Email of the day (2)
Comment of the Day

September 13 2011

Commentary by David Fuller

Email of the day (2)

On Robin Griffiths' forecast:
"This article details some of Robin Griffiths' views on the markets. It is worth the time to read."

David Fuller's view Many thanks for this analysis which is posted in the Subscriber's Area. Robin Griffiths is well known to veteran subscribers and a number of his World Investment Strategy reports can be found in the Fullermoney Archives by using the Search facility shown upper-left, fourth item down.

Robin Griffiths' 'road maps' are always interesting. Here is the opening from his latest report:

Most world stock markets have suffered a bad fall. This move does not look like the end of something, but more like the start of a new bear market for the Western world.

However, there will still be opportunities to make money in these markets. To put that into perspective, we note that all Western markets are lower now than they were ten years ago. They are in a secular bear move. Around this secular trend there have been successive cyclical bull and bear phases. The last of the bulls started in March 2009 and has now just ended.

In a normal four-year cycle, markets tend to have three good years and one bad. However, in the presence of a secular downtrend, the skew tends to become nearer to 24 months up and 24 down. The most recent high was 26 months after the March 2009 low. The system is working pretty much as it should.

Investors are realising that their earlier hopes of a strong, self-sustaining, recovery in the West were too enthusiastic. They are now concerned that a long period of very modest growth at best, or a new recession at worst, is a more likely outcome. Such is the level of fear attached to this change of view that the price of gold has reached new highs.

We have used the analogy of a railway train, with the engines of the world at the front. These are China and India, whilst the carriages at the back are the mature Western markets. The length of the train is about one year long. It is indeed true that the Asian and emerging markets have been in a cyclical bear phase for well over a year and are now into the final capitulation leg.

This is likely to represent a good buying opportunity very late this year. The Western markets may not hit bottom until late next year with the laggards not bottoming until four years after the last major low, which targets March 2013.

The "secular bear move" for western stock markets referred to above is what Fullermoney prefers to call a secular valuation contraction, so that people do not confuse it with the much shorter cyclical bull and bear trends also referred to above.

Lengthy valuation contractions follow secular valuation expansions which occur during boom years. They create a glass ceiling for almost a generation and are punctuated by cyclical bear trends of varying severity. You can see the last big secular contraction clearly on this historic chart of the DJIA. It commenced near the beginning of my financial career in 1966 and continued well into 1982 before the next valuation expansion occurred. That ceiling looks more elastic on this historic chart of the S&P 500 Index but is also clearly discernable.

The present secular valuation contraction commenced in 2000 and will probably persist for at least another five years, as I have mentioned before. I remain hopeful that the approximate replay of bear markets ending in 1970 and 1974 coincide with lows seen in 2002 and 2009 for the present valuation contraction. If so, the current and any subsequent cyclical bear phases for the S&P 500 Index should bottom well above the March 2009 low of 666.

Single-figure PERs and high yields are a characteristic of valuation lows at the end of secular valuation contraction cycles. Of these, dividends are the better guide. For the record, the S&P 500 reached a yield high of 6.21 percent in 2Q 1982 with the help of GDP growth and a corporate culture of dividend increases. With the S&P 500 currently yielding 2.24 percent, anything close to the 1982 yield before the end of this decade is obviously a very big ask, not least in today's environment of deleveraging, slow economic growth and high unemployment.

In the late 1990s dividends were described by corporations and too many fundamental analysts or economists as "an inefficient use of capital". That attitude has changed, not least because western stock market indices have been rangebound at best. Significantly, the successful multinational companies which Fullermoney likes are the antithesis of their debt-ridden national governments in terms of balance sheets. They are benefiting from Asian-led global GDP growth, as we often mention.

The western 'dividend aristocrats' reviewed by Eoin recently will not lift the S&P 500 Index yield to 1982's level, partly due to the underperformance of domestic companies in a slow growth environment. However, successful multinational companies are much bigger and stronger than three decades ago, thanks to globalisation and technology. Today's cyclical bear market is improving their valuations. Consequently they should do well in the next cyclical bull phase and even better in future decades as the next secular valuation expansion commences, propelled by cheaper energy prices in real terms, lower levels of debt following a decade of deleveraging, the march of technological innovation and Asian-led global GDP growth.

Returning to Robin Griffiths' article, I share his long-term enthusiasm for China and India. Tactically, there is still no evidence that their cyclical bear market lows have been reached. However, it often pays for investors to nibble on weakness because indices will be well above their troughs when we have clear evidence that the lows have been established.

I regard Robin Griffiths' forecasts of FTSE 4400 and S&P 900 in October, and gold $1650 this month as extreme and therefore unlikely.

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