Market WrapUp (Wed. 01-26-03)

Financial Sense Online ^ | 2/26/03 | Jim Puplava

[arete]

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Today's Market WrapUp by Jim Puplava 02.26.2003  Mon   Tue   Wed   Thu   Fri

Getting Cheaper, But Still Not A Buy

A common mantra on Wall Street and on the desk of financial anchors is stocks are cheap. It is time to start buying because we are in a new bull market. The major averages have now fallen three years in a row; make that four if you measure the markets this year. Markets have fallen four years in a row only once before and that was during the Great Depression. The feeling is that it can’t happen again. The safety net put in place during the depression will prevent another depression from ever occurring, so why the worry? Instead the Street believes that the markets hit their nadir last October and are now in the beginning stages of a new bull market. “Stocks are cheap” and “stocks are a screaming bargain” is echoed everywhere you look. It makes the headlines in papers, the front cover of financial magazines, and on the cable channels, which in effect have become advertising billboards for Wall Street.

Fund managers are loading up their portfolios with bull market favorites on the belief that once the fireworks begin in Iraq the markets are going to soar. This war, when it begins, will be telegraphed and made into a media extravaganza. Our bombers and fighter aircraft have been equipped with cameras so each bombing mission will be seen in real time. Those cameras will also protect the US against false accusations of strafing civilian targets, or deliberately attacking civilians. In war, civilian casualties are hard to avoid, but if they occur the cameras will capture the pictures. There will be more than 500 reporters from around the world to write and televise it. It reminds me of gladiatorial events in the Roman coliseum. Welcome to warfare in the 21^st century. The high tech way in which this war will be fought, the bombing missions, the smart bombs, and technical wizardry of modern warfare is expected to generate large audiences for media companies. On Wall Street they are hoping the high tech weapons will generate an investment gold rush with military technology generating the same Pavlovian response from investors as the tech revolution did. Networks will bilk the war for all that they can with 24-hour coverage and analysis, provided by armchair pundits and would be generals.

Once the war is over, oil prices will plunge, the markets will take off and consumer and business confidence will be restored. It will be back to good times again, so on Wall Street, the feeling is let the war begin and let’s remove all impediments to investing and the economy. Iraq in the minds of analysts and money managers is this year’s excuse for falling stock prices. However, what happens if the war doesn’t go as planned, or if devastating terrorist attacks are carried out on US soil? What happens, even if the war does go well and as a result, the US is faced with governing Iraq until a suitable government can take over the reigns and restore order to the country? What will be the cost of this occupation? More importantly, what about the lives of soldiers, some who will die in this conflict? On the other side there will be sons and husbands who also lose their lives. War is never something to celebrate, much less turned into a media circus.

Regarding the investment markets, the war won’t change the debt levels of this country; they will only make it worse. War isn’t going to solve or pay for Herbie Homeowner and Larry Lawnmower credit card bills. It won’t pay for underfunded pension plans or absorb the glut of tech capacity that still exists in this country and around the globe. Unless the Pentagon has plans to drop cell phones, DVD players, PC’s, video games and PDA’s on Iraq, there is a mountain of this stuff piling up in the warehouse and distribution channels around this country. The fundamentals of the tech industry are horrible and remain uncertain. Why else would tech CEO’s keep firing so many workers?

Now as far as the reason to buy stocks because they are cheap, let us examine that picture. As shown in the three tables below I have listed the top ten market cap stocks that make up all three major indexes in the US. Starting with the Dow and proceeding to the Nasdaq, one can draw several conclusions. Stocks have gotten cheaper from where they were three years ago but they are far from being a bargain. You will notice that stock valuations become more expensive as you move from the blue-chip Dow, the S&P 500, and the Nasdaq. The top ten companies in each index make up some of the finest companies within the US. They are all leaders in their field. They are, for the most part, great businesses and great business franchises. However, with the exception with one company in the Dow they are hardly cheap. When stocks are selling at 2-3 times their growth rates, they are not cheap. They can only viewed as cheap if you use your wildest imagination, which is why Wall Street is often referred to as the Street of Dreams.

Dow Jones Industrials
Company	P/E	Div %	P/Book	P/Sales	P/CF
3M	24	2.1%	8.1x	3.0x	17.3x
Procter & Gamble	21	2.0%	8.0x	2.6x	12.1x
IBM	20	0.8%	5.9x	1.6x	9.7x
United Technologies	13	1.7%	3.3x	1.0x	9.6x
Merck	15	0.9%	1.8x	0.1x	12.8x
Johnson & Johnson	23	1.6%	7.0x	4.2x	17.8x
Wal-Mart	26	0.6%	5.4x	0.9x	16.9x
Caterpillar	20	3.0%	2.9x	0.8x	8.5x
Coca Cola	22	2.2%	8.3x	5.0x	20.8x
Altria	8	6.7%	4.0x	1.3x	7.4x
S & P 500
Company	P/E	Div %	P/Book	P/Sales	P/CF
Microsoft	24	0.3%	4.5x	8.2x	15.4x
GE	15	3.3%	3.7x	1.8x	7.8x
Exxon-Mobile	20	2.7%	3.0x	1.2x	11.7x
Wal-Mart	26	0.6%	5.4x	0.9x	16.9x
Pfizer	18	2.0%	9.4x	5.2x	20.0x
Citigroup	12	2.5%	1.9x	1.8x	6.0x
Johnson & Johnson	23	1.6%	7.0x	4.2x	17.8x
IBM	20	0.8%	5.9x	1.6x	9.7x
Am. Int'l Group (AIG)	18	0.4%	2.2x	2.2x	11.3x
Merck	15	0.9%	1.8x	0.1x	12.8x
NASDAQ
Company	P/E	Div %	P/Book	P/Sales	P/CF
Microsoft	24	0.3%	4.5x	8.2x	15.4x
Intel	32	0.5%	3.0x	4.0x	12.1x
Cisco	25	0.0%	3.4x	5.0x	17.5x
Dell	32	0.0%	13.6x	1.9x	19.5x
Oracle	29	0.0%	11.7x	6.6x	19.9x
Amgen	38	0.0%	3.8x	12.4x	29.1x
Fifth Third Corp	19	2.0%	3.6x	4.8x	21.0x
Qualcomm	29	0.6%	4.5x	7.7x	25.2x
Comcast	182	0.0%	1.7x	2.2x	12.3x
EBay	88	0.0%	6.7x	19.5x	46.4x

They only become cheap if you use historically low interest rates, which are used to discount future earnings. Even then P/E multiples of 20, 26, 32, 88, and 188 are not a bargain. Dividend yields of .3, .6, and 2 percent don’t compensate in current return for many of today’s stock market risks. Nor are companies whose stock price is 4, 8, or 12 times book value, or 4, 6, 8, or 12 times sales. In summary, all we can say is that stocks have gotten cheaper than they were three years ago, but they still are far from being a bargain. At the bottom of bear markets you will find stocks selling at 5-7 times earnings. Dividend yields will be higher than Treasury bond yields, and will be selling at less than book value and annual sales. By then your neighbors will have sold out their positions forswearing never owning a stock or mutual fund in their lifetime. Speculating in stocks will cease do be a national pass time. Cable channels will go back to covering news and sports. People will go back to saving and consumption will be a luxury other than basic necessities. That is when you will know that the bear market has ended. That will be the time to buy with complete abandon. The only problem is that you would have had to conserve your capital and be in a position to buy.

Back to the day’s horse trading, the markets headed south again for many of same reasons given for their climb yesterday. Instead of falling oil prices we had rising oil prices. The price of crude oil hit a 12-year high. Intra-day prices got as high as $37.70 a barrel as a report was released that U.S. inventories fell 1 million barrels to 271.9 million in the week ending Feb. 21. Inventory levels have fallen 14 percent from a year ago and are now at a three-decade low. In the words of one trader, “Inventory levels are now dangerously low. We are only one small problem away from operating the nation’s refineries at a minimum. If more supply is needed by the economy, refineries, consumers, and businesses are going to have to pay up.” The east and midwest portions of the country are still experiencing harsh weather so demand for heating oil is drawing down inventories. There is no excess capacity available.

All Is Quiet On The Earnings Front
As far as the month is concerned, it looks like stock prices are headed down for their third straight month. The S&P 500 is down 3.3 percent this month and is down 5.9 percent for the year. The Dow lost 3.1 percent this month and is down 6.4 percent YTD. The Nasdaq is down 1.3 percent this month and 2.4 percent this year. The Nasdaq is the most overvalued market of all three major indexes. This is where the money is. This money is vulnerable to a huge setback if things don’t play out as planned. Preliminary reports hint that Q1 of this year isn’t going to be rosy. HP reported that Q1 this year fell short on the revenue side as demand slowed as a result of companies pulling back on capex spending. Companies have been laying off more workers, and energy prices and rising commodity and labor costs are zapping profit margins as there is little room to raise prices. Inventories are building and further stock market losses mean companies will have to contribute more money to fund company pension plans. Q1 is looking bad. Wall Street has got its work cut out for it. They are going to have to pull a rabbit out of the hat or turn investors attention away from earnings. Maybe that is why they are looking at war. Energy prices have risen 42 percent in the last three months and gasoline prices are near or at records in certain parts of the country. Higher energy prices are an additional tax on the economy.

Volume hit 1.34 billion on the NYSE and 1.21 billion on the Nasdaq. Volume continues to decline in the market, which is not a good sign for the bulls. Breadth was negative by 19-12 on the Big Board and about the same on the Nasdaq. The VIX rose .90 to 37.02 and the VXN jumped 2.64 to 46.97.

Overseas Markets
European stocks fell as Swiss Reinsurance Co. became the region's latest insurer to say it will reduce its dividend and Aviva Plc, the U.K.'s biggest insurance company, said profit may decline this year if stocks drop further. The Dow Jones Stoxx 50 Index fell 1.1 percent to 2113.70, paced by Bayer AG as the drugmaker said it may put aside money to settle lawsuits over cholesterol treatment Baycol. The Stoxx 600 Index shed 0.9 percent to 177.40. Both indexes dropped for a fifth day in six.

Japan's Topix stock index fell for a seventh day, its longest losing streak in 20 months. Mizuho Holdings Inc. slid after saying it plans to sell $1 billion of preferred shares, which will dilute shareholders' returns. The Topix dropped 0.1 percent to 818.38, with Mizuho, the world's largest bank by assets, slumping to a six-week low. The Topix had its longest string of losses since the seven days ended June 19, 2001. The Nikkei 225 Stock Average was little changed, shedding 3.68 points to 8356.81.

Copyright © 2003 Jim Puplava
February 26, 2003

Chart courtesy of www.stockcharts.com

 

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[arete]

Regarding the investment markets, the war won’t change the debt levels of this country; they will only make it worse. War isn’t going to solve or pay for Herbie Homeowner and Larry Lawnmower credit card bills. It won’t pay for underfunded pension plans or absorb the glut of tech capacity that still exists in this country and around the globe. Unless the Pentagon has plans to drop cell phones, DVD players, PC’s, video games and PDA’s on Iraq, there is a mountain of this stuff piling up in the warehouse and distribution channels around this country. The fundamentals of the tech industry are horrible and remain uncertain. Why else would tech CEO’s keep firing so many workers?

Not to worry. We're all going to be selling each other insurance and giving guided tours of downtown Toledo.

Richard W.

[arete]

Market WrapUp is Delivered!

Richard W.

[arete]

Nikkei down 56.90 -- 20 year low. Hummm

Richard W.

[sarcasm]

Democrats Support Greenspan in Resolution

[Gritty]

We're all going to be selling each other insurance and giving guided tours of downtown Toledo.

Hamburgers, Richard. You forgot the hamburgers.

You know, the ones we are going to flip for each other? Vegetarian ones, of course!

[Mr. Jeeves]

Speculating in stocks will cease do be a national pass time.

Jim badly needs an editor - he's constantly doing this. And what kind of car is an "Exxon-Mobile"?

It's interesting that on the charts above, Merck's financials look relatively solid - that kind of surprised me.

[Steven W.]

I enjoyed this, though, because they're a master of misdirection and effectively combining a mix of apples & oranges to always meet their objectives (which is usually pumping their readers toward gold). Note how he selectively chooses the highest market cap subset of the larger market (as the cliche goes, it's a market of stocks more than a stock market) to begin and then narrows the focus from the mismatch between any set of traditionally comparable equities to not only select NASDAQ stocks with the highest market caps, but, coincidentally, higher multiples and lowest possible yields to make his point, rather than doing any historically feasible analysis, like comparing S&P yield (which for the past couple days has actually even exceeded the corresponding rates in US Treasuries, an historic benchmark for trend watchers) or "dogs of the DOW" comparisons with proper adjustments to reflect today's extremely low interest rates.

In any event, one can find any number of high quality companies across sectors whose stocks are trading for decent multiples (P&E <= 12), many paying extremely good yields exceeding the 2,5 and even 10 year treasury notes. Some may not be cheap but many are not expensive, either ;)

[B4Ranch]

You appear to be aware of these companies that look good now. One question: What is the debt ratio in terms of annual net income for these companies that look so good?

[B4Ranch]

Bank Secrecy Act Regs to Cover Precious Metals Dealers

[arete]

I had head about the new regs. Sounds to me more like it may be a tax collection issue as well as the government wanting to know where the gold is. More intrusion into our privacy under the cover of fighting terrorism.

Richard W.

[Doctor Stochastic]

Perhaps Glenn Hubbard's resignation will help the markets. The Current Administration seems to have had no economic plan for the past couple of years.

[arete]

The Democrats may not realize just what kind of toxic waste Greenspan is about to become -- or maybe they do. The economic finger pointing is just getting started. Wait until things really get bad.

Richard W.

[cibco]

BTTT

[B4Ranch]

I wonder how far down the road collection is.

[jwh_Denver]

Once the war is over, oil prices will plunge, the markets will take off and consumer and business confidence will be restored. It will be back to good times again, so on Wall Street, the feeling is let the war begin and let’s remove all impediments to investing and the economy. Iraq in the minds of analysts and money managers is this year’s excuse for falling stock prices.

This is where I'm at odds with Jim Puplava. If this is going to be the overall perspective of the market it will show up on the tape. And you can't fight the tape. It doesn't matter what the facts are now or that the markets are being manipulated or whatever. You make money by going with the overall perspective until the facts scare you out. Back at the beginning of 2000 how much of the smart money was seeing maybe one of history's biggest bubbles go up and up while they knew it was going to break but held to make the bigger bucks and finally bailed out on enough is enough or just plain fear?

Facts will show up on the tape sooner or later but the tale of the tape is what matters now.

[STONEWALLS]

"What happens, even if the war does go well and as a result, the US is faced with governing Iraq until a suitable government can take over the reigns and restore order to the country?"

.....a close friend of mine is retired CIA.....since 9/11 he has been recalled and works special assignments on a contract basis.....the CIA has been actively trying to recruit qualified Iraqi exiles to participate in a post war government to stabilize the country....when approached, the exiles look down at their shoe laces and say nothing....

Good luck to everyone!

Stonewalls the Ant

[steveegg]

Selected quotes and observations...

Regarding the investment markets, the war won’t change the debt levels of this country; they will only make it worse. War isn’t going to solve or pay for Herbie Homeowner and Larry Lawnmower credit card bills. It won’t pay for underfunded pension plans or absorb the glut of tech capacity that still exists in this country and around the globe.

I'll comment on the tech capacity in a bit. The debt bubble is where I wholeheartedly agree with Jim; that's a hell of a ticking time bomb. As what has been propping up (such as it is) the economy has been deficit spending, it's not going to be pretty if the bubble pops while the rest of the economy is in the shape it's in.

Unless the Pentagon has plans to drop cell phones, DVD players, PC’s, video games and PDA’s on Iraq, there is a mountain of this stuff piling up in the warehouse and distribution channels around this country.

Considering that a bunch of E-bombs are reportedly headed toward Baghdad, this glut is going to be cut into as the Iraqi electronic infrastructure is going to have to be rebuilt from the ground up. Other than that possibility, which would only really be temporary, the glut will continue until production capacity is cut.

They (the quoted top 10 stocks in the Industrials, S&P 500 and NASDAQ) only become cheap if you use historically low interest rates, which are used to discount future earnings. Even then P/E multiples of 20, 26, 32, 88, and 188 are not a bargain. Dividend yields of .3, .6, and 2 percent don’t compensate in current return for many of today’s stock market risks. Nor are companies whose stock price is 4, 8, or 12 times book value, or 4, 6, 8, or 12 times sales. In summary, all we can say is that stocks have gotten cheaper than they were three years ago, but they still are far from being a bargain. At the bottom of bear markets you will find stocks selling at 5-7 times earnings. Dividend yields will be higher than Treasury bond yields, and will be selling at less than book value and annual sales. By then your neighbors will have sold out their positions forswearing never owning a stock or mutual fund in their lifetime. Speculating in stocks will cease do be a national pass time. Cable channels will go back to covering news and sports. People will go back to saving and consumption will be a luxury other than basic necessities. That is when you will know that the bear market has ended. That will be the time to buy with complete abandon. The only problem is that you would have had to conserve your capital and be in a position to buy.

Considering that there is far more money in the market chasing essentially the same level of profit, the historical price-to-whatever levels, which had worked in the past as the ratio of investment capital to profit had been essentially constant until recently, is at least a bit low. While I don't share Jim's belief that P/Es will drop to 5-7 at the bottom (I'm looking at more along the lines of 10-12), I agree that P/E's of 20 and above are out of whack, and that a good portion of stocks are still overvalued.

What would change this is if the "nouveau" investors abandon the market, thus restoring the historical "capital-to-profit" levels. That is what Jim is predicting, and as much as I want to completely disagree with him, I can't quite discount that possibility. The market can't be propped up until earnings catches up, and considering that the market has been undeniably propped up, I have my doubts as to whether a further decline in the market can be made orderly.

[steveegg]

File that quoted excerpt under the "Jim Needs an Editor" file. From my readings of the WrapUp and Storm Watch series, that reads as Jim's explanation of Wall Street's behavior, behavior that he has regularily belittled. It was constructed poorly, however.

[razorback-bert]

War is never something to celebrate, much less turned into a media circus.

Bears repeating and I agree.

[Dec31,1999]

The investment environment looks terrible, which means it's probably a good time to buy stocks, especially since I wouldn't. I always miss the dips.