What to Expect From Jackson Hole
This Friday Chairman Ben Bernanke will speak at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming.
Last year, Bernanke hinted that the Fed might embark on a second round of asset purchases to bolster the recovery, dubbed QE2. That speech kicked off a 28 percent rally in the Standard & Poor’s 500 Index of stocks that ended in a three-year high on April 29th.
At the last Fed meeting policy makers pledged to keep their benchmark interest rate near zero until at least mid-2013 and also said they “discussed the range of policy tools” available, giving hope that they may add to their record stimulus. That signaled that a QE3 might be on the table.
The whole world will be watching Bernanke’s speech, so if he chooses not to say very much, the global markets are sure to be disappointed. Though many market observers deny we will get a QE3, still there is hope among many that one will be forthcoming in some form.
Predictions are that Bernanke will suggest that the central bank will lengthen the average maturity for its $2.86 trillion of assets, which would help bring down long-term interest rates. The yield on the benchmark 10-year Treasury note dropped as low as 2.062 percent on Aug. 19 in New York, according to Bloomberg Bond Trader prices. Yields have fallen to record lows since the Fed announced its rate pledge on Aug. 9.
At the Fed’s last meeting Federal Reserve Bank presidents Charles Plosser of Philadelphia, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis all voted against the Fed’s decision to keep the target for the federal funds rate at zero to 0.25 percent until at least mid-2013. Plosser and Fisher both said last week the pledge won’t help spur growth. The last time three policy makers dissented was in November 1992.
The central bank has kept the rate on overnight loans among banks near zero since December 2008. It also purchased $1.7 trillion of Treasury and mortgage debt between December 2008 and March 2010, and the $600 billion of Treasuries from November through June. The result was a temporary rise in risk assets but economic growth and job creation remains moribund.
Despite what many market watchers believe, the Fed is not out of bullets yet. Bernanke told Congress on July 13 the Fed does have stimulus options; these include buying additional securities, increasing the average maturity of its bond portfolio, lowering the interest rate on excess reserves and pledging to keep its balance sheet near a record high for a longer period of time.
When he foreshadowed the Federal Open Market Committee’s Aug. 9 decision to hold interest rates near record lows, the S&P 500 Index climbed 7.6 percent between Aug. 8 and Aug. 15. Unfortunately, it has since fallen 6.7 percent since amid concerns that U.S and global economic growth are faltering. Still, the Fed got a pretty good response to its decision, so they may deploy one or more of their remaining tricks.
The bond market seems to be already is pricing in an expectation that the Fed will announce new purchases of $500 billion to $600 billion, and investors looking for confirmation in Bernanke’s Jackson Hole speech may be disappointed.
The cost of living in the U.S. accelerated at an annual pace of 1.8 percent in July, excluding food and energy costs, which are typically more volatile. The gain was the largest in more than a year, according to Labor Department data released Aug. 18. That signals that, at least, QE2 was successful in staving off deflation.
However, the economy grew at a weaker-than-projected 1.3 percent annual pace in the second quarter, the Commerce Department said July 29, and growth in the prior quarter slowed to 0.4 percent, the weakest three-month period since the recovery began June 2009, suggesting that QE2 did little for the economy.
Morgan Stanley analysts have cut their estimate for expansion worldwide this year to 3.9 percent from a previous prediction of 4.2 percent. Part of the reason was “the drama” around lifting the U.S. debt ceiling, which helped depress financial markets and erode business and consumer confidence, the analysts said in a report last week.
Bernanke would have to overcome internal opposition to additional measures after his rate pledge led to the three dissents. There is less agreement this year among FOMC members that further easing is needed than there was a year ago when Bernanke spoke out. That suggests that the Fed chairman won’t hint at additional measures in Jackson Hole.
Still, Bernanke’s has shown he is willing to swim against the tide of dissent among the Governors in his decision to pursue the rate pledge with or without the full support of his fellow policy makers. So we the markets may get some, even if little comfort, this week.
Monday, August 22, 2011
Monday, August 15, 2011
Ramblings of a Portfolio Manager
Ramblings of a Portfolio Manager—This is NOT 2008!
It feels awful out there…trust us, we know. We’ve cancelled all summer plans to remain in the office to mind this market even though with 500 point Dow swings it is difficult to know exactly what to do, if anything (we wonder why Obama and the EU leaders haven’t done the same, instead choosing to put lotion on each others’ backs in some exotic warm locale). With volatility like this it is easy to make a mistake so we monitor, take advantage of dislocations and try to understand where things are headed. For many investors, however, it's easy to draw parallels between this market and 2008 and there from comes the volatility we are seeing. We don’t believe this period in the worlds’ economies or markets is anything like 2008 (or 1974 for that matter) and there are a number of indicators that tell us otherwise.
For example, if we look at the 2Yr USD Swap Spread chart below Courtesy of Bloomberg (a measure of fear over the financial health of banks)– it is clear that professionals in the global credit markets (as opposed to the retail investor in the US Treasury markets) do not believe this is 2008 all over again. The current 2 year USD Swap Spread, which ballooned to nearly 170 bps in the fall 2008, still hovers at a slightly elevated 29bps—it’s hardly a blip in the chart. We aren’t even where we were at the end of 2010 in terms of fear regarding the financial system. Remember, 2008 was all about the fear of every US Financial Institution being insolvent and/or under-capitalized. And we did have real defaults... remember CIT? That was true credit risk.
At the moment what it appears is that we are dealing with is a global sovereign/currency crisis, which requires large-scale solutions: Eurozone fiscal unity; Chinese participation in the EFSF, etc. Of course, some economists are talking about the possibility of breaking up the Euro, however, even the Germans (who get almost 40% of their GDP from exports) are vitally aware of the implications of operating once again under the Deutsche Mark. If we do some overly simple math we see that Germany can easily lose as much as €300Bln in exports every year if that were to happen. Compare that to their current peripheral contribution to Europe? It makes it look like peanuts. In any case, if Greece, Portugal and Spain collapse; then Germany is already on the hook. And the there are the German, French, Italian banks -- no one wants to see this happen and they aren’t going to let it.
We hear rumors daily—for example, on Thursday some small unknown Chinese bank supposedly stopped doing business with SocGen—it was false and certainly benefitted the rumor monger as it dropped the futures 200 points alone in just 10 minutes (of course the futures recovered and we had a nice day—hope he/she lost his/her shirt)—but most of these are just plain false. Yet while many of these fears/rumors are unfounded, the volatility they create is not helping to improve trading liquidity. Furthermore, the liquidity that the Central Banks are pumping into the markets is losing its benefits as investors take it for granted. It is clear that the global economy is slowing, and risk is being re-priced. But that doesn’t mean one cannot make money in stocks. In fact, as we have all seen over the last 3 years, the pendulum can over swing both ways until sanity prevails. At the moment, we believe risk is being overpriced and will return to normal slowly but in short order.
The good news is that right now our markets are functioning: $10Bln in new corporate bonds priced last week alone as companies took advantage of negative real interest rates to clean up their balance sheets. That's an important data point. It means that investors still have cash to put to work and issuers can still come to market. It also means that Corporate America is getting healthier and while dislocations such as negative real rates can persist for a time, the bond markets and, most likely the equity markets, have overreacted and we are due for a reversal. This morning Japan reported much better than expected GDP. And we have only seen upward revisions to S&P 500 earnings projections since earnings season. No, this is not 2008 although it may feel like it. We suggest you turn off the financial news, enjoy your summer vacation and let the capital markets quiet down and sort themselves out. They always do—even post 2008.
It feels awful out there…trust us, we know. We’ve cancelled all summer plans to remain in the office to mind this market even though with 500 point Dow swings it is difficult to know exactly what to do, if anything (we wonder why Obama and the EU leaders haven’t done the same, instead choosing to put lotion on each others’ backs in some exotic warm locale). With volatility like this it is easy to make a mistake so we monitor, take advantage of dislocations and try to understand where things are headed. For many investors, however, it's easy to draw parallels between this market and 2008 and there from comes the volatility we are seeing. We don’t believe this period in the worlds’ economies or markets is anything like 2008 (or 1974 for that matter) and there are a number of indicators that tell us otherwise.
For example, if we look at the 2Yr USD Swap Spread chart below Courtesy of Bloomberg (a measure of fear over the financial health of banks)– it is clear that professionals in the global credit markets (as opposed to the retail investor in the US Treasury markets) do not believe this is 2008 all over again. The current 2 year USD Swap Spread, which ballooned to nearly 170 bps in the fall 2008, still hovers at a slightly elevated 29bps—it’s hardly a blip in the chart. We aren’t even where we were at the end of 2010 in terms of fear regarding the financial system. Remember, 2008 was all about the fear of every US Financial Institution being insolvent and/or under-capitalized. And we did have real defaults... remember CIT? That was true credit risk.
At the moment what it appears is that we are dealing with is a global sovereign/currency crisis, which requires large-scale solutions: Eurozone fiscal unity; Chinese participation in the EFSF, etc. Of course, some economists are talking about the possibility of breaking up the Euro, however, even the Germans (who get almost 40% of their GDP from exports) are vitally aware of the implications of operating once again under the Deutsche Mark. If we do some overly simple math we see that Germany can easily lose as much as €300Bln in exports every year if that were to happen. Compare that to their current peripheral contribution to Europe? It makes it look like peanuts. In any case, if Greece, Portugal and Spain collapse; then Germany is already on the hook. And the there are the German, French, Italian banks -- no one wants to see this happen and they aren’t going to let it.
We hear rumors daily—for example, on Thursday some small unknown Chinese bank supposedly stopped doing business with SocGen—it was false and certainly benefitted the rumor monger as it dropped the futures 200 points alone in just 10 minutes (of course the futures recovered and we had a nice day—hope he/she lost his/her shirt)—but most of these are just plain false. Yet while many of these fears/rumors are unfounded, the volatility they create is not helping to improve trading liquidity. Furthermore, the liquidity that the Central Banks are pumping into the markets is losing its benefits as investors take it for granted. It is clear that the global economy is slowing, and risk is being re-priced. But that doesn’t mean one cannot make money in stocks. In fact, as we have all seen over the last 3 years, the pendulum can over swing both ways until sanity prevails. At the moment, we believe risk is being overpriced and will return to normal slowly but in short order.
The good news is that right now our markets are functioning: $10Bln in new corporate bonds priced last week alone as companies took advantage of negative real interest rates to clean up their balance sheets. That's an important data point. It means that investors still have cash to put to work and issuers can still come to market. It also means that Corporate America is getting healthier and while dislocations such as negative real rates can persist for a time, the bond markets and, most likely the equity markets, have overreacted and we are due for a reversal. This morning Japan reported much better than expected GDP. And we have only seen upward revisions to S&P 500 earnings projections since earnings season. No, this is not 2008 although it may feel like it. We suggest you turn off the financial news, enjoy your summer vacation and let the capital markets quiet down and sort themselves out. They always do—even post 2008.
Monday, August 8, 2011
Ramblings of a Portfolio Manager
Dear Investor:
After Last week’s market turmoil you no doubt are scared and rethinking what crazed decision ever lead you to invest in stocks in the first place. That’s only natural. You’re also probably going to be watching all the Financial TV pundits over the weekend, from Nouriel Roubini, telling us Armageddon is just around the corner to Warren Buffett, waving his little American flag singing “buy buy buy.” How can you make sense of all this rhetoric and jargon? Where were these geniuses’ 2000 Dow points higher?
We thought long and hard about what to write this week but in doing so we ran across this week’s Barron’s piece on the week gone by. Now, we all know Barron’s can be a fairly bearish publication but we found a surprising amount of bullishness in what they had to say. So rather than cobble together something on our own, we reprint here, in part, an article from that publication we thought accurately paralleled our thoughts. Full credit to Barron’s and the author for the piece, we take no credit other than finding it online at midnight last night and seeing that the article is both sober and balanced.
Barron's(8/8) Attention, Shoppers. It's Time To Buy
12:10 AM Eastern Daylight Time Aug 06, 2011
(From BARRON'S)
By Andrew Bary
After the recent plunge in major global markets, U.S. stocks look attractive. The benchmark Standard & Poor's 500 index trades for little more than 12 times projected 2011 profits, one of the lowest price/earnings ratios in a generation. The Dow Jones Industrial Average has a similar P/E -- 11.6 times this year's estimated earnings. Its dividend yield of 2.62% exceeds the depressed 2.56% yield on the 10-year Treasury note, another rare occurrence. This isn't the1970s, when P/E ratios were low but inflation and interest rates were high. Investors are worried about different problems: a weakening domestic economy, Europe's debt mess, political dysfunction in Washington and a massive and seemingly intractable federal budget deficit. Yet American corporations rarely have been in better shape, with generally robust profits and balance sheets flush with more than $1 trillion in cash. Analysts are loath to predict when the sell-off, which began July 22, might end, but many say they see stocks ending the year higher. If the S&P 500 merely gets back to its 2011 peak, set in April, the index would rise 14%. "The economy is doing well enough to keep earnings rising and bring some bullishness back to the stock market," says Jim Paulsen, investment strategist at Wells Capital Management.
Investors have been rattled by the swift pace of the sell-off, in which the S&P 500 fell more than 10% in 10 trading sessions. This marks only the fourth such decline in a bull market since the end of World War II. The other three 10% drops occurred in late 1974, October 1997 (during the Asian crisis) and August 1998 (after the collapse of the hedge fund Long-Term Capital Management). The good news is that the market rallied an average of 18% in the ensuing three months after each of those three setbacks, according to J.P. Morgan strategist Thomas Lee. Stocks might be near a bottom after a week of selling. The Dow finished Friday at 11,444.61, up 60.93 points in a volatile session but down 5.8% for the week. Most of the damage occurred Thursday, when the average fell 512 points, or 4.3%, its biggest point drop since late 2008. The industrials are down 1.2% for the year; they were up 10.7% at their April peak. The S&P 500 ended the week at 1,199.38, off 7.2% for the five days and 4.6% for the year. The situation is worse overseas, as the table nearby shows. The Euro Stoxx 50 index is down 15% this year, Japan's Nikkei is off 9% and formerly once-hot Brazilian stocks are down 24%. Every major European market except Switzerland has a P/E below 10, and European stocks yield an average of 4%. Closer to home, the top 50 U.S. banks trade on average at around book value. They have been cheaper only twice in the past 25 years-during the deep recession of 1990 and the 2009 financial crisis. Both those times were major buying opportunities, and today, notes RBC Capital Markets analyst Gerard Cassidy, the industry's fundamentals are improving. At 37.60 a share, J.P. Morgan Chase (ticker: JPM) trades below book value and for under eight times projected 2011 profits. The stock yields 2.7%, which is likely is going higher. Citigroup (C), at 33.44, is down 29% this year and trades for less than 75% of book value of $48.75. Tangible book is a conservative measure of shareholder equity that excludes goodwill and other intangible assets stemming from acquisitions. Goldman Sachs (GS), at 125.18, trades just above tangible book, and Morgan Stanley (MS), at 20.02, changes hands below tangible book of $26.97. A wobbly global economy poses risks for big financials, but the industry's capital levels are appreciably higher than in 2008 and leverage is lower. It will be tough for most big financial companies to earn 15%-plus returns on equity in the coming years-a performance that was common before 2008-given higher mandated capital levels. But the stocks are priced for single-digit returns or worse. Drug stocks, normally defensive, haven't done a lot to protect investors lately. Pfizer (PFE), at 17.49, trades for around eight times estimated 2011 profits, while Merck (MRK), at 31.71, has a similar P/E ratio. Both yield more than 4.5%.Government pressure on drug-cost reimbursements could escalate around the world, but that concern seems captured in drug stocks' low valuations. Technology companies have more exposure to Europe than other stock-market sectors, but they also have excellent balance sheets and low price/earnings multiples. Microsoft (MSFT), at 25.68, trades for nine times estimated earnings for the fiscal year ending next June. Its P/E, excluding net cash and investments of $6 a share, is under eight. Intel (INTC), at 20.79, trades for nine times projected 2011 profits and yields 4%, while Hewlett-Packard (HPQ), at 32.63 fetches less than seven times current-year profits. Apple (AAPL) the market's premier mega-cap growth stock, at 373.62, trades for 14 times what it is likely to earn in the fiscal year ending September. Excluding $80 a share in cash and investments, its P/E is closer to 10. In the energy sector, many investors prefer exploration plays and oil-service stocks, but the best value could lie in industry giants like ExxonMobil (XOM) and Chevron (CVX). At 74.82, Exxon trades for under nine times projected 2011 profits and yields 2.5%, while Chevron, at 97.61, has a P/E of just seven based on estimated 2011 net. It yields 3.2%. The recent drop in U.S. oil prices to $87 a barrel from $100 could pressure profits, but the stocks look to be discounting far lower oil and gas prices. The prospect of cuts in the Pentagon budget has crunched defense stocks. Northrop Grumman (NOC), for instance, now trades at 55.49, down from 70 in early July, and sports a P/E of eight. It yields 3.6%. Lockheed Martin (LMT), another major contractor, trades for 72.82, or 9.7 times earnings, and yields 4%. Gold has been a bright spot, rising $36 an ounce last week to $1,663.80. The metal is up 17% so far this year. Gold is shining because investors fear that the U.S. government will continue to pursue policies-notably zero-percent rates and massive fiscal deficits-that will further debase the dollar and spark inflation. Gold remains an "underowned" asset class with few individuals and institutions with a sizable weighting, which could mean more buying. While gold has gained, major producers have lagged. The leading miner, Barrick Gold (ABX), is down 14% this year to 45.86, and trades for just 10 times estimated 2011 profits. Gold bugs weren't happy that Barrick paid up to buy a major copper miner earlier this year, diluting its exposure to gold. There is rumored to have been heavy selling of Barrick by some institutional investors in recent months. Even so, Barrick has rarely had such a low P/E and its profits have a lot of leverage to gold prices. Berkshire Hathaway (BRKA) is a financial Fort Knox, with one of the strongest balance sheets among huge companies. Its shares have been no safe haven, falling11% this year to $107,300, or just 1.1 times book value. Berkshire looks inexpensive with a price/book ratio that has rarely been lower in recent decades. Its earnings power has never been better. Berkshire CEO Warren Buffett has been cool to stock buybacks -- the company has repurchased virtually no stock since he took over in 1965 -- but he ought to consider a buyback rather than paying cash for another major acquisition, given Berkshire's low valuation. Stocks had a tough summer in 2010 as the S&P 500 dropped 15% from its spring high to a low of about 1,050 in late August. That proved to be a buying opportunity as Federal Reserve Chairman Ben Bernanke came to the rescue with a new credit-easing program, known as QE2. By the end of 2010, stocks had risen 20% from their August lows. While the Fed is more reluctant to begin a fresh asset-buying plan this year, stocks look even cheaper than they were last summer. Historically, it has been good to buy the stock market when its trades around 10 times earnings. Barring global financial mayhem, investors with a modicum of patience should do well. Stocks could be the best asset class in the world.
After Last week’s market turmoil you no doubt are scared and rethinking what crazed decision ever lead you to invest in stocks in the first place. That’s only natural. You’re also probably going to be watching all the Financial TV pundits over the weekend, from Nouriel Roubini, telling us Armageddon is just around the corner to Warren Buffett, waving his little American flag singing “buy buy buy.” How can you make sense of all this rhetoric and jargon? Where were these geniuses’ 2000 Dow points higher?
We thought long and hard about what to write this week but in doing so we ran across this week’s Barron’s piece on the week gone by. Now, we all know Barron’s can be a fairly bearish publication but we found a surprising amount of bullishness in what they had to say. So rather than cobble together something on our own, we reprint here, in part, an article from that publication we thought accurately paralleled our thoughts. Full credit to Barron’s and the author for the piece, we take no credit other than finding it online at midnight last night and seeing that the article is both sober and balanced.
Barron's(8/8) Attention, Shoppers. It's Time To Buy
12:10 AM Eastern Daylight Time Aug 06, 2011
(From BARRON'S)
By Andrew Bary
After the recent plunge in major global markets, U.S. stocks look attractive. The benchmark Standard & Poor's 500 index trades for little more than 12 times projected 2011 profits, one of the lowest price/earnings ratios in a generation. The Dow Jones Industrial Average has a similar P/E -- 11.6 times this year's estimated earnings. Its dividend yield of 2.62% exceeds the depressed 2.56% yield on the 10-year Treasury note, another rare occurrence. This isn't the1970s, when P/E ratios were low but inflation and interest rates were high. Investors are worried about different problems: a weakening domestic economy, Europe's debt mess, political dysfunction in Washington and a massive and seemingly intractable federal budget deficit. Yet American corporations rarely have been in better shape, with generally robust profits and balance sheets flush with more than $1 trillion in cash. Analysts are loath to predict when the sell-off, which began July 22, might end, but many say they see stocks ending the year higher. If the S&P 500 merely gets back to its 2011 peak, set in April, the index would rise 14%. "The economy is doing well enough to keep earnings rising and bring some bullishness back to the stock market," says Jim Paulsen, investment strategist at Wells Capital Management.
Investors have been rattled by the swift pace of the sell-off, in which the S&P 500 fell more than 10% in 10 trading sessions. This marks only the fourth such decline in a bull market since the end of World War II. The other three 10% drops occurred in late 1974, October 1997 (during the Asian crisis) and August 1998 (after the collapse of the hedge fund Long-Term Capital Management). The good news is that the market rallied an average of 18% in the ensuing three months after each of those three setbacks, according to J.P. Morgan strategist Thomas Lee. Stocks might be near a bottom after a week of selling. The Dow finished Friday at 11,444.61, up 60.93 points in a volatile session but down 5.8% for the week. Most of the damage occurred Thursday, when the average fell 512 points, or 4.3%, its biggest point drop since late 2008. The industrials are down 1.2% for the year; they were up 10.7% at their April peak. The S&P 500 ended the week at 1,199.38, off 7.2% for the five days and 4.6% for the year. The situation is worse overseas, as the table nearby shows. The Euro Stoxx 50 index is down 15% this year, Japan's Nikkei is off 9% and formerly once-hot Brazilian stocks are down 24%. Every major European market except Switzerland has a P/E below 10, and European stocks yield an average of 4%. Closer to home, the top 50 U.S. banks trade on average at around book value. They have been cheaper only twice in the past 25 years-during the deep recession of 1990 and the 2009 financial crisis. Both those times were major buying opportunities, and today, notes RBC Capital Markets analyst Gerard Cassidy, the industry's fundamentals are improving. At 37.60 a share, J.P. Morgan Chase (ticker: JPM) trades below book value and for under eight times projected 2011 profits. The stock yields 2.7%, which is likely is going higher. Citigroup (C), at 33.44, is down 29% this year and trades for less than 75% of book value of $48.75. Tangible book is a conservative measure of shareholder equity that excludes goodwill and other intangible assets stemming from acquisitions. Goldman Sachs (GS), at 125.18, trades just above tangible book, and Morgan Stanley (MS), at 20.02, changes hands below tangible book of $26.97. A wobbly global economy poses risks for big financials, but the industry's capital levels are appreciably higher than in 2008 and leverage is lower. It will be tough for most big financial companies to earn 15%-plus returns on equity in the coming years-a performance that was common before 2008-given higher mandated capital levels. But the stocks are priced for single-digit returns or worse. Drug stocks, normally defensive, haven't done a lot to protect investors lately. Pfizer (PFE), at 17.49, trades for around eight times estimated 2011 profits, while Merck (MRK), at 31.71, has a similar P/E ratio. Both yield more than 4.5%.Government pressure on drug-cost reimbursements could escalate around the world, but that concern seems captured in drug stocks' low valuations. Technology companies have more exposure to Europe than other stock-market sectors, but they also have excellent balance sheets and low price/earnings multiples. Microsoft (MSFT), at 25.68, trades for nine times estimated earnings for the fiscal year ending next June. Its P/E, excluding net cash and investments of $6 a share, is under eight. Intel (INTC), at 20.79, trades for nine times projected 2011 profits and yields 4%, while Hewlett-Packard (HPQ), at 32.63 fetches less than seven times current-year profits. Apple (AAPL) the market's premier mega-cap growth stock, at 373.62, trades for 14 times what it is likely to earn in the fiscal year ending September. Excluding $80 a share in cash and investments, its P/E is closer to 10. In the energy sector, many investors prefer exploration plays and oil-service stocks, but the best value could lie in industry giants like ExxonMobil (XOM) and Chevron (CVX). At 74.82, Exxon trades for under nine times projected 2011 profits and yields 2.5%, while Chevron, at 97.61, has a P/E of just seven based on estimated 2011 net. It yields 3.2%. The recent drop in U.S. oil prices to $87 a barrel from $100 could pressure profits, but the stocks look to be discounting far lower oil and gas prices. The prospect of cuts in the Pentagon budget has crunched defense stocks. Northrop Grumman (NOC), for instance, now trades at 55.49, down from 70 in early July, and sports a P/E of eight. It yields 3.6%. Lockheed Martin (LMT), another major contractor, trades for 72.82, or 9.7 times earnings, and yields 4%. Gold has been a bright spot, rising $36 an ounce last week to $1,663.80. The metal is up 17% so far this year. Gold is shining because investors fear that the U.S. government will continue to pursue policies-notably zero-percent rates and massive fiscal deficits-that will further debase the dollar and spark inflation. Gold remains an "underowned" asset class with few individuals and institutions with a sizable weighting, which could mean more buying. While gold has gained, major producers have lagged. The leading miner, Barrick Gold (ABX), is down 14% this year to 45.86, and trades for just 10 times estimated 2011 profits. Gold bugs weren't happy that Barrick paid up to buy a major copper miner earlier this year, diluting its exposure to gold. There is rumored to have been heavy selling of Barrick by some institutional investors in recent months. Even so, Barrick has rarely had such a low P/E and its profits have a lot of leverage to gold prices. Berkshire Hathaway (BRKA) is a financial Fort Knox, with one of the strongest balance sheets among huge companies. Its shares have been no safe haven, falling11% this year to $107,300, or just 1.1 times book value. Berkshire looks inexpensive with a price/book ratio that has rarely been lower in recent decades. Its earnings power has never been better. Berkshire CEO Warren Buffett has been cool to stock buybacks -- the company has repurchased virtually no stock since he took over in 1965 -- but he ought to consider a buyback rather than paying cash for another major acquisition, given Berkshire's low valuation. Stocks had a tough summer in 2010 as the S&P 500 dropped 15% from its spring high to a low of about 1,050 in late August. That proved to be a buying opportunity as Federal Reserve Chairman Ben Bernanke came to the rescue with a new credit-easing program, known as QE2. By the end of 2010, stocks had risen 20% from their August lows. While the Fed is more reluctant to begin a fresh asset-buying plan this year, stocks look even cheaper than they were last summer. Historically, it has been good to buy the stock market when its trades around 10 times earnings. Barring global financial mayhem, investors with a modicum of patience should do well. Stocks could be the best asset class in the world.
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