The thing about earnings which investors sometimes forget is that they do not automatically end up in the investor’s pocket, and that earnings which actually get paid out do. Hence the premium which dividend paying companies have over non dividend paying companies. If earnings are not paid out, then they must be used effectively. One of the ways in which an investor can figure out whether or not companies are deploying earnings effectively is to determine whether or not the company’s book value is growing. see this link from Hussman for a more in depth discussion.
On another note, there was a scare in the sovereign debt market last week as the solvency of several countries were called into question. EMD took a hit as a result and yields increased to around 7.5%. If this continues to drift down and hits the 10% mark, I will scale in.
EEM has now dropped for four straight weeks and is now resting at last September’s low. I am a buyer, but do not feel the fear yet.
Adding to PGF
Not much to report following the past few weeks, as markets held onto their trading ranges, leaving technical traders waiting for a breakout.
I have been looking to increase my equity exposure as the world heads out of recession, but have not added to any positions since adding to EEM a few months ago. I guess I too, am looking for the breakout (hopefully to the down side).
I did get the idea to add to positions which I felt are still undervalued despite the impressive run up, and found financials to be attractive. This is because investors are still wary of betting on banks to recover, but I have no doubt that financial institutions are here to stay and will continue to make massive amounts of money. Right now, the ETF PGF (which consists of preferred financial stocks) has PB ratio of only 1.37 but is yielding nearly 9%, which is much better than S&P’s PB of nearly 3.5 and yield of 2.11%. Of course, the reason why banks are still selling slightly cheaper is because investors are also not sure about the value of assets held on their balance sheets (and hence the true book value), but I think that the odds in favour of them not being as bad as what people thought are quite high. I would caution, however that PGF holds preferred shares with no voting rights and hence should behave more like bonds than equities. But what can I say.. I am sucker for dividends. For those wishing to gain true capital appreciation I would recommend taking a look at XLF instead (PB @ 1.4 and yield at 1.42%). If the market breaks to the downside I might sell my PGFs and move into XLF.