YPO Presentation

7/28/2019 YPO Presentation

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Sideways Markets

Are We There Yet?

By Vitaliy Katsenelson, CFA

Chief Investment Officer

Investment Management Associates, Inc.


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Murmansk


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Sideways Market Keeps Marching On

5

The bear markets were actually sideways markets

and happened the time


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Market Cycles 101: Secular vs Cyclical

Secular Markets last 5 years or longer Cyclical markets last less than 5 years. Take place in side of secular markets.

1966-1982 Secular Sideways Market

Cyclical Markets:


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Dow Jones Since 1999


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Stock Market Math

Earnings Growth P/E+ Price=

+

Dividend Yield

=

Total Return


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Market Cycles 101: P/E and Es

E P/E Start at P/E End at P/E Returns

Bull Markets Low HighAdding 2 positives = great

returns

Sideways Markets High LowNet-net earnings growth is

cancelled out by P/E

decline = a lot of volatility

and no returns

Bear Markets High LowAdding 2 negatives =

horrible returns


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Stock Market is Only Cheap if You

S&P is at 18 times 12 trailing earningsabove average but not too expensive. But


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Stock Market is Only Cheap if You

Earnings are inflated but unsustainably high corporate profit margins. Profitmargins will mean revert (in this case decline). Profit margins mean revert

because capitalism workshigher profits attract more competition and

earnings will decline.


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In the Long Run Earnings Growth =

GDP Growth


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S&P 500 Earnings Last 10 years

= 4

$61

$65

$50

Actual Average 10 Year E

Ex-Crisis Average 10 Year E


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=,9

6= 25

= ,96

= 26

= (& 500 30, 2013)

(& 10 2003 2012)

38%

Stock Market is Very Expensive!!!


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We are in Secular Bull Market If:

Profit margins continue to expand or at least maintain current level

unlikely

Revenues (GDP) will continue to grow at good pacesgiven the

exciting macropicture (China bubble, Japan debt bubble, Europe, QEs )maybe? Or maybe not?

P/E will continue expandunlikely, past secular bull markets ended at this

type of valuations


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Brief Summary of Strategy and Analysis for Todays Environment

Be a buy and sell investor. Buy and hold is in a coma (see next chart) . Time

(price) stocks through a strict buy and sell process. Buy when undervalued, sellwhen fairly valued.

Time stocks, not the market: Market timing is very difficult. In the short run

emotions are in the drivers seat.

Dont buy for the sake of being invested. Dont lose money by making marginaldecisions. In the absence of good stocks to buy, be in cash. The opportunity cost

of cash is not as high as in a secular bull market.

Increase your margin of safety: Fewer (better) stocks will be in your portfolio.

Favor dividend-paying stocks. Dividends were 95% of the return in previoussideways markets. (Warning: dividends are part of the analytical equation, not the

equation.)

Look overseas -- increases return without increasing risk.


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Thank You!

You can read full version of sideways market presentation

here http://bit.ly/swpresentation

Read articles at http://ContrarianEdge.com
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