Robin Griffiths' World Investment Strategy
Comment of the Day

September 23 2010

Commentary by David Fuller

Robin Griffiths' World Investment Strategy

My thanks to a subscriber for this impressive report, published by Investment Research of Cambridge, and also to the author for granting Fullermoney permission to post it. You will not find a more readable technical review in one PDF, in my view, and the author's views are unequivocal. Here is a sample
Many markets entered secular downtrends in the year 2000. They are ten years into the downturn with possibly another ten years to go. Even if we have a cyclical bull phase in these markets, we will only dip into them for brief rallies, they are not investments.

Other markets are in secular uptrends and will stay in them for another ten years. We do not like to be out of these markets for long, but the short term volatility they can display is brutal.

The problem is that when major markets have a meltdown, all investments - even the ones that are not supposed to be correlated together - are going to move down at the same time. This is one of those times.

We may not call the timing exactly, and so might have to tolerate a small rally against us for a time, but we do expect all markets to be lower at the end of September than at the start.

David Fuller's view A Fullermoney view for a number of years is that Wall Street is in a cycle of valuation contraction, during which p/e ratios, on average, gradually decline on a rolling rather than linear trajectory, while yields rise on a similar basis. Until the current cycle this last occurred for the US stock market between 1967 and 1982, as you can see on this historic chart for the DJIA.

Initially, Fullermoney referred to this as a secular bear market, defined in terms of valuation contraction. However I stopped referring to it as a secular bear market because many people understandably assume that this means falling share prices. There will certainly be cycle bear trends in a secular valuation contraction and investors of my generation are unlikely to forget the 1973/4 market slump. However the 1967 to 1982 period was mainly a sideways ranging phase beneath a glass ceiling for the DJIA near 1025.

Mean reversion is another way to describe a long period of valuation contraction during which historically high valuations become historically reasonable. They tend to be lowest after sharp sell-offs, such as we last saw in 2008 and early 2009. However valuations will also contract in a ranging market if many companies are increasing earnings and raising their dividends, as we have seen over the last year.

In 2Q 1982 Wall Street saw its lowest valuations since 1943, including a dividend yield of 6.21% for the S&P500 Index, while forming its 4th higher low, well above the 1974 trough. It did so mainly because US companies grew their way to lower valuations while the stock market remained unfashionable, relative to the earlier and secular cycle of valuation expansion. Additionally, companies were more willing to raise dividends in order to attract investors.

We have seen that companies are more willing to raise dividends over the last year as well, but could we see further valuation contraction in a broadly ranging market given the US economy's serious problems? Probably, provided the US economy can bumble alone with a modest expansion rather than slide back into recession. US multinationals have strong balance sheets, can borrow very cheaply and are benefiting from a soft dollar and surging GDP growth in most of the emerging (progressing) economies.

What about Robin Griffiths' forecast above:

…we do expect all markets to be lower at the end of September than at the start.

Not to mention his forecast on page 2 of WIS:

Our target for the FTSE-100 index is 4,400 and for the S&P 500 index it is 940. At these levels we would be ready to buy for a rally through to the year end.

I am more optimistic, as I also was in commenting on the July WIS and a fine earlier report: "Mapping the Markets", which is also in the Archive. I continue to see the lengthy ranging process in Western stock markets as mean reversion towards the 200-day MAs. It also allowed valuations to improve. The greater strength of Fullermoney secular themes such as Asian progressing markets, South American resources producers and global technology stocks is impressive. I maintain that monetary policy trumps most other factors most of the time, and it remains very accommodative.

Therefore I look for no worse than some additional reaction and consolidation over the next few weeks, with support for the S&P 500 most likely encountered above either the late-August or July lows. Like Robin Griffiths, I maintain that stock markets will be strengthening once again before the end of October. I think the environment for equities will remain benign well into 1Q 2011, provided agricultural commodities do not spike too high, as we last saw in 1Q 2008.

Meanwhile, s ubscribers will know that all forecasts are no more than educated guesses, at their very best. The entire history of forecasting is far more notable for duff calls than prescience. Therefore, in the manner of a naturalist (think of David Bellamy) we should quietly wait for price charts to show us the market's direction.

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