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Vitaliy Katsenelson, CFA

Sideways Market Keeps Marching On


The bear markets were actually sideways markets and happened the time

Market Cycles 101: Secular vs Cyclical


Secular markets last 5 years or longer Cyclical markets last less than 5 years. Take place inside of secular markets. 1966-1982 Secular Sideways Market

Cyclical head fakes

Cyclical Markets:

Dow Jones Since 1999

Market Cycles 101: P/E and Es

E
Bull Markets

P/E

Start at P/E End at P/E


Low High

Returns
Adding 2 positives = great returns

Sideways Markets

High

Low

Net-net earnings growth is cancelled out by P/E decline = a lot of volatility and no returns
Adding 2 negatives = horrible returns

Bear Markets

High

Low

Stock Market is Only Cheap if You


S&P is at 18 times 12 months trailing earnings above average but not too expensive. But

If Profit Margins Can Stay at All Tim High


Earnings are inflated and corporate profit margins are unsustainable. Profit margins will mean-revert (in this case, decline). Profit margins mean-revert because capitalism works: higher profits attract more competition and earnings decline.

In the Long Run, Earnings Growth = GDP Growth 1950 - 2010

In the Short Run? 1999 - 2012

S&P 500 Earnings Last 10 Years


=
2 4 2
Ex-Crisis Average 10 Year E Actual Average 10 Year E

$65 $61

$50

(& 500 30, 2013) (& 10 2003 2012)

=
38%

1,590 = 61 1,590 = 65

26 25

Stock Market is Very Expensive!!!

We Are in a Secular Bull Market If:


Profit margins continue to expand or at least maintain current level unlikely

Revenues (GDP) continue to grow at a good pace. Given the exciting macro picture (China bubble, Japan debt bubble, Europe, QEs ) maybe or maybe not.

If you are not confused about the economy, you dont understand it.
Charlie Munger, Berkshire Hathaway Annual Meeting 2013 P/E continues to expand unlikely: past secular bull markets ended at this type of valuation.

Sorry, could not spend more time on sideways markets, but you can read about them in 7 languages:

ATEA
ATEA (ATEA in Oslo) 6.5 NOK ($1.03b ) market cap No net debt Sales 20b NOK (Sweden, Norway, Denmark and Finland) 60% of sales from hardware sales, 20% software, 20% services Growth 2-3% about market (takes market share) EBITDA (our approximation): products 3.5%; services 7% Good management set goals, reached them

Thank You!
You can browse the full version of the sideways market presentation: http://bit.ly/swpresentation
2008 Value Investing Congress presentation: http://contrarianedge.com/presentation/ Read articles and sign up for emails: http://ContrarianEdge.com

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