Stocks at bargain levels

Investors who sit on cash should consider using some of it to increase their stockholdings.

• We have had some inflation worries since autumn 2010 for the Chinese economy. I recommended to under weight Chinese stocks last autumn when they peaked. According to BCA analyst Yan Wang, inflation is caused mainly by food prices and not by wage increases. Since the recent food price increase is caused by weather patterns diminishing food supply, he thinks prices will decrease soon. Freeing Chinese policy makers from restraining economic policies. Moreover, Chinese stocks haven't done anything in the past two years. Below you see a chart of the Shanghai SE A Share Index.

Source: ThomsonReuters

 

 Keep in mind that the Chinese economy is not having structural problems - massive debt - like developed economies (USA, Europe, and Japan).

• Another stock which is very attractively valued is the insurer Zurich Financial trading at a Price to Book of 1.3x and sports a dividend yield of 8.3%. The Swiss Government  Benchmark Bond with maturity in 10 years is yielding 1.7%.  Zurich is massively oversold as the chart below illustrates with a RSI of 26

Source: ThomsonReuters

 

Even if stocks are tading lower in the next few weeks - which I doubt - think of buying some more with some residual cash!

Shiller PE is bearish

I have seen the graph below in a presentation this week of David Darst of Morgan Stanley. According to the Shiller PE stocks are only to outperform in the next decade if this PE is substantially lower than its longterm average.
 

The shiller PE divides the average of the last 10 years earnings of the index  by the index and provides you a cyclically adjusted PE ratio. According to the graph the PE stands today at 24x and it is well above the longterm average of about 16.

US houshold debt hangover

Do you think the US consumer will have paid his excessive debt back in 1 or 2 years? A chart by Nomura implies 2020 is more plausible.

Inflation would help to speed up the process!