Q3 2012 Letter from the President | Part 2

This week we will be presenting excerpts from the latest President’s Letter by Roger Hewins. If you missed it, catch up with yesterday’s post on risk and volatility in the market.

So what’s the good news?

Well, markets remain cheap. Latest numbers show the ratio of expected earnings for the next year to stock prices – called the “forward looking p/e ratio” – to be quite low around the world:



Europe, Australia, Far East (EAFE)


Emerging markets


Source:  J.P. Morgan Asset Management

Earnings are still pretty good, and with rising earnings and more or less stable prices, stocks are cheap based on traditional measures. Of course, if our fears are realized and big troubles hurt these companies and their earnings, they could get cheaper still. That is risk. But from where we are today, anything short of some serious setbacks could mean very good things for the investor.

What about Stockton?

Well, the good news is that excellent bond managers, such as the team at Vanguard, managed to avoid holding any of the bonds from Stockton or the other two California entities which filed for bankruptcy. If anyone naively believed they could buy their own bonds and do without professional credit analysis, let this be a lesson to them. Buying bonds from a broker and having no credit analysis is like picking up quarters on the freeway. It might work for a while, but…

More potential good news – perhaps these entities will effectively address their problems now. They have an opportunity to completely restructure their financial obligations, and we can only hope they get it right this time. Lots of pain, but we knew that was coming all along, like watching a slow motion train wreck. Fingers crossed.

Stay tuned for tomorrow’s post, “Meanwhile, in the rest of the world…” 

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OneBite Editorial Staff
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Q3 2012 Letter from the President | Part 2

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