Is the cult of equity dying, as bond king Bill Gross recently opined in his monthly investment outlook? Gross runs the world’s largest and one of its most successful bond funds, the PIMCO Total Return Fund and is one of the country’s most influential investors and prognosticators. As Gross’ chart, “Stocks For The Really Long Run” shows, stocks, with their 6.6% annualized inflation adjusted returns, have vastly outperformed bonds and cash over the last one hundred years; a fact chronicled by Wharton professor Jeremy Siegel in his investment classic, Stocks For The Long Run. Gross maintains this track record is unsustainable for a number of reasons, not the least of which is PIMCO’s expectation that the economy will grow at a much slower pace for the foreseeable future. Under PIMCO’s now famous “new normal” forecast, real GDP should crawl along at 1-2% a year versus the historical average of 3.5% in the post-war era.
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Many investors seem to agree that the cult of equity is dying. Investors have been pulling money out of stock mutual funds for years. As independent research firm Bianco Research reports and its chart of cash flows into U.S. stock mutual funds shows, “investors correctly started selling domestic equity mutual funds on an annual basis in mid-2007… in fact, in the months ending May 2012, net new cash flow out of these funds set a record at $193.93 billion.” You sure wouldn’t think so looking at how the markets have performed this year though. Stock markets across the world have rallied, led by the U.S. Professional investors are much more bullish than individuals are about the ability of the Federal Reserve and the European Central Bank among others to boost growth and stimulate demand.
Put this week’s WEALTHTRACK guest in the optimist’s camp, with some caveats and measured advice for investors. He is Financial Thought Leader, David Darst, Chief Investment Strategist at Morgan Stanley, where he criss-crosses the globe advising clients. He is also an acknowledged expert in asset allocation and a prolific author. Among his most recent books is a best seller, The Little Book That Saves Your Assets, which I highly recommend. I began the interview by asking David, given recent events, why should investors trust the financial markets.[/expand]
WEALTHTRACK Episode #912; This program was originally broadcast on September 14, 2012.
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David Darst #912
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Guest Info
David Darst
Managing Director and Chief Investment Strategist
Morgan Stanley Smith Barney
Newsletter
“Price controls!” And you know they “have never worked.” That’s how Jim Grant described the Federal Reserve’s policy to further suppress interest rates to me this afternoon. The publisher of the must read newsletter, Grant’s Interest Rate Observer calls the Fed’s latest policy initiative a “big deal.” As Don Rissmiller of Strategas Research Partners told clients today, the Fed is “all-in.” It sure is! The Fed has made an open-ended commitment to buy $40 billion a month of mortgage-backed securities and extend its “Operation Twist” purchases of longer-term Treasury securities until it sees the labor market “improve substantially”. Plus the Fed is extending its zero short-term interest rate policy through mid-2015 or longer.
The markets loved the news. According to Bloomberg, both the S&P 500 and the Dow “climbed above their highest closing levels since December 2007, two months after both gauges set record highs.” Gold took off surging more than 2% to $1,772.10 an ounce. The dollar fell against most currencies.
Before I tell you about this weekend’s guest, I want to mention that this weekend we will have more of my interview with Jim Grant about the Fed’s moves on our WEALTHTRACK EXTRA feature on our website. It’s where we have previously posted exclusive podcasts and extended interviews with many of our Great Investors and Financial Thought Leaders. We are expanding our offerings and adding interviews you won’t see anywhere else, including questions exclusively for WEALTHTRACK EXTRA. This weekend we will also talk to this week’s guest, David Darst, who travels all over the world to talk to Morgan Stanley clients and frequently picks up on global trends ahead of the pack. One is his observation that emerging market investors will become a new source of demand for giant multinationals, what he calls the global gorillas, and will usher in a new golden age of stocks. Be sure to visit WEALTHTRACK EXTRA to hear more!
This week’s WEALTHTRACK guest is David Darst, Chief Investment Strategist at Morgan Stanley. David is an acknowledged expert on asset allocation and a prolific author. Among his most recent books is a best seller, The Little Book That Saves Your Assets, which I highly recommend. I’ll begin the interview by asking David about investors lack of trust in the financial markets, even in the face of the market’s recent stellar performance.
As always, if you can’t join us at the appointed hour on your local public television station, you can watch the show on our website as a podcast or streaming video. You can also find the One Investment picks of our guests and my Action Points there. For those of you who would like to see our program 48 hours in advance of the broadcast, you can subscribe to our WEALTHTRACK PREMIUM subscription service on the website.
Until then, we hope you have a great weekend and make the week ahead a profitable and a productive one!
Best regards,
Consuelo
Action Point
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One Investment
DARST: GROWING GLOBAL FOOTPRINT
Johnson & Johnson (JNJ)
Price: $68.15 on 9/12/12
52-week range: $60.83 – $69.75
“Johnson & Johnson is a company of 126 years. It’s had some problems. They’ve had some recalls, some product recalls, they’ve had some manufacturing issues. This is one of the great ethical companies of all time. They’ve just installed a new chairman succeeding Bill Weldon, who did a good job. They’ve installed, April 12 of this year, Alex Gorsky. He’s a U.S. Military Academy grad, he’s a native of Michigan, he’s one of five kids, he was posted in Greece, he was posted in Hawaii. He then went to work as a salesman for J&J, and 28 years later he’s the CEO. What is he doing? In short, they are basically taking their global footprint and now going to expand it.
You take companies that are the biggest consumer products companies in the U.S. They are about 34% emerging markets. You take the big beverage companies, okay, your big cola companies, they are about 50% emerging markets; you take the biggest toothpaste companies that we have, they are 50% in emerging markets. Johnson & Johnson is only 20% in emerging markets. They have a gross margin, that’s sales less cost of goods sold, of 70%. Their revenues this past year were $70 billion; their earnings were 20%, after taxes, $14 billion. They have $12 of debt, they have $70 billion of equity. Dividend is 3.5% and a tendency to grow the dividend over time. We think this is a classic example, and I am thrilled that it’s cheap. They can earn $5. It sells for 13 times earnings It’s towards the low end of its historical multiple.That’s the kind of company that’s emblematic of the themes that we’ve been discussing that we think will give you a long, a good return to buy in, it’s just cheap valuation.”
– David Darst
Transcript
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Archive
#834- 2/17/12
The difference between winning games, championships and super bowls with your portfolio. Morgan Stanley’s Chief Investment Strategist and asset allocation master, David Darst shares the winning strategies.
#751- 6/17/12
Two top investment pros. BlackRock’s Chief Equity Strategist and respected mutual fund manager, Bob Doll, and Morgan Stanley’s Chief Investment Strategist and asset allocation master, David Darst will discuss where to diversify your portfolios globally.
439 | 03-27-09
Three masters of critical investment strategies discuss their plans for financial survival and recovery. Morgan Stanley strategist, David Darst, author of the best seller, “The Little Book that Saves Your Assets” will talk about how to reallocate your assets during financial turmoil. “Wizard of Wharton” professor Jeremy Siegel will look at long term strategies to beat the stock market and BlackRock’s financial crisis expert Peter Fisher will report on the condition of the financial system.
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