Posted on 02/26/2003 5:49:10 PM PST by arete
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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 cant 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 21st 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 lets remove all impediments to investing and the economy. Iraq in the minds of analysts and money managers is this years excuse for falling stock prices. However, what happens if the war doesnt 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 wont change the debt levels of this country; they will only make it worse. War isnt going to solve or pay for Herbie Homeowner and Larry Lawnmower credit card bills. It wont 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, PCs, video games and PDAs 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 CEOs 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.
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 dont compensate in current return for many of todays 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 days 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 nations 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 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 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
Chart courtesy of www.stockcharts.com
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Copyright © 1997-2003 James J. Puplava Financial Sense is a Registered Trademark
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Not to worry. We're all going to be selling each other insurance and giving guided tours of downtown Toledo.
Richard W.
Richard W.
Richard W.
Hamburgers, Richard. You forgot the hamburgers.
You know, the ones we are going to flip for each other? Vegetarian ones, of course!
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.
Richard W.
Richard W.
.....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
Regarding the investment markets, the war wont change the debt levels of this country; they will only make it worse. War isnt going to solve or pay for Herbie Homeowner and Larry Lawnmower credit card bills. It wont 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, PCs, video games and PDAs 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 dont compensate in current return for many of todays 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.
Bears repeating and I agree.
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