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The Price to Earnings (P/E) ratio was at 10.22 in the beginning of 1926 and reached 20.61 in 2009—an average increase of 0.84% per year. The highest P/E ratio was 136.50, recorded during the bull market in 1932, and the lowest was 7.07, recorded in 1948.

The P/E ratio has never gotten to a level less than 5, even through the Great Depression during the 1920s and 1930s and the 2008–09 global financial crisis.

The P/E rose dramatically over the past 80 years because investors believed that corporate earnings would grow faster in the future. However this is unlikely to continue in the future as corporate earnings are projected to be sluggish.

Source: Will Bonds Outperform Stocks over the Long Run? Not Likely” by Peng Chen, CFA of MorningStar Investment Management and Roger Ibbotson, Ph.D. of Yale School of Management and Ibbotson Associates

Related ETF:

SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

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The Dividend Yield dropped from 5.15% at the beginning of 1926 to just 1.10% at the end of 2000.

The Dividend Payout Ratio was at 46.68% the beginning of 1926 but decreased to just 31.78% at the end of 2000. The highest dividend payout ratio was in 1932 and the lowest was in 2000.On average the dollar amount of dividends after inflation grew 1.23% a year, while the dividend-payout ratio decreased by 0.51% per year.

Source: Long-Run Stock Returns: participating in the real economy by Roget G.Ibbotson (Professor of Finance, Yale School of Management) and Peng Chen(Ibbotson Associates)

Related ETF:

SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

Investors are better off to steer clear of all these technology companies that are brought public by Wall Street and yield-hungry venture capitalists.While in the past Silicon Valley venture capitalist firms used to fund high quality innovative companies today the majority of the VC firms’ sole aim to make money the fastest way possible and move on to the next hyped-up startup.

Instead of chasing the latest silly and meaningless ideas like greedy VC firms do, smart investors may want to invest their hard-earned money in companies that actually make products or offer services that helps the society live better. One strategy is to select companies that hold leadership positions in their respective industries.Generally these companies have been around for a long time and strive hard every day to maintain their edge over the competition. While there are thousands of such world-class companies ten are listed below for consideration. As the market continues to take investors on a roller-coaster ride everyday one can add these stocks to their portfolios in a phase manner and hold them for the long-term.

1.Company: BASF AG (BASFY)
Current Dividend Yield: 4.53%
Country: Germany
Investment Rationale: The largest chemical maker in the world.

2.Company: ABB Ltd (ABB)
Current Dividend Yield: 4.20%
Country: Switzerland
Investment Rationale: A leader in power and automation technologies.

3.Company: LaFarge (LFRGY)
Current Dividend Yield: 3.79%
Country: France
Investment Rationale: One of the top cement makers in the world.

4.Company: Linde AG (LNEGY)
Current Dividend Yield: 2.09%
Country: Germany
Investment Rationale: A leading supplier of industrial, process and specialty gases.

5.Company: Nestle SA (NSRGY)
Current Dividend Yield: 3.65%
Country: Switzerland
Investment Rationale: The world’s biggest food company.

6.Company: Autoliv (ALV)
Current Dividend Yield: 3.29%
Country: Sweden
Investment Rationale: One of the top integrated automotive safety system suppliers.

7.Company: Empresa Nacional de Electricidad (EOC)
Current Dividend Yield: 4.10%
Country: Chile
Investment Rationale: One of the largest electricity generating companies in Latin America.

8.Company: Teva Pharmaceuticals Ltd (TEVA)
Current Dividend Yield: 3.06%
Country: Israel
Investment Rationale: The world’s largest generic drugs maker.

9.Company: Diageo (DEO)
Current Dividend Yield: 2.77%
Country: UK
Investment Rationale: The world’s largest spirits maker.

10.Company: Novo Nordisk (NVO)
Current Dividend Yield: 1.74%
Country: Denmark
Investment Rationale: Leading global diabetes care company.

Note: Dividend yields noted are as of May 23, 2012

Disclosure: Long ABB, LFRGY

I recently came an interesting research report titled “Will Bonds Outperform Stocks over the Long Run? Not Likely” by Peng Chen, CFA of MorningStar Investment Management and Roger Ibbotson, Ph.D. of Yale School of Management and Ibbotson Associates

The following are some of the key takeaways from the report:

1.The table below shows the performance of the S&P 500 Index, the Barclays Capital U.S. Aggregate Bond Index, the Ibbotson U.S. Intermediate-Term Government Bond Index, and the Ibbotson U.S. Long-Term Government Bond Index over various time periods:

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The average annual stock returns have been poor relative to bonds for the past 10 years and mediocre for the past 20, 30, and even 40 years relative to bonds.

2.Over the very long term however, stocks easily beat bonds. The chart below shows the return of various asset classes over the 85-year period since 1926:

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3.U.S. stocks’ compounded total returns over other long periods are shown below:

January 1825–December 19251 7.3%
January 1926–December 2010 9.9%
January 1825–December 2010 8.5%

With relatively high returns stocks outperform bonds over long periods.

4.For the 40-yer period from 1971 thru 2010, the majority of the bond returns came from yields and only a small portion from capital gains. In contrast, stocks generated the most return from capital gains and only some of the returns from dividend yields.

5.Given the current low-yield environment projected to continue into the future, it would be almost impossible for bonds to generate the same amount of capital gains as they did in the past.

6.In 2010, the dividend yield on the S&P 500 was 2.03%. If stocks produce an average of even 2% in capital gains per year then the total return of stocks per year will be 4.03%. So one can expect stocks to beat bonds going forward.

7.Stocks tend to outperform bonds over long periods. However stocks are riskier assets compared to bonds even when held for very long time periods.

Source: Will Bonds Outperform Stocks over the Long Run? Not Likely” by Peng Chen, CFA of MorningStar Investment Management and Roger Ibbotson, Ph.D. of Yale School of Management and Ibbotson Associates

Related ETFs:
iShares Lehman TIPS Bond Fund (TIP)
iShares Barclays 20+Year Treasury Bond Fund (TLT)
SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

Today though mining is the major industry in Chile, financial services account for about 16% of the GDP according to a Doing Business in Chile report by KPMG. From a size perspective, the country’s total banking assets is equal to the assets of one large Brazilian bank.

Some of the reasons to invest in Chilean banks/financial sector include:

• Chileans are big savers with the current savings rate standing at an astonishing 21.6%.
• The country’s has a mandatory saving system for all dependent employees.
• Due to the lack of company retirement plans and limited government pensions plans, most Chileans have private pension plans which are managed by five asset management firms.
• The financial sector also benefits from the Chilean government running a regular budget surplus for the past few years.
• With the structural changes in the banking sector in 1997 many foreign players have entered the market.
• Under the constitution, both domestic investors and foreigners have the same equal rights.

The Top 10 Banks in Chile are listed below:

Source: Doing Business in Chile, KPMG

Founded in 1978, Banco Santander(SAN) is the largest bank in Chile. Banco Santander is a unit of the Santander Group of Spain. The second and third largest banks are Banco de Chile (BCH) and Banco BCI respectively.Corpbanca (BCA) is the Chilean oldest bank.Other foreign-owned banks with strong presence in the country include Banco BBVA (unit of Spain’s BBVA), Scotia Bank(unit of Bank of Nova Scotia of Cananda) and Banco Itau (unit of Itau Unibanco of Brazil).

Investment services provider Administradora de Fondos de Pensiones Provida SA (PVD) also offers an option to invest in Chile’s financial services sector.

Disclosure: Long BCH and BCA

The BPO industry continues to grow as large companies especially in the developed world try to maintain high profits by cutting costs. Among the emerging countries, India is the main destination for companies looking to outsource IT functions though other countries are trying to become competitive. The following chart shows the tremendous growth of the IT-BPO revenues in India:

Source: NASSCOM

Key highlights from a report on the NASSCOM site:

Milestone year for Indian IT-BPO industry-aggregate revenues cross the USD 100 billion mark, exports at USD 69 billion.

Within the global sourcing industry, India was able to increase its market share from 51 per cent in 2009, to 58 per cent in 2011, highlighting India’s continued competitiveness and the effectiveness of India-based providers delivering transformational benefits.

The industry continues to be a net employment generator – expected to add 230,000 jobs in FY2012, thus providing direct employment to about 2.8 million, and indirectly employing 8.9 million people.

As a proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an estimated 7.5 per cent in FY2012.

The industry’s share of total Indian exports (merchandise plus services) increased from less than 4 per cent in FY1998 to about 25 per cent in FY2012.

The Top 15 Global OutSourcing IT-BPO Service Providers Based on Revenues in 2009 are listed in the table below:

Source: World Investment Report 2011, UNCTAD

U.S. IT giant IBM (IBM) employs over 426,000 workers globally. Since the implosion of the dot com bubble IBM shifted most of the jobs from the U.S. to other countries especially to India. Today the company has more employees in India than in the U.S. IBM’s focus on the growth of BPO services and the shifting of jobs to overseas cheaper locations has helped its earnings which in turn has contributed to the strong performance of its stock over the past few years.

IBM’s competitor Hewlett-Packard Company (HPQ) has over 324,000 employees in over 50 countries. More than one-third of its employees in the HP Services unit are based in India. Indian outsources Tata Consulting Services and Wipro (WIT) employ thousands of workers both in India and overseas and are large enough to appear in the global ranking list. All the other firms listed above also have some form of presence in India.

Disclosure: No Positions

S&P 500 Index: 3.0 %
CAC 40: -4.8%
DAX: 6.3%
FTSE 100: -5.5%
IBEX35: – 23.3%
Bombay Sensex: 4.5%
Shanghai: 6.6%
Bovespa: -3.9%

The FTSE Athex index of Greece reached a 22-year low this week. Spain’s IBEX35 index has reached levels reached during the peak of global financial crisis in 2009.

Financials have been hit especially hard this year as the crisis in Spain, Greece, Italy in Europe continues and many banks are still dealing with the impact of heavy losses from the credit crisis of 2008. The following chart shows the YTD performance of exchange-listed foreign bank stocks traded on the US markets:

Click to enlarge

Source: BNY Depository Receipts

The worst performers so far this year are Argentine, Spanish and Greek banks. Brazilian banks Banco Bradesco(BBD) and Itau Unibanco (ITUB) are also down by double digit percentages this year.

Disclosure: Long some of the banks shown in the chart

Exxon Mobil, the highest ranked firm in the list, alone made a profit of $41.1 billion, up 35% from previous year. The oil giant’s dramatic rise in profit is simply the result of sky-rocketing oil prices in 2011.

Meanwhile since the global financial crisis millions of workers have lost their jobs and many continue to remain unemployed. In April, the unemployment rate stood at 8.1% with some 12.5 million Americans unemployed according to official BLS data.

As U.S. companies’ profits soar many pay a higher amount of their earnings in dividends. Since most of the outstanding public stocks are held by the wealthy the majority of the dividend payments go to them. However for many years labor’s share of income has declined. In fact, according to a report by the Council on Foreign Relations labor’s share of income has plummeted since 2009 while personal dividend income as a percentage of disposable income has soared.

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Source: Where Have All the Profits Gone? Karl Marx Could Have Told You, CFR

The decline of labor’s share of income is not beneficial to the country in the long run.

Is gold near a bottom?

Gold’s hasty demise from safe haven to risky asset

Defying the Odds – Why the French Economy Works Surprisingly Well

If Greece goes: An exit is likely to shatter faith in the eurozone’s integrity for ever

How Much Is Enough?

Eurozone crisis: what if … Greece leaves the single currency

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Winner in the “Best of Russia” photography contest, 2011

Courtesy: Photo Gallery: Moscow from on High, Der Spiegel

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Source: A global search for dividends, Fidelity Investments

From the Fidelity Viewpoints interview of Ramona Persaud, manager of the new Fidelity Global Equity Income Fund :

Q: Why have non-U.S. stocks historically tended to deliver higher dividend yields?

Persaud: There seem to be specific factors on a country-by-country basis that help explain the prevalence of higher yield outside the United States. For example, shareholders in parts of Asia where there is high family ownership often demand cash returns from their equity investments. In the U.K. and Chile, pension funds have had large ownership stakes and have advocated for high payout rates. In Brazil, there is a minimum 25% payout of earnings set by law. In Australia and New Zealand, dividends are often not subject to double taxation, as they are here in the U.S., so that incentivizes high payout ratios. Other examples are found in countries with a history of hyperinflation—such as Indonesia, Argentina, and Germany—where above-average dividend yields suggest that investors demanded high payouts to help offset inflation and earn real returns. So from a global perspective, there are great yield opportunities across the world, and this includes the United States, as I believe income is at a cyclical low here, with conditions ripe for a rebound.

Ten foreign stocks currently paying dividends of over 5% are listed below for further research:

1.Company:CorpBanca SA (BCA)
Sector: Banking
Current Dividend Yield:7.71%
Country: Chile

2.Company:National Grid PLC (NGG)
Sector: Electric Utilties
Current Dividend Yield: 5.61%
Country: UK

3.Company: Chunghwa Telecom Co Ltd(CHT)
Sector: Telecom
Current Dividend Yield: 6.16%
Country: Taiwan

4.Company:City Telecom (CTEL)
Sector: Telecom
Current Dividend Yield: 7.05%
Country: Hong Kong

5.Company:Philippine Long Distance Telephone Co (PHI)
Sector: Telecom
Current Dividend Yield: 5.85%
Country:Philippines

6.Company: Vodafone Group PLC (VOD)
Sector: Telecom
Current Dividend Yield: 5.35%
Country: UK

7.Company:Companhia Siderurgica Nacional (SID)
Sector:Basic Materials
Current Dividend Yield: 6.26%
Country: Brazil

8.Company:Administradora de Fondos de Pensiones Provida SA (PVD)
Sector:Investment Services
Current Dividend Yield: 8.38%
Country: Chile

9.Company:Alumina Ltd (AWC)
Sector:Metal Mining
Current Dividend Yield: 6.42%
Country: Australia

10.Company:Australia and New Zealand Banking Group Ltd (ANZBY)
Sector:Banking
Current Dividend Yield: 6.60%
Country: Australia

Note: Dividend yields noted are as of May 16, 2012

Disclosure: Long BCA

Source: Euro Briefing, April 2012, Institute of International Finance

U.S. banks are better performers than European banks and even the banks in emerging markets as shown by the green line. The key takeaway from the chart is that the gap between U.S. and Euro zone bank stock prices continues to widen since 2010. European banks continue make lower lows while U.S. banks have recovered swiftly. One of the reasons for the disastrous performance of Euro zone banks is that they failed to raise significant capital since the credit crisis unlike their American peers.

UK ensnared in eurozone ‘mega crisis’, says Bootle

All Work and Low Pay – Getting By Without Minimum Wage in Germany

The psychology of debt

Share buybacks: the other way company managers rob you

How to pay less tax

‘Clear evidence of a bubble is lacking’—really?

Eurozone crisis “irrelevant” to global growth

Church in Ecuador

From the report:

Both exchange companies are contending with similar forces: an overall slowdown in trading, the rise of smaller public exchanges such as BATS and Direct Edge, and the increasing number of trades being executed “off exchange”—either at wholesale brokerages or on private trading venues known as dark pools.

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The general public is already wary of investing in equities due to the recent credit crisis, continuing failure of banks, collapse of the housing market, flash trading, resurgence of high-risk taking by banks using complex derivatives, the never-ending European debt crisis and a myriad of other factors. Added to this list of negative reasons is the rise of dark pools and off exchanges. It is not clear how much markets are impacted due to the new ways of trading. So investors should not read too much into the trading volumes on the organized US exchanges.

Related:

Duration of Stock Holding Periods Continue to Fall Globally

In February of this year Caterpillar shut down its plant in London, Ontario and moved it to Muncie, Indiana where labor costs are cheaper. From the article Caterpillar Closes Plant in Canada After Lockout in The Wall Street Journal:

MUNCIE, Ind.—Bulldozing its way through a high-profile dispute over wages, Caterpillar Inc. CAT -0.52% said Friday it will close a 62-year-old plant in London, Ontario, that makes railroad locomotives, eliminating about 450 manufacturing jobs that mostly paid twice the rate of a U.S. counterpart.

Caterpillar’s decision, ending a standoff with locked-out workers huddled around barrels of burning scrap wood outside the London factory gates, may benefit another downtrodden manufacturing city: Muncie, Ind., where Caterpillar last year opened a locomotive plant and where it is trying to fill jobs at about half the pay workers in Ontario received. At a job fair in Muncie Saturday, Caterpillar will be offering jobs at that plant at wages ranging from $12 to $18.50 per hour. Wages for most workers at the Ontario plant are about 35 Canadian dollars an hour (US$35.03).

In addition to lower labor costs, companies are also benefiting from lavish incentives offered by governments to lure jobs and stimulate growth. The article added:

When Caterpillar agreed to revitalize a former Westinghouse electrical-equipment plant in Muncie that had been idle for 12 years, state and city officials provided incentives that could reach about $28 million, assuming Caterpillar meets its goals for adding as many as 650 jobs. Those incentives include tax credits, infrastructure improvements and worker-training funds.

If Caterpillar increases its investment in Muncie to replace the Ontario capacity, Muncie officials said it may qualify for further incentives. “We’re going to do all we can to help them,” said Jay Julian, chief executive officer of the Muncie-Delaware County Economic Development Alliance.

From an article in The Vancouver Sun discussing the decline of manufacturing in Canada and the resurgence of manufacturing in the U.S:

Canada has suffered a noticeable decline in manufacturing jobs since the 2008 recession, with employment in the sector falling to 1.76 million last year, down from more than 2 million in 2007. Today, manufacturing output in Ontario is one-fifth below the peak recorded in 2000, although it’s growing again after a sharp contraction in 2009. Even though manufacturing in Canada is in the midst of a cyclical rebound, as measured by both shipments and output, job gains have been few and far between.

The reason why Canada has become uncompetitive and Caterpillar chose to close the plant in Ontario is shown in the following graph:

Source: Is the U.S. economy regaining its luster?, Fidelity Viewpoints

Dirk Hofschire, Senior Vice President of Asset Allocation Research at Fidelity Investments noted in the latest edition of Fidelity Viewpoints:

A second development is we have had greatly improved U.S. competitiveness in the manufacturing sector. This is an area where some of the low energy costs for manufacturers is helping. The real story is that, over the past decade we’ve had limited wage gains, really strong gains in worker productivity, and the dollar has declined in value. All of these things together have led to a large decline in unit labor costs here in the U.S. As a result, there’s a big increase in our competitiveness in this sector, relative to other countries around the world. We’re starting to see evidence of companies making more manufacturing investments here in the United States, and even some examples of companies bringing production back onshore.

In summary, though the high tech sector, green energy industry and others have been hyped to be the next job engines it may finally be the good old manufacturing sector that helps the economy get back on track. Regions such as the Greenville/Spartanburg corridor in South Carolina are already emerging as the Mecca of manufacturing in the U.S.

However research reports from HSBC and Nomura suggests that there could be cautious optimism towards European bank stocks according to an article in Euromoney. HSBC notes that international investors are becoming less negative towards Spain and Italy since they are underweight financials in those countries compared to all other regions. Within financials, they observe an increase in holdings of banks.

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Source: Are European banks poised for a rebound?, Euromoney

Quoting the Nomura research report the article noted “while lending from banks remains weak, this is due to a lack of credit demand from solvent borrowers that want leverage rather than banks’ inability to supply.” A survey of loan officers also showed that loan demand from corporations are expected to increase in the next two quarters while households will continue to reduce credit demand though at a lower rate.

From an investment perspective, among the exchange-listed European banks traded on the US markets, National Bank of Greece (NBG), Banco Santander (STD), Banco Bilbao Vizcaya Argentaria (BBVA) and Credit Suisse (CS) are in the negative territory so far this year.

Investors may want to consider UK’s Barclays(BCS), HSBC (HBC) and Germany’s Deutsche Bank (DB). HSBC especially has a strong global footprint and is in a relatively better position than other British banks. Of the OTC-traded banks, Sweden’s Nordea Bank AB (NRBAY), Svenska Handelsbanken AB (SVNLY), Swedbank (SWDBY) are also worth looking into at current prices.

Disclosure: Long SWDBY

Source: Warning Signs Rise for Big Lenders in Asia, The Wall Street Journal

The article also noted:

To be sure, Asian banks are adequately capitalized, economic growth remains faster than in the U.S. and Europe, and nonperforming loans are rising from very low levels.

Nonperforming loan ratios are 73% below their long-term average in Asia, with some countries at 1% or lower, according to brokerage CLSA Asia Pacific Markets. CLSA has said it expects nonperforming loans to turn sharply higher this year.

U.S. banks are now stronger than European banks. However Asian banks are in a much better position than both U.S. and European banks. Banks in Asia are highly regulated and follow conservative business practices with very limited exposure to derivatives and high-risk lending. Hence U.S. investors looking to invest in foreign bank stocks can consider some of the Asian banks shown below:

Singapore’s DBS Bank (DBSDY) and United Overseas Bank (UOVEY) appear on the World’s 50 Safest Banks ranking by Global Finance magazine and also in the Bloomberg Markets’ latest annual ranking of the world’s strongest banks.

Disclosure: No Positions

The following chart shows the Biggest Nuclear and Hydro Power Generators in Europe and Russia:

Click to enlarge

Source: Fortum, Investor/Analyst Material, May 2012

Some of the above utilities that trade on the US markets are listed below with their current dividend yields:

1.Company:Electricite de France SA (ECIFY)
Current Price: $4.18
Current Dividend Yield: 7.19%
Country: France

2.Company:E.ON AG (EONGY)
Current Price: $20.76
Current Dividend Yield: 6.29%
Country: Germany

3.Company: Enel (ENLAY)
Current Price: $3.10
Current Dividend Yield: 16.75%
Country: Italy

4.Company: GDF Suez (GDFZY)
Current Price: $22.42
Current Dividend Yield: 9.14%
Country: France

5.Company: RWE AG (RWEOY)
Current Price: $42.16
Current Dividend Yield: 6.25%
Country: Germany

6.Company: Iberdrola SA (IBDRY)
Current Price: $18.17
Current Dividend Yield: N/A
Country: Spain

7.Company: Fortum (FOJCY)
Current Price: $4.17
Current Dividend Yield: 6.31%
Country: Finland

8.Company: Verbund AG (OEZVY)
Current Price: $5.36
Current Dividend Yield: 2.69%
Country: Austria

9.Company: EDP Energias de Portugal SA (EDPFY)
Current Price: $28.62
Current Dividend Yield: 8.46%
Country: Portugal

10.Company: Gas Natural (GASNY)
Current Price: $2.90
Current Dividend Yield: 6.32%
Country: Spain

11.Company: Norsk Hydro AS (NHYDY)
Current Price: $4.54
Current Dividend Yield: 2.96%
Country: Norway

Note: All prices and dividends are as of May 4, 2012

Disclosure: Long EONGY, FOJCY, RWEOY

Disclosure: No Positions

The following are few of the interesting charts related to US stocks found in the Barclays Equity Gilt Study of 2011:

Click to enlarge

a. Real Investment Returns of Asset types by Decades

b. Comparison of Returns with and without Reinvestment of Income

c. US Real Return on Equities with Gross Income Re-invested

Download: Barclays Equity Gilt Study 2011 (full version in pdf)

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The U.S. and China consume more than four times the power consumed by the next largest market of Japan. With has a population of about 1.1 billion India’s power generation capacity is much lower than that of China. Though Russia has a small population it produces more electricity than India.

Source: Fortum, Investor/Analyst Material, March 2012

Disclosure: Long Fortum