Ruminations of an Old Bull
Current corporate fundamentals look well-placed for the long term.
Years ago my father told me a story about a young bull and an old bull looking down from the hill onto the pasture filled with cows.
The young bull turned to the old bull and said, “Wow, look at those beautiful cows, let’s run on down and have some fun!” The old bull smiled and snorted and replied, “Let’s stroll on down and take ‘em all on, one at a time.”
Which reminds me of the market.
After a couple of years of standing on the sidelines, with nothing much to do but suffer the trading patterns of the day, it strikes me that the time for the bulls has finally arrived. Why?
Quite simply, the risk-reward ratio looks to be on their side. Corporate profits look to be steadily improving (albeit off easy comparisons). Most balance sheets are in pretty good shape. Right sizing for the big guys has taken hold with an appropriate integration of new systems and technologies, and in fact most companies are on their way to being pretty lean and mean.
Valuations aren't way out of whack. Goldman Sachs (GS) recently indicated that P/E ratios are trading around 15 times and EBITDA is at 8.5 times forward levels, both in the middle of historical ranges. While some may argue this is appropriate for the current deleveraging environment with returns driven by operating, rather than financial gearing, if managers decide to gear up and begin to reinvest in businesses, the expected returns and targets will increase commensurately.
And there's still a boatload of liquidity sitting on the sidelines. Investors have few places to go with yields at dishearteningly low levels.
Sure, there are concerns about demand, the plight of the consumer/unemployed, unrecognized losses at banks and pension funds, and dysfunctional state and federal government policies. But what the hey; the contrarian would ask “How much worse can it get?”
Exactly, which is why, like the old bull, it’s probably time to take a stroll down the hill, sniff around and find a nice, tall, cool glass of milk.
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