Doug Kass has a great piece hidden behind the RealMoney paywall this morning in which he reconciles the obvious headwinds we’ve all been belaboring with a handful of not-so-well-knowns that favor the bulls. Below are three factors that should favor the bulls headed into year-end: Individual Investors are simply not in:
In 2011, economic uncertainty (here and abroad) and unprecedented volatility have conspired to turn off major classes of investors who have de-risked. As a contrarian I rejoice in the fact that individual investors have redeemed $420 billion of domestic equity funds over the past five years while contributing $830 billion to (low-yielding) fixed-income products. That swing, of $1.25 trillion, since early 2007 is, by far, an all-time record change in preference of bonds over stocks.
Neither are hedge funds and other institutions:
The de-risking is not confined to retail investors, as, according to this week’s ISI Hedge Fund Survey, hedge funds’ net long exposure is the lowest since the generational low in March 2009. Moreover, pension funds’ exposure is substantially skewed toward bonds over stocks, despite the meager yield returns. A massive reallocation out of fixed income and into equities remains a growing possibility, particularly if reduced corporate profit expectations prove to be too conservative and if there is better economic traction.
Valuations are far from dear (historically-speaking), allowing for bad news to be digested relatively easily:
I lastly want to address current valuations, which I view as attractive. Risk premiums (the earnings yield less the risk-free rate of return) stand at a multi-decade high, placing stocks, in theory, even cheaper than at the March 2009 bottom. Looking out longer term in history, over the past 50 years the S&P 500 has averaged a 15.2x P/E multiple while the yield on the 10-year U.S. note averaged 6.67%. Today, the S&P 500 trades at only 12.5x (2012 earnings) while the yield on the 10-year U.S. note stands at only 2.05%.
All important points worth coinsidering. Follow Doug on Twitter
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