an overview of the economy and stock market - caswell...

An Overview of the Economy

and Stock Market

Whitney Tilson

May 7, 2013

Kase Capital Management

Manages Hedge Funds and Mutual Funds

and is a Registered Investment Advisor

Carnegie Hall Tower

152 West 57th Street, 46th Floor

New York, NY 10019

(212) 277-5606

[email protected]

Disclaimer

THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT.

INVESTMENT FUNDS MANAGED BY WHITNEY TILSON MAY HAVE POSITIONS IN MANY OF THE COMPANIES DISCUSSED HEREIN. HE HAS NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION.

WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED IN THIS PRESENTATION.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND FUTURE RETURNS ARE NOT GUARANTEED.

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U.S. Economic Overview

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Previous estimate

Latest estimate

-5-

The U.S. Has Had 15 Consecutive Quarters of

(Tepid) Economic Growth

Source: Bureau of Economic Analysis.

The Great Recession was

more severe than previously

thought. For Q4 ’08, the

initial estimate was -3.8%; it

was then revised to -6.8%;

and currently to -8.9%

-6-

Job Creation Has Been Tepid, Though It Has

Been Positive for 38 Consecutive Months

Source: Bureau of Labor Statistics, nonfarm payrolls, seasonally adjusted.

-800

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The Unemployment Rate Has Fallen, Though It Remains High at 7.5% And the situation remains grim for the 4.4 million long-term unemployed (those

jobless for more than half a year), who account for 37% of the unemployed


3%

4%

5%

6%

7%

8%

9%

10%

11%

Un

em

plo

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t R

ate

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Job Losses Were More Severe Than Any Downturn

Since the Great Depression. 70% Have Been

Regained, But the Process is Slow… 1.9% of All Jobs Are Still Missing


Job loss

from peak

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-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

0 6 12 18 24 30 36 42 48 54

Months after pre-recession peak

1948 1953 1958 1960 1969 1974 1980 1981 1990 2001 2007

2007-present

200119901981

The four most recent recessions have had the longest recoveries – and they are taking longer and longer…

-9-

However, Relative to Other Countries That Have Endured

Financial Crises, We’ve Not Lost Nearly as Many Jobs

Source: http://oregoneconomicanalysis.files.wordpress.com/2012/09/rr_employment.jpg?w=500&h=300.

-10-

Job Creation is Only Matching Population Growth,

Keeping the Percentage of Adults with Jobs Stubbornly Low The government counts 11.7 million Americans as unemployed. The real number is more like 17 million.

Source: Bureau of Labor Statistics.

10 million

jobs

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Consumer Confidence Is Near a 4½-Year High,

Though It Remains Low by Historical Standards

Source: Conference Board.

0

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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Leading Economic Indicators Have

Rallied Strongly

Note: Shaded areas represent recessions as determined by the National Bureau of Economic Research.

Source: Conference Board.

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The ISM Manufacturing Index Has Weakened

Source: ISM.

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The Current Recovery is Very Weak Relative

to the Average of Recessions Since WWII

Source: Council of Foreign Relations, Center for Geoeconomic Studies.

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Relative to the Last Two Recoveries, Private Non-Residential

Investment Has Been Strong, But This Has Been Offset By a Weak

Housing Market and Shrinking Government Spending and Jobs

Source: New York Times, 2/10/12.

Percentage change since the start of each recovery

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The Housing Market is Finally Showing Some

Signs of Life Thanks to Enormous Government

Intervention and All-Time-Low Interest Rates

Source: WSJ, Council of Foreign Relations, Center for Geoeconomic Studies, Hanson Associates.

-17-

Corporate Profits as a Percent of National Income

Are at the Highest Level in More Than 60 Years,

While Personal Income is at a 47-Year Low

Source: Bureau of Economic Analysis, in the NY Times, 3/3/13;

www.nytimes.com/2013/03/04/business/economy/corporate-profits-soar-as-worker-income-limps.html.

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Household Income Has Stagnated While

National Debt Per Household Has Soared

Source: NY Times, “The Dangerous Notion That Debt Doesn’t Matter,” Steven Rattner, 1/20/12.

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The U.S. Has Run Deficits Over Much of the Past 40 Years,

With the Widest Deficits Since WW II in the Aftermath of

The Great Recession

Source: OMB data, FactCheck.org, www.factcheck.org/2012/06/obamas-spending-inferno-or-not.

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The Deficit is Significantly Worse Today Than

in Previous Recessions Since WWII

Source: Council of Foreign Relations, Center for Geoeconomic Studies.

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Summary

I am cautiously optimistic that a tepid economic recovery will

continue in the U.S., but with the S&P 500 up 14% YTD, the

markets have already had a good year so I don’t see much

upside unless the economy really takes off, which I think is

unlikely.

And there are a number of factors that could derail the recovery:

1. The U.S. economy and/or housing market turns down

2. A turn for the worse in Europe

3. China has a hard landing

4. A sovereign debt crisis in Japan

Overview of the Stock Market

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The U.S. Stock Market Had an Enormous Rally The Dow and S&P 500 are at All-Time Highs

Source: BigCharts.com

S&P 500 Index

We Think We’re Likely in A Range-Bound Market – And

With Interest Rates Low and P/E Multiples High, It’s Hard

to See How a Sustained Bull Market Could Occur

Source: Ned Davis Research; WSJ Market Data Group; appeared in WSJ 6/16/09; GNP and

interest rate data: “Warren Buffett on the Stock Market”, Fortune, 12/10/01

Gain in

GNP

373%

Gain in

GNP

177%

Interest Rates on Long-Term Govt. Bonds

12/31/64: 4.20% 12/31/81: 13.65% 12/31/98: 5.09%

Range-bound markets

See: Active Value Investing: Making Money in Range-Bound Markets by Vitaliy Katsenelson

16 years 13 years 17 years 10+ years

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1860 1880 1900 1920 1940 1960 1980 2000 2020

Lo

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CA

PE

, P

/E1

0)

Year

19011966

2000

Price-Earnings Ratio

Long-Term Interest Rates

1981

1921

1929

22.33

Based on Inflation-Adjusted 10-Year Trailing Earnings, the S&P 500 at 22.3x Is Trading at a 15% Premium to Its 50-Year Average of 19.4x

Source: Stock Market Data Used in "Irrational Exuberance" Princeton University Press, 2000, 2005, updated, Robert J. Shiller.

Current P/E: 22.3x P/E average since 1881: 16.4x

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P/E average since 1960: 19.4x

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Which Would You Rather Own

Over the Next 10 Years?

1) A 10-Year U.S. Treasury, currently yielding 1.66%

• The U.S. was downgraded by S&P in 2011

• Continued political dysfunction in Washington

• Huge looming liabilities

• The monetary printing presses are running at high speed to fund our deficits

and stimulate our way out of the current economic downturn, leading to the

likelihood of at least moderate inflation over time

Or:

2) The following four stocks, all of which are rated AAA (the only ones

left with this rating), higher than the U.S. government:

• Exxon Mobil: dividend yield 2.9%, P/E multiple (2013 est): 11.1x

• ADP: 2.6% yield; P/E: 22.3x

• Microsoft: 2.8% yield; P/E: 11.4x

• Johnson & Johnson: 3.1% yield; P/E: 15.7x

Average yield: 2.9%; average P/E: 15.1x (equal to earnings yield of 6.6%)

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Investors With a Long (10+) Year Time Horizon Are Nuts to

Prefer U.S. Treasuries Over Dividend-Paying Blue-Chip

Stocks Purchased at Moderate Multiples

It is virtually certain that a well-diversified portfolio of dividend-paying blue-chip

stocks purchased at moderate multiples will far outperform 10-Year Treasuries

over the next decade

• Especially when inflation is taken into consideration

– Inflation impairs the value of bonds, but not companies with pricing power due to

strong competitive moats

• Especially when the market has been close to flat for more than a decade

• Total returns over the next decade for stocks should be in the 4-6% range (likely

higher for solid companies with rich dividends trading at moderate multiples), as this

chart shows:

an overview of the economy and stock market - caswell...

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