Posted on 06/22/2013 6:37:12 AM PDT by SeekAndFind
NEW YORK – Stocks dropping across the globe. Six weeks of gains wiped out in the U.S. The biggest drop in the Dow Jones industrial average in 1 1/2 years.
It’s easy to give into panic and sell along with everyone else. But there is a good case for staying calm.
Three reasons you may want to hold on to your stocks:
– STRONGER ECONOMY: Nothing kills a stock rally like a recession. Four of the five previous bull markets ended as investors sold during a recession, or anticipated one.
Are we anywhere near a recession now? Quite the opposite. The economic recovery seems to be gaining traction.
Americans spent more at stores in May, despite higher payroll taxes. Sales of previously occupied homes last month topped five million at an annual rate for the first time in 3 1/2 years.
Better yet, the jobs picture is brightening. Since October, employers have added an average of 196,500 jobs a month, up from 157,000 a month in the previous eight months. And unemployment, still relatively high at 7.6 percent, looks likely to head down. The Fed said Wednesday that it could fall as low as 7.2 percent this year, then down to 6.5 percent next year.
One warning: Recessions are difficult to predict, so anything is possible.
– STOCKS SEEM REASONABLY VALUED: Major U.S. stock indexes have dropped more than 2 percent this month even though corporate profits are at a record high.
All else being equal, investors who buy now could be getting stocks at a good price.
One way to value stocks is to look at their price-earnings ratio. To calculate a P/E, you divide the price of a stock by its annual earnings per share. A company that earns $4 a share and has a $60 stock has a P/E of 15, for instance. The lower the P/E, the cheaper the stock.
The Standard & Poor’s 500 index is trading at 16.1 times earnings per share over the past 12 months, according to S&P Dow Jones Indices, which oversees the index. The average since World War II is 17.5. Translation: Stocks are slightly cheaper than the long-term average now.
To be sure, there are other ways to value stocks, and not all are as encouraging.
Still, it’s clear that stocks are not wildly overpriced. And if you believe the economic recovery will continue, earnings are likely to grow, too.
– CASH APLENTY: Don’t be surprised if companies launch yet another round of stock buybacks, which could lift stock prices. Fewer shares outstanding means higher earnings per share.
The impact of stock buybacks on the market the past four years has been big.
Nearly every other large player in the stock market – insurers, brokerages, state and local governments, pension funds – has been selling. And yet stocks have more doubled from their recession lows. A big reason is that U.S. companies, not counting financial firms, have bought more than $1 trillion of their own stock in the five years through 2012, according to the Federal Reserve.
Depending on your point of view, the outsize role of buybacks is either good or bad.
Skeptics say buybacks show companies don’t have anything better to do with their money, a bad sign for future profits. Stock bulls say it shows that the people who know their companies better than anyone else – corporate executives – think their stocks are a bargain, and so should you.
Whoever is right, buybacks are likely to continue because companies have plenty of firepower. Companies in the S&P 500 have $1 trillion of cash, according to S&P Dow Jones. The cash hoard has never been higher.
The stock market is like gambling, sort of like Roulette if you ask me.
A better measure of a company's value is its "P/D ratio" -- the ratio of its price to its dividends. Earnings can be manipulated and mis-reported, but once a company pays a cash dividend then the investor has at least that bit of confidence in the company.
You make some good points, but there has been very few cases of financial statement fraud since the advent of Sarbanes-Oxley. A better reason to take P/E with a grain of salt is that the expected E becomes terribly inflated just before a recession.
This article misses the whole point that most of that $ is coming from Fed printing which in turn is forcing other countries to print.
I’m pretty sure on the stocks I’m familiar with earnings=dividends, and when Ive calculated the PE ratio it matches.
What percent of stocks have P/Ds at great variance from P/Es?
I find this to be a naïve article in that it doesn’t mention Bernanke indicating an end to the Fed buying of 85 billion a month in securities.
That is the reason the stock market went up, because the Fed was artificially keeping bonds low. There was no place else for an investor to go to make money on his money.
So, stocks are inflated.
Also, the economy itself is a lie. The Fed said that they’d stop QE when employment improved and inflation stayed low. Employment is artificially low due to huge numbers dropping out of the job market and huge numbers settling for part time jobs. Therefore, UE6 is the real unemployment number and not UE3. Inflation also isn’t real because the new means of counting inflation removes fuel and food from consideration. In fact, the Obama Administration is hinting that the real way to count food is by counting basket items only if there is no cheaper replacement. So, if steak is up, then they can say that isn’t real because you should lower your sights and choose cheaper roast....burger....guts....whatever. If Post Toasties is up, then you should be buying generic oatmeal.
Voila! No Inflation.
In other words, this is all a lie. The stock market is NOT healthy. It is a guy in a coma on life support. They’ve added a recording of his old voice and are saying, “See, he’s talking.”
I have the best possible reason not to panic about stocks: I’m out of the market. I do not wish to profit from crony capitalism as Obama and his allies choose economic winners, even on the rare occasions that those winners survive. I do not wish to lose in a game that is now rigged. I do not wish to put my money into a stock market that will inevitably fund Obama’s destructive agenda. Given those overwhelming reasons, I chose to stay out of the game.
All I see from my desk is company after company laying off...
Company after company buying back their stock, but company officers and executives after company officers and executives selling theirs. What’s wrong with that picture?
Maybe you aren’t reading the financial statements correctly. Except for small cash businesses, it’s rare for a company’s earnings to equal its dividends. For that to happen, a company would have to pay out 100% of its profits to its shareholders without retaining any earnings for expansion, future investments, etc.
There was a great article in one of the big financial magazines (Forbes, I think) recently about an interesting phenomenon that is happening in corporate America. There are a number of CEOs of prominent companies who are simply cashing out and walking away from their careers even when they are still in their prime age for that line of work (mid-50s). The common theme among a lot of them is that they simply don’t enjoy working in an organization where the drive for meet shareholders’ expectations takes away their creativity and their ability to do a lot of things they enjoy doing.
To heck with stocks for the time being. The FED manipulation of the markets has been so grotesque that the DOW, for example, now at 14,800, should truthfully be at anywhere from 10,000 to 11,000, *before* any major correction takes place. With a correction, who knows? It could get ugly.
The bond market is leading the way on this, with money flowing out at an impressive clip. However, yields, which typically lag, are lagging a lot longer this time. This may indicate a “yield ceiling”, which would happen when there is a preference to *not* issuing bonds in the first place, instead of paying higher yields.
Think of it like buying a car on credit. If the car costs $20k, with 10% interest, even if the dealer knocks off $2k from the price tag, then raises the interest to 20%, it is not a better deal. It would be better to spend your money elsewhere.
And bonds behave more like the rest of the economy. This juggling act between deflation and inflation is going to be harsh when it falls apart.
You’re kind of correct. I tend to ignore the paper numbers and look at the return on my investment which I think of as MY price-to-earnings ratio.
The Shock Market is rigged, but where yo gong to go? Cash? The PPT will always be there to shore things up.
I'd think this is good. Those profits people took can be spent. Income taxes will be paid on capital gains, a lot of it short term....helps the feds balance the budget, helps the states too.
Who loses? Why the little guy who thinks he has the information necessary to make sound decisions.
What I did is buy a few penny stocks that didn't decline in the selloff. Didn't spend much more for them than I would for a Monopoly game. I just don't take it seriously or put real money in it. It's a game, and I'm a player who doesn't have the complete rule book needed to make the best decisions.
I find your comment to be naive in that it assumes the article purports to analyze market factors from a sincere & honest perspective.
Everything, and I mean everything, is pure disinformation. The only "true" information is that which must be teased out via multiple mechanisms from a wide range of source materials (which themselves are oftentimes pure fabrications).
All of these financial reports/new items that blam and some others post up are fodder for LIVs.
This is one reason why dividend-paying stocks became very attractive after the 1999-2000 stock market bust. Most of those tech companies never paid any dividends, so their "earnings" were nothing more than a mirage.
Tapering The Taper Talk ("Fed's next big announcement will be to increase, not diminish QE")
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