In our March letter, we visited the dramatic corrections in the broad markets that occurred in the 4th quarter of 2018. NASDAQ had its worst quarter ever; the S&P its worst since the Great Depression; Bill Gross quit the business and Warren Buffett blamed his losses on an accounting change.
All that changed in 2019. The bond market hit higher highs on near-historic low yields. The DJIA is at or near and all-time high. Only the Dow Transports lags, suggesting that demand is slowing.
With all of the fundamental measures--price to earnings, price to book, and dividend yield--at historic extremes, one has to wonder who is buying at these prices. Well, a zero interest rate policy, a corporate tax cut and relaxed repatriation of foreign earnings can do strange things. Mainly, encourage corporations to buy their own shares.
In the absence of corporate purchases, there's not much buying strength in this market.
This yields an ancillary benefit to corporate management as it increases share prices and boosts the value of stock options. It's also worth noting that insider selling remains strong, meaning that corporate managements are buying shares with corporate funds and personally selling into the market strength.
The following chart illustrates the purchases and sales for directors and officers of publicly-traded companies over the past year. Sales of stock have been consistently greater than purchases over that time period. That doesn’t instill a lot of confidence.
Moreover, it seems to us that corporate insiders personally selling into higher prices created by corporate purchases is a breach of fiduciary duty. But, we digress...
Fixed income markets are no more attractive. The yield on the 10-year U.S. Treasury is close to 2%. A paltry return, for certain, but much more attractive than the negative yields investors are willing to accept on German and Italian bonds. Germany and Italy are not alone – there are over $13 trillion of global bonds with negative yields. To illustrate the craziness, Austria recently sold a second tranche of its 100-year bonds (due 2117) at a yield to maturity of 1.17%. Austria is a lovely country, but its economic history over the last 100 years has not been one of stability. Investors are betting the next 100 years will look significantly different.
We continue to be vigilant and attentive to the risks that exist in the equity and fixed income markets. While the U.S. stock market has had one of its strongest starts to the year, we believe that the fundamentals do not support the valuations. As such, we prefer to find opportunities elsewhere – income-producing real estate, private loans, mineral rights and royalties, and other natural resources and commodities.
Very truly yours,
Branzan Investment Advisors, Inc.
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