For what I would call a generalized investment fund, I view the equity markets as marginally attractive. As I tried to explain in the speech, we have just gone through the longest decline in P/E ratios in over half a century. Many are saying the stock market is attractive, because over the last 50 to 70 years the average P/E was 15 to 16 versus 12 to 13 now; therefore we have a discount. I would argue that to compare historical P/E ratios.
over this period is inappropriate, given the fundamental structures of our system are so dramatically different in terms of leverage.
I try to remind people that at the beginning of the depression in 1929, US debt-to-GDP was 16% after 11 straight years of surplus. And at the beginning of 1942, World War II, after fighting depression for 12 years, we were at 41% debt-to-GDP, and we didn’t have any offbalance- sheet entitlement liabilities.
What we are looking at today is so far removed from any of these periods that I don’t think it is an appropriate comparison. If you have a company with slow growth expectations, peak margins and business volatility, what type of P/E is given it? Typically, it is a lower P/E.
This is analogous to what we are going through currently with slow economic growth, peak margins and a volatile business outlook. From day one of this of this recovery, I have argued that it would be substandard. The Federal Reserve’s estimates have been off by 100%.
We are holding a high cash level in FPA Capital Fund; it is up around 31% to 32%. Some could argue it should be higher. Our managers have been selling three- to four-times as much as they have been buying this year. The cash builds up. At some point in time, there is going to be a dislocation in the stock market.