; India – 34.7%; China – 38%.
John commented: “Don’t expect a runaway bull market anywhere savings rates are low and rising. What are savings rates telling us are the best countries in which to invest? China, India, and Turkey.”
If nothing else, Chinese and Indian savings rates boost my confidence in our real estate plays in both countries. Turkey, where we have invested in the past, we currently give a pass to. More for paid subscribers on the China/India property plays below.
The British govt Dept. of Transport announced £43 mn ($67 mn) in grants for low-carbon autos. You will get up to 25% of the value of the car back, to a limit of £5000. The measure will increase demand for Japanese electric engine cars, especially those form Nissan Motor Co., which will begin producing its all-electric Leaf vehicles in Sunderland at the start of 2013. Mitsubishi Motors and Toyota Motor Corp. may also benefit.
Electric-engine cars need a subsidy because they cost more than gasoline burners. Britain aims to cut the country’s cargon emissions by a third by 2020.
Mr. Thomas also bought a Leaf:
“The electrician from Nissan showed up at my home today to ascertain if it can generate sufficient juice to recharge my new all electric Leaf, which will be delivered in Dec. The good news is that it does, but the town permits and the installation of a new 50 amp circuit breaker for the EVSE charging dock (see below) was going to run several hundred dollars, half of which is tax deductable. Since the charging dock will have a 25 foot cable with a SAE standard J1772 universal plug, it can be used to top up a Leaf, or any other electrical vehicle that comes down the pike. It is also over engineered to handle triple the Leaf’sload demand to accommodate future upgrades with heftier battery packs.
“It was quite entertaining chatting with the tech. Some of his customers were “extreme” environmental early adopters, with bidirectional ‘time of use’ electric meters that allow their solar panels and wind mills to make them net suppliers of power to the grid. My new PG&E smart meter actually scored poorly on its SAT test, as it was still awaiting some future upgrade to become fully functional. He then pinned a life sized poster of my new charging station to the wall in the appropriate location, presumably so we and our gardening tools can learn to live with it.
“As he left, he thanked me for taking the technology a long awaited leap forward. Wow! When was the last time someone thanked me for my business?”
More on what the Leaf means to our portfolio for paid subscribers below. Along with news from Brazil, Panama and Chile, Greece and Turkey, Canada, South Africa, Britain. And first a strong buy.
