Friday, February 13, 2009

Gold, McDonald's, and Stocks for the Long Run

The above images are from Yahoo-Finance.
They compare the price action of McDonald's stock and the exchange-traded fund for gold, GLD over 5, 2 and 1 year periods.

Some time ago, Forbes Magazine introduced the Big Mac Index, which correlated prices of a Big Mac in different cities in different countries. This basically utilized a Big Mac as a form of currency, just as gold bulls assert that gold is money.
Interesting to see how gold and McDonald's have traded so closely for so many different time periods. Of course, GLD pays no dividend, while MCD has a significant dividend. These differences add up and provide most of the intellectual support for the "stocks for the long run" hypothesis.
So far as stocks for the long run go, Credit Suisse (click for link) has an advertisement for stocks with the veneer of academia. It goes to great lengths to come to the tortured conclusion that stocks are about as cheap as ever. The argument is that stocks over many years have returned 6.2% over inflation, and that the current mild deviation from that trendline shows that we're near a bottom. Yet if the ultimate return for stocks is a mere 5% over trendline, then stocks are way overpriced. On price to dividend, price to tangible book value, price to earnings metrics, etc., stocks are nowhere near as cheap as they have been at major market bottoms.

Also, the CS writeup assumes reinvestment of dividends for stocks but almost certainly does not account for reinvestment of income from the competing asset classes it looks at, bonds and cash in the bank. And the fairer comparator to stocks should not be government bonds but rather corporate bonds. Finally, in prior years, stocks were expensive to buy and sell, whereas bonds and cash were not.
It's sad to see the same hucksters trying to persuade the same people at this time that the stock market is cheap. Compared to what corporate debt yields, stocks are not cheap now. Government bonds are not cheap, gold at $930 is not cheap, cash yielding nothing is not cheap; not much is cheap amongst financial assets. Perhaps oil in the $30s per barrel will be proven cheap.
We'll see: that's what makes the markets interesting.
Copyright (C) Long Lake LLC 2009

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