Tuesday, April 11, 2006


Your head, sir?

Down 0.2 percent yesterday and down another 0.3 percent today. Last week John Hussman wrote something quite interesting that I had suspected, but didn't have much data to collaborate:

Among stocks belonging to the S&P 500, those rated “A” or “highest quality” have gained just 1.01% year-to-date. In contrast, companies rated “B -” or “lower quality” have gained 10.17% year-to-date. At the bottom of the quality barrel, those S&P 500 companies rated “C” or “D” for “lowest quality” (or in reorganization) have gained a striking 16.90% year-to-date. The pattern is the same in the Russell 2000, where the highest, lower, and lowest quality stocks in the index have posted average year-to-date gains of 7.38%, 13.03% and 20.09%, respectively....One need not predict an abrupt end to this low-quality rally to recognize that it's dangerously mature. Over the past 3 years, the average price/revenue and price/book ratios of the lowest quality stocks have virtually doubled (from 1.26 to 2.57 times revenues, and from 1.67 to 3.15 times book value). In contrast, the valuations of the highest quality stocks have remained constant or actually decreased (from 2.16 to 2.17 times revenues, and from 3.95 to 3.64 times book value).

If the past few days are any indication, small cap investors are getting their heads handed back to them. So far my portfolio is holding up reasonably well, in relative terms anyway. However, I am very aware that my portfolio isn't exactly...umm...shall we say.. stacked with blue chips. So for now, to be on the safe side, I'm going to get a bit defensive and refrain from making any purchases until the dust has settled.

Comments: Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?