Rosenberg: Cash is no longer king

1st November 2012 / Europe / Comments are Disabled

Not so long ago, when asset prices evolve according to what was the state of the economy. Now, however, this dependence is reversed and asset prices affect economic development. The Fed also completely changed the relationship between stocks and bonds. We find thus in a situation where the weak economy and profits. Rates which are discounted, but it is increasingly shifted into negative numbers. Dividend income shares in the S & P are also compared to government bond yields threefold, and this further increases the attractiveness of stocks. Before 2009, yet we saw no correlation between changes in the Fed’s balance sheet and the stock market. Now it is at least as strong as the correlation between corporate profits and stock prices. I doubt that the “wealth effect” is the correct response to a wide range of challenges facing the economy. There is no doubt but that the Fed is able to influence asset prices and intends to do so until the unemployment rate drops significantly.

The results of the Fed’s policy is clear: the stock market from its base grew by 116%, real estate prices as measured by the Case-Shiller gained 4%. Even though economic activity remains weak and depression deepens. Ben Bernanke also wanted to achieve a reduction in yield corporate bonds. They actually did so at their minimum, risk spread income government bonds, but corporate bonds rated BBB still attractive. And it is another part of the market, where Bernanke wants to cause the rally to support the return of the risk and reduce the cost of capital. I do not know how much it will help the economy, return on investment in this segment, but his policy should be supported.

My opinion on the development of the stock market has been conservative in the past, but I have never claimed that investors should hold mostly cash. This may be the best safeguard against loss of capital value, but does not make anything. In the current environment of zero interest rates cash is king, it is cash flow. In the stock market, it means that we have to focus on dividend growth and dividend yield. They might serve such a large Canadian banks and technology companies in the U.S..

For these reasons, I find it attractive and precious metals mining company. Those also helps that the growth of money supply growth exceeds its rate of extraction of gold and silver. Although the gold in the last decade has generally led to better stock than mining companies. Now, however, this trend reverses, the reason they are their attractive valuation, increasing profit margins and increasing attention devoted to the management of cash flow. And these titles also offer the most attractive feature of good stock investment present, therefore the dividend.

author is David Rosenberg, chief economist and strategist at Gluskin Sheff.

(Source: FT)

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