Posts tagged ‘Financial Times’

Siegel Digs in Heels on Stocks

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Jeremy Siegel, Wharton University Professor and author of Stocks for the Long Run, is defending his long-term thesis that stocks will outperform bonds over the long-run. Mr. Siegel in his latest Financial Times article vigorously defends his optimistic equity belief despite recent questions regarding the validity and accuracy of his long-term data (see my earlier article).

He acknowledges the -3.15% return of U.S. stock performance over the last decade (the fourth worst period since 1871), so what gives him confidence in stocks now? Let’s take a peek on why Siegel is digging in his heels:

Since 1871, the three worst ten-year returns for stocks have ended in the years 1974, 1920, and 1978. These were followed, respectively, by real, after-inflation stock returns of more than 8 per cent, 13 per cent, and 9 per cent over next ten years. In fact for the 13 ten-year periods of negative returns stocks have suffered since 1871, the next ten years gave investors real returns that averaged over 10 per cent per year. This return has far exceeded the average 6.66 per cent real return in all ten years periods, and is twice the return offered by long-term government bonds.

 

Siegel’s bullish stock stance has also been attacked by Robert Arnott, Chairman of Research Affiliates, when he noted a certain bond strategy bested stocks over the last 40 years. Here’s what Mr. Siegel has to say about stock versus bond performance:

Even with the recent bear market factored in, stocks have always done better than Treasury bonds over every 30-year period since 1871. And over 20-year periods, stocks bested Treasuries in all but about 5 per cent of the cases… In fact, with the recent stock market recovery and bond market decline, stock returns now handily outpace bond returns over the past 30 and 40 years.

 

If you’re 50, 60, or older, then Siegel’s time horizons may not fit into your plans. Nonetheless, in any game one chooses to play (including the game of money), I, like many, prefer to have the odds stacked in my favor.

In addressing the skeptics, such as Bill Gross who believes the U.S. is entering a “New Normal” phase of sluggish growth, Mr. Siegel notes this commentary even if true does not account for the faster pace of international growth – Siegel goes on to explain that the S&P 500 corporations garner almost 50% of revenues from these faster growing areas outside the U.S.

On the subject of valuation, Mr. Siegel highlights the market is trading at roughly 14x’s 2010 estimates, well below the 18-20x multiples usually associated with low-interest rate periods like these.

In periods of extreme volatility (upwards or downwards), the prevailing beliefs fight reversion to the mean arguments because trend followers believe “this time is different.” Just think of the cab drivers who were buying tech stocks in the late 1990s, or of the neighbor buying rental real estate in 2006. Bill Gross with his “New Normal” doesn’t buy the reversion argument either. Time will tell if we have entered a new challenging era like Mr. Gross sees? Regardless, Professor Siegel will be digging in his heels as he invests in stocks for the long run.

Read the Whole Financial Times Article Written by Professor Siegel

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

October 14, 2009 at 2:00 am 2 comments

Technology Does Not Sleep in a Recession

Hibernate Bear 

Our economy may be coming out of a long economic hibernation; however technology does not sleep through a recession. Gordon Moore, co-founder of Intel Corporation, has proven this trend true through his groundbreaking piece written in the April 1965 issue of Electronics Magazine. In the article Mr. Moore predicted transistor densities would double about every two years (“Moore’s Law”).  Transistors can be thought of as the brains of electronics devices, and the industry (Intel and other semiconductor manufacturers) has been boosting the brain power of electronics for decades. How far has the industry come? The number of transistors contained on a chip has gone from 16 in 1960s to over 600 million today – now that’s what I call progress!

These achievements have been nothing short of revolutionary, and many people consider the introduction of the transistor as the greatest invention of the 20th century.  According to many industry experts, Mr. Moore’s forecasts have been shockingly accurate and many believe “Moore’s Law” will hold true for years to come – despite challenging technological limitations.

Source: The Financial Times

Source: The Financial Times

We may curse at our computers (I absolutely despise Vista), but there is no arguing with the huge productivity and standard of living improvements we have experienced over the last forty years – since the introduction of the transistor. Many take their GPS, Tivo, WiFi laptop, iPhone, and HiDef TVs for granted, however I for one thank Gordon Moore and those diligent engineers for making my geeky tech dreams come true.

However the cost of further advancements is becoming pricier. As line widths (the ability to add more transistors) narrow, the costs of building fabrication plants (“fabs”) with the necessary equipment are running in the multi-billion range. The Financial Times (FT) article talking about semiconductor trends mentions a $4.2 billion state-of-the-art factory in upstate New York that is just beginning construction. The FT notes that only two players (Intel and Samsung) have firm plans to build 20 nanometer fabs. For comparison purposes, one nanometer is equal to one-billionth of a meter and a human hair is 100,000 nanometers wide. In other words, a nanometer is pretty darn tiny. To further illustrate the point, Intel has managed to fit up to 11 Intel Atom processors – each packed with 47 million transistors – on the face of an American penny.

Source: The Financial Times

Source: The Financial Times

As the chip making industry become more costly, fewer semiconductor manufacturers will be playing in the sandbox:

“Intel argues that only companies with about $9bn in annual revenues can afford to be in the business of building new fabs, given the costs of building and operating the factories and earning a decent 50 per cent margin. That leaves just Intel, Samsung, Toshiba, Texas Instruments and STMicroelectronics.”

 

The economy may still be in the doldrums, but the $60 trillion global economy (as measured by Gross Domestic Product) never sleeps – technologies created by Gordon Moore and others continue to propel amazing advancements.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 24, 2009 at 4:00 am 4 comments


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