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The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible

What’s the biggest risk to the market right now?

 

Most people would probably answer this question with one of the following: Oil, China, Russia/Ukraine, Terror/Middle East. To be sure, these are all big risks. The biggest risk I see, however, is valuation and that’s not a very Hedgeye thing to say.

 

One of the more interesting weather vanes for valuation is the Shiller PE, also known as the CAPE ratio. It looks at the market’s price relative to the trailing 10 years of earnings to smooth out the normal cyclical variability of corporate earnings. Hedge Fund billionaire Cliff Asness, co-founder of AQR, and frequent author (https://www.aqr.com/cliffs-perspective) published a terrific analysis of the Shiller PE several years ago. 

The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible - Crazy bull cartoon 08.19.2014

To summarize, he looked at the monthly Shiller PE multiple from 1926-2012 (n=1,032) and then looked at the subsequent market returns over the following decade. What he found was really interesting. He took all those observations (each monthly value over 86 years) and broke them into deciles and then looked at the subsequent 10-year return by decile of starting Shiller PE. He found that S&P 500 returns matched perfectly against those starting Shiller PE multiples.

 

In statistical speak, the returns are monotonic to the starting multiple’s decile. In other words, you make the most money buying the market when the Shiller PE multiple is in the bottom decile (i.e. the market is the cheapest) and vice versa. The highest valuation decile begins at a multiple of 25.1x and goes up to the highest multiple ever observed, 46.1x. Following that period, the real return for equities in the ensuing decade was just 0.5%/year. The current Shiller PE is 27.3x. The table below shows these returns by decile, while the chart below that shows the current (and historical) Shiller PE.

 

While 10 years is a long time, and the markets could always rally higher in the short term, the reality is that unless almost a century’s worth of market history is suddenly irrelevant (the mother of all “It’s Different This Time” arguments), the outlook for buy-and-hold returns over the next decade is terrible, which is why we at Hedgeye constantly emphasize the need to be keep moving out there.

 

The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible - steiner1

The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible - steiner2

 


Guest Speaker Call: OUTLOOK FOR NATURAL GAS PRICES AND BASIS

Guest Speaker Call: OUTLOOK FOR NATURAL GAS PRICES AND BASIS - Marketing Image

 

On Wednesday, February 18th at 11:00 a.m. EST Hedgeye’s Macro and Energy teams will host a guest speaker call on US natural gas fundamentals with Keith Barnett, Head of Fundamental Analysis at Asset Risk Management (ARM), which is an independent producer services company that provides solutions for more than ninety clients through financial hedging advisory, physical marketing, and midstream solutions.

Topics for Discussion

  • Rapid growth in US production driven primarily by emergence of Marcellus / Utica shale play has created basis price dislocations as infrastructure and demand re-calibrate to new supply / demand regional balances…
  • Demand growth along the US Gulf Coast [industrial, LNG exports, and pipe exports to Mexico] create a “battle zone” for basis differentials to re-balance in 2016-2020, with the Haynesville waiting in the wings…
  • British Columbia / Northern Alberta shale plays will look for a home, especially if BC LNG exports continue to be delayed and lower crude prices dampen oil sands (gas demand) development…
  • Lower crude prices will affect the supply side through reduced liquid-oriented gas, and the demand side by impacting petchem plant development, global LNG price arb, and Mexico project development…
  • And more…

A visual presentation will be included and circulated along with dial-in information prior to the call.

 

About Keith Barnett……Keith Barnett is Senior Vice President and Head of Fundamental Analysis at Asset Risk Management.  He has over 30 years of experience in the energy industry with leading companies like Chevron, Columbia Gas Transmission, American Electric Power, and Merrill Lynch Commodities. Keith held engineering, managerial and executive positions with those companies in the areas of production, drilling, offshore platform design, natural gas marketing, fuel procurement, trading and structuring analytics, corporate strategy and fundamental analysis of energy markets. He had significant participation in two National Petroleum Council studies; including leading the power demand team in the 2003 natural gas study and serving on the steering and report-writing committees. Keith was also the Natural Gas Task Force lead for the Edison Electric Institute for several years. He has testified before the Federal Energy Regulatory Commission and the Senate Sub-committee on Energy on natural gas and power matters. He is a frequent speaker on natural gas, power, and global energy markets. 

 

Prior to joining Asset Risk Management, Keith served as Director of Strategic Analysis for Merrill Lynch Commodities where he led the effort to create an integrated global point of view for energy commodities that could serve short term trading and longer-term investment horizons. He also worked most recently with Spring Rock Production, which is producing a state of the art natural gas and oil production forecast for the USA and Canada.  Keith has an engineering degree from Texas A&M University.

 

About Asset Risk Management……Headquartered in Houston (with offices in Chicago, Denver and Pittsburgh), Asset Risk Management (ARM) has been helping oil and gas producers make better hedging decisions since 2004. ARM represents more than 85 public and private companies and interacts with all major energy commodity counterparties. ARM’s value is realized not only in the development and implementation of dynamic strategies, but in the ongoing optimization of those strategies as warranted by market volatility, execution efficiencies, reporting and continual monitoring of technical and fundamental factors in the market with the client's best interests and specific objectives in mind.  Learn more: http://asset-risk.com/.


GLD: Removing Gold from Investing Ideas

Takeaway: We are removing Gold from Investing Ideas.

We are removing Gold from Investing ideas in the aftermath of reported Q4 U.S. macro data and a Fed meeting which was largely uneventful. Remember, we like Gold (which is quoted in U.S. dollars) against a declining dollar and a compressing yield curve.

GLD: Removing Gold from Investing Ideas - gl9

The truth is that the 10-year Treasury yield has ticked up to 2.0% from 1.65% at the end of January. The dollar is down 0.70%, but we believe the incremental FED reversion on an interest rate cut on the back of a Q4 GDP miss would have been more of a catalyst if this trade had legs.

 

Over the longer-term, we still think the dollar could strengthen against the Euro and Yen which would be bad for Gold by historical evidence.     


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February 13, 2015

 

In today's edition of RTA Live, Hedgeye CEO Keith McCullough outlines the Reatl-Time Alerts positions as of 10:15AM, gives a crash course in volatility, and takes subscriber questions on the phone.


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