“I step back and look at a 1.7% bond, and to me that’s like picking up dimes in front of a steamroller, a very inadvisable policy,” says Leon Cooperman, Omega Advisors chairman & CEO, explaining what he looks at to find value in his investment decisions and disclosing his stock picks.
Video and computer transcript below:
lee, thank you for stickingaround, chairman and ceo of am — omega advisors. why did you want to talk about these chats? basically, a new environment, where if you like to buy low, you get excited. i want to share with your audience some things i look at in arriving at a conclusion. 7% 10 government bond rate 4% is giving off a message none of us should ignore. we’re in a world of lesserreturns privilegely than we’ve been used to historically. that doesn’t mean thetock market is unattractive. i look at the alternatives available to me, cash, government bonds, high yield bonds, equities, i’ve been of the view and continue, equities represent the best wheel house of the neighborhood and we don’t know if it’s a good neighborhood or bad neighborhood, important point. there’s a tremendous amount of uncertainty incorporated in prices. i think the economy is okay, not great, okay. it’s not a feel-good economy, as i say.with the united states, the labor force grows 2% a year andlabor force itself grows 1% a year and need 3% growth to dentunemployment and not getting that, getting 2%. 99% versus 1%, that type of dialogue continues. the economy is growing, 2, 2 1/2% per annum, looking over the next four quart e, profits rise 5%, dividends rise. i think the economy is on the plus side.secondly, i don’t know if you have these charts available, we’re in an environment of near zero short term interest rates. low long term interest rates, have central banks all over the world.historically they said the central bank writes the market for wall street. and the head of the central bank is telng us, he wants more growth and inflation. money supply versus fed funds.that’s not my chart actually. you didn’t even order that chart? no.exhibit 3, if we can coordinate here, i guess we’reuncoordinated, basically, valuation, if we can give you a little glimpse, if we can get it up, i don’t know, the last 50 years, the s&p multiple has averaged about 15 times. when the multiple averaged 15 times, the 10 year u.s. government bond rate average, 6.67%. we’re sitting here now, the multiple on the market is under 5 times our estimate earning somewherearound — could you finish? for 50 years, the multiple on the market was 15, the multiple in the market was 15, the 10 year government bond was 6.67. the 10 year government bond is 7% and the multiple in the market is 12.5. over half the s&p companies today yield more than bonds. that condition has not existed for over 50 years. investors are booking into theirexpectations very conservative expectations. they may have a very optimistic set of expectations for facebook but for the market as an a whole, they’re quite depressed expectations. for the last five years, the public has been a significant liquidator of equity holdings and significant buyer of bonds. 7% bond, to me, like picking up dimes in front of a steamroller, very very inadvisable policies. historically, the 10 year u.s. government bond normal times has yielded in line with nominal gdp. what does that mean? if real growth is 2-3, inflation say 2-3 as a number. that means nominal gdp would be growing 4-6%. that means basically in a normal environment we’ll get to over the next two or three years, the 10 year government bond couldgravitate to 4 or 5, 6%. at 4 or 56%, you have a significant capital loss in your holdings. i don’t think people appreciate that. right now, it’s a fear factor driving them towards fixed income. equity values are as attractively valued than anything i’ve seen. there have been 39 deals of $300 million or more of market value. the average premium was 35, closer to 40% over the last sale. we have to understand, when you buy a share in business, you’rebuying your share of brick, machine, building power and that’s been more expensive in the market today versus history and interest rates. you want individual names. what do you want?it’s almost a to z. we’d like to find companies in two categories, multiples of earnings, less than the growth rate you will get or selling at a significant discount what we perceive to be provide market value. our touchstone has been most publicly traded companies have two values, market values at a thousand shares and private values that a potential strategic investor pay for an entire business. we like to find private companies to discount public company value for discount for change. we missed 39% of takeovers and got two. one is 100% and sunoco. we had a decent sized position there. sunoco.takeovers we only had two put before the takeover is done, wewill have more than two. a name we like, apple, 11 timesearnings, growing, we think, at 17%. aig, selling around nine times our estimate of earnings. we think a growth rate camble to that. — comparable to that. capital, seven timesearnings,growing about that rate. interesting health care business, express scripts selling at 13 times earnings, we think 20% a year. google. we talked this morning about facebook, google, 14 times earngrowing, 18% per annum. halliburton, growing 12% a year. no shortage of names. metlife? metlife, right.metlife — qualcomm. qualcomm. i think you bought morejpmorgan stock. we didn’t have time to go into. that is something we need to go into. it was a bet. wasn’t bet your company bet. they earn 15, $20 billion, a $2 billion loss, maybe a bit more. stocks at six times earnings. you know. jamie was on a pedestal, got knocked off the pedestal, still a hell of a ceo.you have a decent yield. the yield is probably 3 1/2%, i’m guessing presently. the alternative is keep your money in money market earnings, earning zero. there’s no shortage of stocks. not an environment to be on margin, borrow money to buy stocks. there is an amount of uncertainty around the world.you have to make certain assumptions. does not have a recession and china, hard landing and growth decelerates to 7, maybe 8 opposed to higher numbers you have seen previously. ultimately, the ecb, with the imf, with germany, with france, with the united states, with china and japan, they will deal with the problems in europe. greece will ultimately exit theeuro. when they exit the euro basically, they will have put inplace a wind fence to protect the system. those are judgments you have to make. if those judgments are wrong, then you have to rewrite your script.