Markets continue to push higher and as they do so many are questioning the validity of the valuations.

The headline news is of “all-time highs” and people wondering if this is justified or an artificial boom induced by zero interest rates and QE.

Is it real?

The truth is probably somewhere in the realm of it’s mostly justified but partly artificial.

In 1999 when the S&P was last at current values, both the earnings per share and dividends paid out were roughly half the levels they are today so the index was twice as expensive on those metrics as it is now.

That being said the market in 1999 was significantly above its historic average price to earnings so in and of itself the above comparison does not mean today it’s cheap, it could equally mean back then it was very expensive.

However it is certainly more comfortable to be at these levels supported by the current numbers.

A frothy element of the market in 1999 was technology, Microsoft as an example was trading at a similar share price then to now; its profits over the last twelve plus years have increased over 300% with no share price appreciation!

Indeed most older technology stocks stand today at fractions of their 1999 valuations, companies such as Cisco, Intel, Yahoo and Oracle.

As mentioned in previous blogs the shares being bid up recently have been the multi-national names in sectors such as “consumer staples” which provide stable returns and higher dividends (the so called bond proxy equities), there is as yet little appetite for more volatile and less predictable earnings such as those of technology based companies.

Tepper and taper

David Tepper who owns and runs “The Appaloosa Hedge Fund” has over the last decade produced simply astounding returns both in equity and debt investments (he earns $billions annually).

Not known as a “bull” he has since the beginning of the year been consistently positive about the outlook for equities.

His thesis is that markets are now in a Goldilocks period (the sweet spot of the porridge neither too hot or cold but just right). He argues that inflation is muted, that Central banks have primed markets with liquidity, the tax receipts of Governments are increasing as profits rebound and that sentiment continues to improve as memories of the near death experience fade.

He further asserts that the gradual withdrawal (taper) of central bank assistance is not something to be feared but is a necessity to maintain equilibrium; the dangers are he believes to the upside in terms of overly rapid asset price appreciation and not to the downside.

Scores on the doors

The portfolios continue to do well (handily beating their benchmarks) and as we believed should happen in time, those with higher volatility holdings have performed strongly as money rotates out of cash, gold and bonds (we think there is more of this to come).

As to individual companies we previously wrote about as appearing to us undervalued.

Bank of America is up over 140% from its lows

AIG is up over 120 %

Vivendi is up over 50%

Portfolio rebalance

You will be receiving the rebalance pack this week, it is really helpful to us if you would be able to sign and return the authorities needed at your earliest convenience. Additionally if you have not returned your fee agreements we will not be able to input your rebalance.

NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.