Friday, August 10, 2007

Stocks Are Cheap!

Here's link to legendary investor, Bill Miller, commentary for Q2 2007.

Ah, given the extent of the woes around the global markets, I'm ass-u-ming that most would like to know what's Bill Miller's opinions on the market outlook. (see page 3)

  • I am constantly asked for my market outlook, so I will give one, not because I know but because I am asked.

    The market last week had its worst week since the fall of 2002, which was a pretty good time to buy stocks. Other things equal, lower stock prices mean values are better and future rates of return higher. This latest sell off to 1458 on the S&P 500 — from a high of 1553 reached only a few weeks ago — puts us still above the 1449 level of February 26, which preceded the sell-off in early March that occasioned much angst but, of course, should have been bought. We are now trading just about the same level after this sell-off that marked the high before that sell-off.

    The proximate cause of this sell-off is a reappraisal of risk in the credit markets, starting first at subprime but now having spread to the riskier parts of corporate credit, namely high-yield bonds and loans to finance buy-outs. Many high-profile deals are being delayed, and banks have been unable or unwilling to sell bridge loans into the secondary market, raising fears about future credit problems. While all this is understandably unnerving, there was a lot of sloppy underwriting in subprime, and risk premiums in deals were too low, in my opinion. The current problems in the credit markets are a prelude to sounder lending in the future.

    Stocks are lower in the claim chain on corporate assets than bonds, so when bondholders demand better returns, stocks suffer in the short run. In the intermediate or long run, stock returns depend on valuation relative to fundamentals such as growth rates and return on capital.

    According to data compiled by Bloomberg, stocks are now the cheapest they have been in 16 years. The S&P 500 is valued at 15.4x estimated earnings, the lowest since January 1991.
    Again, a pretty good time to be a buyer of stocks!

    Even after this decline in the stock market, over the past 12 months the market is up 17% with dividends reinvested, which is well above the long-term average.

    I began the year quite bullish and remain so.