are 'Extremely Attractive'
November 29, 2011
Are there any policies that you would advocate with respect to reviving the housing market, such as a principal reduction program?
You should have principal reduction. It would be in the interest of a lot of financial institutions, because investors who've got a mortgage are not valuing it at 100 cents on the dollar. As long as the regulators come in and say “hey, I will let you mark this down and won't hit you with more capital,” and they provide an incentive for banks to do that, that could have a very positive effect.
But a lot of it just has to be worked out on its own. As I said, we can't continue to just produce 500,000 units a year. The long-run average over the last half century is one-and-a-half million units, so we are running at 33% of that. We are running at 25% above the boom years of the 10 years before, so I won't use that as a baseline, but we are running 33% of the 50-year average, and that is clearly not sustainable. Think about automobiles, if we only produced one-third the average you would use up that stock pretty quickly.
But there is still a lot of stock in the housing market.
There is still some stock, with housing formations going way down because of the recession. If the economy begins to improve, people are going to start moving out and seeking housing. Of course, we already have some very good activity in the multi-housing sector; it's just single-family housing that is the problem. Part of it is financing. Interest rates are low, but you've got to come up with a 20% down payment, which is not easy for many people to do.
In the current environment people have taken your “stocks for the long run” as an indication that they should really be looking at a fairly long holding period for equities. Was that your original intent? Is there any aspect of the current environment that calls for a more tactical approach?
That's a very good question. Fair market value of the S&P is 20% to 30% higher than the S&P is today. Valuations are below average. Interest rates are below average. People say, “Oh Jeremy, your book says you have to wait 20 or 30 years.” But from these levels you do not have to wait 10, 20 or 30 years.
In fact, from these valuations and under these interest rates, you are generally going to get good returns in three to five years. When you are selling at a high P/E, then you need many years to guarantee you are going to be good and you will eventually be bailed out. You could call that tactical.
Basically stock prices depend on earnings and interest rates. That's the fundamentals. Right now they are even more favorable toward equities than last year. Does this mean that in 12 months returns are going to be good? No. But does it mean three to five years returns are going to be good? That’s a much higher probability.
If you invest at cheaper-than-average prices you don't have to wait long. You may have to wait a year. Yes, I thought last year was cheap. I think this year is cheap. The S&P has generated a zero return the year, the same as money markets. You haven't done worse. Until today, you actually earned 2% on the S&P. But relative to nominal bonds, which are down 80 basis points over the last year, and TIPS, which are down at least as much, your outperformance potential for equities is higher than it was last year.
Have you changed any aspect of your own personal asset allocation in the last year?
I have moved more into dividend-paying stocks. I like that sector more than ever. With interest rates so very low, there is no income in the bond market, except in the junk bond market, which has its degree of risk. I am switching to dividend-paying stocks that are blue chips and well covered by analysts. They are going to be the new bonds that people are going to be seeking for income, because I don't see bonds as being attractive for years and years and years.
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
