Hussman: "el riesgo más serio"

The most serious risk
John P. Hussman, Ph.D.

Yet even the near-term risks to employment and the economy are not the greatest risks that investors face. Rather, the most serious risk for investors here is the persistent and misguided eagerness of Wall Street to value long-term assets based on short-term earnings results. Investors have priced the S&P 500 in a manner that is far too dependent on the achievement and maintenance of profit margins about 50% above historical norms. This is a mistake. Profit margins normalize over time, and on the basis of normalized earnings, the S&P 500 is about 40% above robust historical valuation norms (and even further above valuation levels that have represented "generational" buying opportunities such as 1974 and 1982, when well-covered corporate dividend yields averaged about 6.7%, versus the current 2%).

Yes, bond yields are low here, but 10-year bonds are a 7-year duration instrument while U.S. stocks are roughly 50-year duration instruments at present. Wall Street analysts appear very comfortable advising their clients to "lock-in" prospective long-term equity returns for the next 50 years at yields that are dramatically below the norm, simply because 10-year Treasury yields are depressed. But where will the 10-year Treasury yield be in 5 years, in 10, in 15, in 20, in 25, in 30 years? Whatever the yield is today will be a distant memory then, but will the return that investors "locked in" in stocks still look like a value?.

Meanwhile, much of the earnings "recovery" we've observed over the past year has been driven by financial companies writing up their assets because the FASB decided in 2009 that it was better to create an opaque monolith out of our entire financial system than to allow the bondholders of banks or other overleveraged financial institutions to lose a penny. A great deal of what represents paper wealth, created out of nothing but a sharpened pencil, will be wiped away in the coming years, because there are not sufficient cash flows behind those asset valuations.

As I've said before, a security is nothing more than a stream of cash flows that will actually be delivered to investors over time. When the cash flows are not sufficient to actually repay the face value of the securities; when the cash flows are used to repurchase stock in order to offset the dilution created by grants of stock to corporate insiders; when transitory peaks in those cash flows are used to value securities, rather than considering the entire stream - when these things happen, investors will predictably lose over time.

For our part, we remain focused on identifying companies with stable revenues, stable profit margins, and a record of distributing cash flows or reinvesting them for growth. We are enormously skeptical of share repurchases and takeovers, which are weak uses of cash with little historical evidence of effective return. If share repurchases were highly counter-cyclical, so that companies massively repurchased stock at depressed valuations and not at elevated ones, we might have more confidence. But that's not what we observe. We prefer companies with stable, predictable cash flows, at reasonable valuations, that earn a consistent return on assets and invested capital, and that don't show earnings with one hand and quietly rob investors of them with the other. These companies will always exist. In an economy that appears likely to remain difficult, we refuse to value stocks in a way that relies on a resumption of normal economic growth and assumes profit margins 50% above the norm.

Enlace: http://www.hussmanfunds.com/wmc/wmc100913.htm