Picture Credit: Adam Y Zhang || What goes up… wait, we’re in orbit?!
I don’t have much more to say. The next Z.1 report comes out in late September, but will only bring the data up to June 30th. I use a pair of adjustments to adjust the share of assets invested in risk assets (stocks) between releases. So far, the adjustments seem reliable as the interim estimates have been tracking the results from new releases.
Could the model be wrong? Sure. I don’t run into many professionals who endorse the asset share model. Part of that is the industry gets compensated off of assets under management. No one wants to forecast declining future revenue. No one wants to have clients move out of stocks, as the percentage fees from stocks are higher than bonds or cash.
Aside from that, the asset share model is a balance sheet model. Most analysts prefer income statement models, even though they work as well, because P/E ratios are more intuitive to market participants. The asset share model is not the only balance sheet model — the Q-ratio is also a balance sheet model.
Though interest rates are low, they are not negative. 10-year investment grade bonds are competitive against domestic stocks at this point. Even if you are losing against inflation, you are losing less against inflation than the market as a whole. Same for cash. I don’t think that there is no alternative. Here are the alternatives:
- Investment grade bonds (market duration)
- Cash
- Value stocks
- Cyclical stocks
- Foreign stocks
- Emerging market stocks and bonds
So consider the alternatives, and consider hedging. I can’t nuance this anymore, as we are in uncharted waters. We are touching the sky.
What would you think about publicly traded demutualized regional banks? These tend to go public at 60 to 70% of book value and are flush with cash. Typically located in small communities and make very conservative residential loans. They weathered the financial crisis extremely well. Kind of the way banking was meant to be.
Look for ones with strong deposit franchises. My friends at M3 Partners specialize in this area. I don’t own much there, but I probably should be looking there.
Time for some foreign cookies and crackers?
Foreign cookies? I’m game.
I’m selling OTM covered calls on GARP holdings. 2 to 4 weeks out in time. If need be I will roll out and up to a degree. Not exactly a free lunch, but a cash flow.
Any chance you can reproduce an updated version of the graph from the March 2021 update of estimated annual total returns of the S&P 500 for the next 10 years overlaid with the FRED data. I think it would really drive home the extreme position the market is in at this point.
The next update will come in late September. Typically the Z.1 report comes out 10 weeks or so after the quarter ends, but for some reason in the second quarter it comes out 12 weeks after the quarter ends. My model has an intra-quarter adjustment mechanism which seem to work well, but I have less confidence in that than the main quarterly calculation.