Where Has All The Value Gone?

valueFor the first time since the financial markets bottomed in 2009, I can say that across the universe of securities I monitor, there are no opportunities worth taking.  Yes, there may be a few pockets of value.  But I already own them.  In general, the widespread opportunities that existed over the past five years have disappeared and been replaced with opportunities that do not provide sufficient risk-adjusted returns.  Ever since markets bottomed in 2009, I’ve constantly had securities on my watch list that were worth buying or nearly worth buying.  Now, I am not even close to making an investment in equities, bonds, private companies, or real estate.  The issue is valuation.

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For the purposes of this article, I won’t write a treatise examining the lack of value in various markets.  Instead, I will provide the following food for thought about equities, bonds, private equity, and real estate.

Regarding equities, an S&P 500 trailing P/E of roughly 17, and a dividend yield under 2% is nothing to get excited about.  I know there are those who will cite all sorts of inexpensive-sounding forward P/Es.  But given the track record analysts have in recent years of far overstating the eventual earnings experience for the S&P 500, I am inclined to believe that forward estimates will continue to do what they’ve done for many quarters—come down.  On the individual stock front, searching for and finding good long-term values (not talking about trading) has become so difficult in recent months that I don’t even think it’s worth my time at current broader-market index levels.  In general, valuations are either too high (for the growth stocks) or growth is too low (for the “value” stocks).  Occasionally, you’ll even find high valuations among the low-growth stocks.  Perhaps that is not surprising given the desperate search for income that Federal Reserve policies have created.  Additionally, preferred stocks were enticing several months ago.  But that is no longer the case.

Concerning bonds, spreads are too narrow and benchmark yields are too low.  As I’ve written before, there are often one-off exceptions that can be found.  But I haven’t noticed any new one-off exceptions lately.

I constantly look for opportunities in private companies, specifically Seed round or Series A stage companies.  In recent months, I’ve examined hundreds of startups.  There were maybe a handful I found enticing and only two I ultimately settled on.  The best way for me to sum up what’s out there in early-stage-startup land is insane valuations and generally unenticing terms.  My hunch is that many early-stage angel investors and venture funds don’t fully appreciate the risks they are currently taking.

In terms of real estate, all of the single-family investments opportunities I come across are offering unacceptably low potential returns for the given level of risk.  There has been an unsustainable rise in single-family house prices in many parts of the country.  It reminds me of an overheated market driven by all-cash-buy-to-rent investors who can’t find acceptable returns in fixed-income markets as well as by flippers, who, in some parts of the country, are partying like it’s 2005.  The Fed has certainly succeeded in driving real estate prices higher.  But it will come at the expense of first-time homebuyers, and, in the future, at the expense of move-up buyers that traditionally came from middle-income America.  In terms of commercial real estate, I am finding good properties in which I could invest.  The problem lies in the structure of the deals.  The operators have either structured the deals with too much leverage in order to make the returns acceptable or offer low returns with average leverage.  In either case, it’s not for me.

So where has all the value gone?  Considering the United States has been stuck in a debt and easy-money-dependent cycle of boom and bust for many years now, it is no surprise that we’ve reached the point at which potential future returns, from a risk-adjusted basis, no longer make sense.  If you’ve been taking advantage of the opportunities available in recent years, a period of pause in which you allow cash balances to build a bit will likely not create any hardship.  The Fed has a pretty solid history of creating booms and busts.  Until proven otherwise, I’ll operate under the assumption that it will happen again, and that value seekers will one day have another opportunity to purchase assets at levels that will eventually provide impressive long-term returns.  Today, however, is not that time.

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