Bearish Canadians. One Street maven thinks it's a lot of bull
Derek DeCloet
Friday, December 15, 2006
Kenneth Fisher likes a lot of things about Canada. He likes the economy, the stock market, even the weather, thanks to the mild spell that this week gripped the Centre of the Universe. But there's one thing about the place he doesn't quite get: the melancholy attitude of the investing public.
“Do you notice,” he asked, “that Canadians tend to be more permanently bearishly biased than Americans?”
No one would accuse Mr. Fisher, the long-running Forbes columnist and founder of Fisher Investments, of being “bearishly biased” about anything. He's usually bullish on the stock market and usually right, judging by his track record and the $30-billion (U.S.) or so that others have given him to manage (BCE and the University of Toronto are among his customers).
But what he's really best at is stirring the pot, and he has done it well in his latest book, The Only Three Questions that Count, which takes many of the beliefs that people hold about the stock market and trashes them. (The first of his three questions is, “What do you believe that is actually false?”)
In an interview during a Toronto pit stop, he said: “I start from the premise that a tremendous amount of conventional investing wisdom is simply passed down over time — and accepted — without any real scientific query as to whether it's valid or not.”
Here's one example: When stocks are selling at high price-earnings ratios, it's a sign the markets are getting expensive and the risk of a correction is high. Baloney, Mr. Fisher says.
Sure, it's the lesson everyone took when the equity bubble began leaking air about six years ago. But high P/Es are an unreliable indicator. The U.S. stock market looked expensive in 1998 and 1999, and the Standard & Poor's 500 rose 51 per cent over those two years. High multiples ruled in 1922, in 1935 (Depression-era profits were low), in 1963, in 1996. And each of those years, the market roared.
Ready for more heresy? Here's a beaut: America's problem isn't that it has too much debt. It's that it doesn't have enough. Government borrowing has gone up, true — but so has the nation's wealth in equal measure. In the United States, at least, deficits are generally good for stock market returns and surpluses are lousy, Mr. Fisher's research shows.
Then there's the belief, a favourite chestnut of Wall Street strategists, that the U.S. consumer is finished because he's got way too much personal debt. Another myth, Mr. Fisher says. The personal savings rate excludes capital gains — which means that, according to U.S. government statisticians, “Bill Gates has never saved much of anything his whole life.”
But we've found a snag in Mr. Fisher's bullish case. Everyone knows that interest rates are near historic lows, and therefore must go higher, which squeezes the stock market. Right? Wrong again, he says. He pulls out a pen and draws a chart. The data, which are in the book, show that since 1800, long-term U.S. government bonds have paid about 5 per cent, on average. That's not much higher than where yields are right now. “Yet I think people have a bias to think that rates are low . . . as opposed to thinking of this” — he points to the spike in the 1970s and early '80s — “as the bizarre.” Why? Because nobody remembers what interest rates were in the 1850s. But anyone who's older than 45 remembers that they were crippling in 1981.
So getting back to those bearish Canadians: Mr. Fisher thinks the conventional wisdom is wrong here, too. On Bay Street, it's dead easy to find people who fear this rally has run strong enough and long enough that it's getting dangerous. Investment managers worry because the S&P/TSX composite index has nearly doubled in four years. They worry because, in the past 18 months, it has barged through the 10,000 mark, then 11,000, 12,000 and, this week, 13,000. They worry because corporations are enjoying profit margins unlike any they've seen since Nehru jackets were in style. And they wonder how much longer it can last.
But, Mr. Fisher says, what do the worrywarts know? “I don't think most of these people would have bet, three or four years ago, that things would work out as they have, because they would have been conservative then.” Check the facts. The TSX has an “earnings yield” of more than 6 per cent (that is, companies are earning about $6 for every $100 in market capitalization). Ten-year government bonds yield about 4 per cent, thanks to low inflation and Ottawa's fiscal probity.
To Mr. Fisher, that says Canadian stocks are a good deal — yes, even now— even if they're nowhere near as cheap as equities in Japan, the United Kingdom or continental Europe. “I think the Canadian market goes up [in 2007]. I just don't think it goes up as much as the rest of the world does.” Long live the bull.
ddecloet@globeandmail.com
