Last August I wrote an article that highlighted the wide spread between the earnings yield on the S&P500 and the yield on treasury bonds. At the time the S&P 500 was in the 1,050-1,100 range which produced an earnings yield of around 7% based on consensus earnings expectations.
Meanwhile 10 year treasury yields had plunged below 3% in anticipation of QE2, producing a net spread between the two of more than 4%. Stocks were a better investment than bonds back then, and soon afterwards the equity market began a rally that took it some 25% higher before today’s list of concerns induced a pull-back. Treasury yields also rose over than time though in recent weeks they’ve dipped back below 3%.
Which brings us to today’s comparison. This morning The Wall Street Journal noted that 2011 full year earnings estimates provided by equity strategists are around $95. Consensus earnings using bottom-up forecasts are higher, which was the point of the article but that’s another story. $95 in earnings on today’s S&P500 of 1,280 is 7.4%, compared with 10 year treasuries of 2.9%. The spread between the two is back to where it was last Summer, in fact it’s even wider. Bonds are once again an unattractive investment.
This is not to ignore the risks currently facing investors. U.S. GDP growth has been disappointingly weak, and the headwinds from high gas prices as well as continued soft housing are weighing on the near term outlook. In addition the European debt crisis meanders on, with the entire world acknowledging Greece’s inability to satisfy its obligations while the EU and IMF persist in throwing good money after bad.
This week’s vote on austerity in the Greek parliament will usher in another round of tax revenue and privatization targets that are unlikely to be met. For this reason the Euro looks vulnerable, and if there are any surprises they’re likely to be negative ones.
Our equity accounts remain fully invested. We think there are good values to be found in selected stocks. One of our biggest positions in Microsoft (MSFT). It’s been a value trap for many investors, but they’ll likely earn $2.58 a share this year and $2.77 next (their fiscal year end is June), and with cash net of long term debt of $38 BN or $4.50 per share the stock is at a P/E of 7.5.
We have also been adding to positions in retailers – specifically we like Family Dollar (FDO). Their low-income customer base will benefit from cheaper gas, and slower growth tends to help this sector as cash-strapped consumers trade down. But FDO also has the opportunity to improve its margins; their sales revenue per square foot is only $163 whereas Dollar General (DG) manages $194. FDO’s operating margin is only 7.3% compared with 10.7% at Dollar Tree (DLTR). Improving these metrics should allow FDO to grow earnings faster than its peers. Holders of their stock include a number of value-seeking investors such as Pershing Square, Lone Pine and Paulson. Nelson Peltz offered $55-60 for the company earlier this year, and management’s rejection suggests they should have some concrete plans to raise the stock price themselves.
In Fixed Income we continue to focus our interest rate risk around the two year sector of investment grade bonds. We don’t like the risk of longer maturities – yields are way too low given the U.S. fiscal position. We continue to have some exposure to emerging market currencies where inflation, interest rates and growth are higher. However, we have trimmed this back recently as we think the EU/IMF/ECB management of Greece’s unsustainable debt load is looking more likely to induce a crisis before the inevitable restructuring. This would be negative for the Euro, and therefore positive for the US$ against most currencies including emerging markets.
Disclosure: Author is Long MSFT, FDO
In one scene of the movie, Wall Street: Money Never Sleeps, big time capitalists, Bretton James and Louis Zabel, are negotiating a stock bailout for Zabel’s firm, Keller Zabel Investments. In doing so, they reveal two powerful negotiating techniques that can help you secure the best deal.
James offers Zabel a measly $2 per share. “Under these conditions”, starts off James, “… [James and co] are prepared to risk $2 a share”.
“2 bucks?”, questions Zabel, breaking out in a nervous laughter shocked by the ridiculously low offer. “You're out of your mind. The stock was trading at 79 a month ago. Our building alone is worth more than 2 bucks a share. My board will never accept this. There is no way I'm going to sell for 2 bucks a share.”
The government representative steps in to back up James, telling Zabel that the government could never justify a high price for his firm and that he has no other option. If he doesn’t sell then he faces bankruptcy.
But Zabel remains unmoved. “I'll take my chances in bankruptcy court before I sell to that barracuda” angrily responds Zabel.
A blanket of silence falls over the room. It looks like the deal is off. Neither party is willing to pay the price the other is wanting.
The Defining Moment
Realising that the negotiation has reached stalemate, James decides to do something completely unexpected. While he really wants to buy Zabel’s firm and knows he is getting a great deal, he decides to walk away.
“Then we have nothing more to talk about” says James as he gets up out of his chair and turns to walk away.
But just as James reaches the door, Zabel calls out "6". It’s a counter offer.
“3 and that's it” responds James.
“5”
“3”
“Alright, we'll call it an even 4. So we don't look so god damn pathetic.”
James pauses for a moment, looks at his colleague for confirmation, who nods back at him in agreement, before taking a step forward. “3, and not a dime more,” says James and locks in the deal.
There are two key negotiation techniques used in the scene above.
Negotiation Technique 1: Use Anchoring and Adjustment
James started at $2 and Zabel started at $6. In what is called Anchoring and Adjustment (see Those Clever People at Wikipedia and a little phenomenon called anchoring) initial values, regardless of how extreme, have a strong affect on final values. In this case, James used a $2 anchor, not because he thought he would get it for such a low price but because he knew it would get Zabel to start thinking low values. To counter that effect, Zabel used a $6 counter anchor to get James to start thinking higher values.
If you are selling, start by asking a high price. If you are buying, start with a low price. The technique will subtly but strongly influence the figure the other party has in their mind, therefore allowing you to get the best price.
Despite the effectiveness of the technique, however, many people will not feel comfortable asking for an excessively high or low figure because they don't want to appear unreasonable. That is, they don’t want to risk the Zabellian response, ‘are you out of your mind?’
For those people, negotiation technique two provides for a more comfortable approach.
Negotiation Technique 2: Walk Away
Who wins in a negotiation? The one who is willing to walk away.
Guess what? Be willing to walk away. Even if you are willing to pay the asking price, pretend like you can walk away. This technique is especially useful for people who don’t see themselves as hard line negotiators.
Why? Because you do not have to haggle, you do not have to offer unreasonable figures, and you do not have to have a big mouth to use this technique. All it requires is that you risk not making the purchase on that very day, which, for most purchases worth negotiating for, is worth risking for.
Here’s How You Do It:
Next time you are negotiating with a business supplier, nicely tell the person:
“Thanks for your help but the price you’re offering is beyond my budget” (or whatever reason you want to give).
“But I’ll tell you what I’ll do. I’ll leave you my name and number and if you can do me a better deal, then give me a call and we can take it from there."
Now if that is the best price the salesperson can do then you probably will not get a phone call, in which case you can just go back the next day or so and buy the product. But if they can do you a better deal then they will call you. After all, you have already proved to them that you are not willing to pay their asking price.
What is more, 9 times out of 10 you will not even have to come back. If the salesperson is able to do a better deal, they will usually offer it to you on the spot. It will probably be along the lines of, “alright let me try asking my manager again and see if we can do you a better deal”.
Having been on both sides of the negotiation table (as a salesperson and as a buyer), I have seen this technique work over and over for all deals great and small. It is not only one of the most powerful negotiation techniques, but also one of the easiest and comfortable to use, which makes it all the more useful in securing yourself the best deal.
personal reputation management
NASCAR - CUP: BREAKING <b>NEWS</b> – Keselowski Hurt
Brad Keselowski was injured today at Road Atlanta…
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Fox News Twitter followers click on links about scary stuff. New York Times followers pay attention to basketball. And Economist readers are interested in yogurt.
Fox <b>News's</b> Twitter Keywords: Crime, Murder, Casey Anthony - Peter <b>...</b>Great <b>news</b>: Service industry now slowing down, too « Hot Air
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