Reasonably Thinking

Last week, I argued that equities continued to look overvalued and consequently sold my stake in Novartis NVS.  Since then, the market has advanced another 2% higher over the past five trading days, and I continue to believe that the current valuation is unsustainable.

Consider…

From a P/E perspective, the Shiller PE ratio, the ratio that averages the previous ten years to account for economic cycles, is 24, whereas a more attractive P/E multiple would be 12-15.  Of equal concern is the abnormally high level of corporate profit margins.  Whereas profit margins typically range from 5.5-7.5% of GDP, profit margins now exceed 10.5%.  A decline in corporate profits will be the likely outcome.  Since the timing of both of these is uncertain, my tactical movements remain tempered–as the data and facts evolve, so too do my opinions.

Sold Viacom

To trim my equity position, I sold my stake in Viacom VIAB.  I originally purchased Viacom back in November, arguing that its content investments were not yet reflected by ratings increases, which drive revenue and ultimately shareholder appreciation.  This decision turned out well, netting me a 32% gain in less than six months.

With the recent equity sales of Novartis and Viacom, cash is now one of my biggest positions.  If equities continue to advance, I have additional positions that I can prune.  Other choices include writing covered calls and buying market puts.