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Why CAPE-Based Concerns About The Stock Market Miss The Point (The AllianceBernstein Blog)
In a recent New York Times article titled "Time to Worry About Stock Market Bubbles," Robert Shiller points out that based on his cyclically adjusted price earnings (CAPE) ratio, stocks have only been this expensive three times in the past. The CAPE ratio can be derived by dividing the S&P 500 by the average of ten years worth of earnings. But Joseph G. Paul at AllianceBernstein thinks CAPE concerns are missing the point. "If you look behind the averages and into the historical drivers of earnings and the multiples that investors are willing to pay for those earnings, the picture looks less grim," Paul writes.
This is because 1. "Shiller’s current CAPE multiple of 25 times implies adjusted earnings for the S&P 500 Index of about $75, a full 30% below the market’s current trailing earnings. A drop of that magnitude would take a recession-level collapse in revenues and margins. Is that a plausible expectation?" 2. "The discount rate used to value earnings. Discount rates are related to the prevailing rate of interest. Today, rates are well below average, whether long term or recent. Lower rates argue for higher multiples."
With that said, Paul writes that "it’s important that investors adjust their perspective to accommodate this new reality and evaluate stocks relative to their alternatives—not simply relative to history—to improve the chances of meeting their long-term goals."
Asset Managers Have Been Too Liberal In Their Description Of Alternative Investments (The Wall Street Journal)
Asset managers increasingly claim to offer alternative investments in an effort to attract more investors. But this practice is distorting the true nature of alternatives writes Michael Kitces The term that was once used for distinct asset classes like real estate and commodities, now includes hedge funds, risk parity etc. "While both types of “alternatives” may meet the classic requirement that they have low correlation to traditional investments, to characterize both in the same manner fails to recognize the source of the returns," writes Kitces.
He suggests that people that are invested in an alternative, double check "whether it truly is in your portfolio because it represents an alternative asset class, or whether it’s simply an active manager trying to add value."
Mutual Fund Fees Are Falling (Morningstar)
Fund fees fell in 2013, with the average mutual fund charging 1.25% today, down from 1.28% in 2012, and 1.47% in 2013. "Fund fees dropped in 2013 courtesy of the huge stock market rally that year," writes Russel Kinnel at Morningstar. "Market rallies cause the total assets under management of the fund industry to grow tremendously and that in turn triggers breakpoints in mutual fund management fees. Those breakpoints are built into a fund's fee structure so a fund charges less for each additional dollar managed over various AUM thresholds."
David Tepper: 'I Am Nervous. I Think It's Nervous Time' (Business Insider)
David Tepper, head of $20 billion distressed debt hedge fund Appaloosa Management, expressed some concern about the stock market at the SALT Conference in Las Vegas. "I think we're OK. But, listen, there's times to make money and there's times not to lose money," Tepper said. "This is probably you're supposed to think about preserving some of your money...I think you can still be long, but I think you're supposed to have some cash now." Tepper said he is "nervous," that the stock market is "getting dangerous" and that he's not saying go short, but "just don't go too friggin long."
UBS Appoints Paul Hatch As New Group Managing Director (Reuters)
UBS has hired Paul Hatch to oversee its wealth management unit in the Americas, reports Jed Horowitz at Reuters. Hatch comes in at group managing director and head of Advice and Solutions "to consolidate oversight of the products and services the firm's 7,000 brokers to sell to 'high net worth' and 'ultra high net worth' clients'," writes Horowitz. Hatch is an industry veteran, having started his career in the brokerage industry and E.F. Hutton & Co, he then moved to Citigroup in 1993, and stayed with Smith Barney until a few years ago. Hatch's appointment is part of a bigger shake up.