Fund Manager
Frank Mersch
Given that 2009 will bring the full effects of a global recession and declining earnings, it may seem counterintuitive that stocks could rally. History shows that stocks are forward looking with most of the stock market weakness occurring before the worst of the economic weakness during past recessions.
The two most severe postwar U.S. recessions occurred in 1957-58 and 1973-75. The S&P 500 bottomed on the fourth quarter of 1957 and 1974 before the worst of the economic weakness had occurred. Stocks in the earlier year during these periods sold off, despite rising earnings and then rallied in 1958 and 1975, despite declining earnings.
While the demise of Lehman clearly triggered a synchronized global recession, we believe the economic and earnings weakness is “already priced in the market”. We have been trying to ascertain when stocks no longer go down when bad news is released. In the past week we have seen a number of cases where this is beginning to occur. We believe stocks are basing in the fourth quarter and are beginning to shrug off bad news.
The relative attractiveness of stocks has now rivaled the worst of postwar bear markets. The dividend yield on the S&P has moved above the yield on long treasury bonds for the first time since the late 1950’s. The dividend yield on the S&P/TSX is well above the yield on long bonds. Based on trailing operating earnings, the spread between the earnings yield on stocks and the long government bond yield has widened to a postwar record of 7.6% in Canada and 6.8% in the U.S. Clearly these spreads discount a serious recession. Even discounting trough earnings by 40-50%, it is a sizable spread.
Although we will be outlining a larger strategy piece for year end, suffice it to say we will be moving towards a fully invested position during the month.
The Fund
For the month, the Fund was down 6.25% versus the S&P/TSX -5.04%.
Front Street Canadian Hedge - Monthly Commentary
Date Published
Fund Manager
Given that 2009 will bring the full effects of a global recession and declining earnings, it may seem counterintuitive that stocks could rally. History shows that stocks are forward looking with most of the stock market weakness occurring before the worst of the economic weakness during past recessions.
The two most severe postwar U.S. recessions occurred in 1957-58 and 1973-75. The S&P 500 bottomed on the fourth quarter of 1957 and 1974 before the worst of the economic weakness had occurred. Stocks in the earlier year during these periods sold off, despite rising earnings and then rallied in 1958 and 1975, despite declining earnings.
While the demise of Lehman clearly triggered a synchronized global recession, we believe the economic and earnings weakness is “already priced in the market”. We have been trying to ascertain when stocks no longer go down when bad news is released. In the past week we have seen a number of cases where this is beginning to occur. We believe stocks are basing in the fourth quarter and are beginning to shrug off bad news.
The relative attractiveness of stocks has now rivaled the worst of postwar bear markets. The dividend yield on the S&P has moved above the yield on long treasury bonds for the first time since the late 1950’s. The dividend yield on the S&P/TSX is well above the yield on long bonds. Based on trailing operating earnings, the spread between the earnings yield on stocks and the long government bond yield has widened to a postwar record of 7.6% in Canada and 6.8% in the U.S. Clearly these spreads discount a serious recession. Even discounting trough earnings by 40-50%, it is a sizable spread.
Although we will be outlining a larger strategy piece for year end, suffice it to say we will be moving towards a fully invested position during the month.
The Fund
For the month, the Fund was down 6.25% versus the S&P/TSX -5.04%.