Does
the U.S. Market’s risk/reward ratio justify holding stocks “long”?
Dr. Prieur du Plessis’,
research findings gleaned from historical P/E ratios between 1871 and 2006 and Jeremy Grantham’s GMO study of
dividend yields, conclude the market is not cheap at a time when earnings
growth is decelerating. Based on a P/E of 18.4, the expected return on
We
at Exceptional Bear have a high degree of certainty that they’re
both overly optimistic – while
the current P/E and dividend yield would indicate mediocre returns over the
next ten years on "long" investments, they also present a highly
attractive environment in which to "short".
Some would even argue that if the expected return of longs is 5.7%, then
the expected returns on “short
positions” should be (1.00-.057)= 94.6%. If longs are in a Bear Market, then "Shorts"
must be in a Bull Market.
From
our perspective, a steep market decline is virtually assured, and a Market
Crash, highly probable. Moreover, this study is an excellent, albeit rare
endorsement for Bear Market Timing, coming from one of the pillars of the
“value, buy & hold” camp, Jeremy Grantham.
“The
best case for caution and bearishness is value, which is a weak
predictor of one year returns, but a dynamic predictor of longer term
returns” - Jeremy Grantham
It
is easy to understand why Grantham came to his conclusion, and we to ours.
Clink on us-equity-returns-what-to-expect
to read Dr. Plessis’ full report
Yours,
Eduardo Mirahyes
