Barron's Calls a Bottom 79 comments
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Barron's cover story this weekend basically calls a bottom to the bear, though not in quite so many words.
Sure, stocks could slide much further -- but they probably won't. By most measures, they are downright cheap.
After blaming Obama for much of stock market woes ("The lousy economy is the main factor, but stocks haven't been helped by Obama administration proposals ... It doesn't help that the Street is calling this an "Obama bear market" and that some investors are looking to "Obama-proof" their portfolios...), Barron's concedes that the president did get at least one thing right: stocks are cheap for investors with patience.
Barron's says its research bears that out. Here's why:
- Stocks are cheap relative to P/E - a Citigroup economist's 2009 earnings estimate for S&P 500 components puts their collective P/E ratio at more than 13, which is where a bunch of bear markets bottomed - except 1974, '82 and '87 when P/E went as low as 8.5. If we get down to 10, S&P could fall another 25% to 500 and DJIA around 5,000. But that probably won't happen, because in previous downturns Treasury yields were much higher, and because another Citigroup analyst says he's seeing signs of panic.
- Stocks are cheap relative to GDP - at 60% of the $14T GDP, stocks are their cheapest relative to economic output since the early '90s. But they're still well higher than the lows of about 30-35% seen in the '70s and early '80s. Stocks are also cheap relative to book value - about 1.3 down from a high of 5 during the dot-com bubble.
- Stocks are cheap relative to gold - S&P 500 is now worth about 75% of the price of an ounce, vs. a peak of more than 5x in 2000. Over the past 40 years, the average stocks-to-gold ratio has been 1.6.
There's also a lot of cash on the sidelines, Barron's says, noting money-market funds now hold $4T - almost half of the market cap of U.S. stocks, and double the amount in money-market funds two years ago.
Barron's expects stocks in defensive industries like drugs (PFE, LLY, MRK, BMY, SGP) and consumer goods (HNZ, KFT, PG, KO, GIS) to benefit from a return of confidence.
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For those prone to bottom calling, or not, here's some more food for thought:
- Babak notes pessimism, as measured by the American Association of Individual Investors' weekly survey, is at record highs. A contrarian buy signal.
- Todd Sullivan says that a couple weeks of positive economic data could cause extreme pessimism to make a rapid about-face.
- Jason Schwartz thinks we're in another bubble - one of uncertainty. Forget about buy-and-hold, he says - but short term gains on oversold stocks could be massive.
- Meanwhile Mike Stathis, while noting stocks are very close to "fair value," for what that's worth, doesn't mean the market won't go lower. In fact, it probably will.
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I know things can always get worse, but, really?
1. This is not 74, 82 or 87 to use the PEs from those times. During those times, the country was relatively affluent (was it 1982 when we moved from most prosperous nation to the net debtor nation status?), had better industrial and man-power base and very little outside competition. Now a majority of us seems to be working in retail, hamburger flipping or serving coffee, housing and related activities (how many times your house title got verified or insured or paid closing costs and real estate agent commissions?) and health-care, none of which adds to true wealth that could be sold to outsiders.
2. The stock market might be cheaper with respect to the GDP, but a big chunk of it on useless work (you polish my shoe and I will polish yourself and both get paid. Perhaps I should not put this in writing and give new idea for the politicians to get extra tax - We should calculate the efforts by the housewives or husbands who work at home in terms of managing the house and bringing up the children, attach the proper cost to their efforts, and add it to our GDP!) and due to politicians with a law education (and who can't understand real manufacturing or economics) dictating that thou shall be paid a minimum of $8.00 per hour along with all the fringe benefits.
3. Gold is higher with respect to the stock market perhaps because folks realize that a) we might not go back to the mass production (that reduces cost and increases profits) and consumption binge that we were in during the last 25 years, b) the politicians want to avoid pain when it is due (they did not want to interfere in the market when the bubbles were developing and everyone went on an orgy), and c) the enormous printing of paper money that is taking place (many argue that since so much money is lost, this is fine. But this makes the assumption that the rest of the world would be foolish for ever to trade their real goods of hard labor for our paper).
I will be personally happy if we can recover from this mess and avoid a possible civil unrest (it is always easy to accept going from poverty to richness, but the reverse is not). As a professor of engineering, I tell my students that perhaps the 1970-2000 was the golden period of this country and they got to work their butts off so that their children when they grow up can talk of a similar period in the future. Perhaps I am wrong and we all can have a good time doing the easy things.
Please... You need to at least use the correct word, which is "paradigm", if you are trying to sound even remotely intelligent.
On Mar 08 09:29 PM User 354104 wrote:
> "Paradyne Shift"??
>
> Please... You need to at least use the correct word, which is "paradigm",
> if you are trying to sound even remotely intelligent.
I've heard "it's different this time because it's global." Yes, that's true, but the response is equally global. Central banks and governments around the world are providing liquidity and stimuli like there's no tomorrow. At the least, this will cushion the landing.
At the end of the day, your emotional responses are your worst enemy when investing. Volatility invokes your fight or flight response unless you've trained yourself.
Is now a good time to keep extra cash ready? Yes.
Is it also a good time to increase your equity purchases or shift some allocation from fixed income to equities? Yes (assuming your time horizon is sufficiently long). Am I suggesting putting on full positions? No, of course not.
Inflation will return. You can bank on it. I don't know when exactly, but at some point this coordinated global effort will inflate prices if the Chinese don't do it all on their own with their $1.8T in reserves.
I started nibbling on the long side last week after sitting largely in cash since October. Names I picked up included DELL ($4/sh in cash, virtually no debt, $1.25ttm EPS, so even if earnings fall by 50% its less than 7x net of cash), EMC (also about 7x net of cash, with high earnings visibility from its recurring contracts), GE (Sold @ $24 & $13, believe the CDS volume doesn't even come close to suggesting the kind of trouble priced into the stock, happy to invest at a discount to BRK), UYG (long @ 1.7, believe the upside potential is several multiples if not a magnitude greater than the downside, compare that profile with SKF). I also added a little LQD and JNK to reduce my overall cash position. Other names I'm watching include WMI, KO, K, PHO, FXC.
On top of the fact that everyone thinks the world is coming to an end, I think the newsflow this week will be positive with 1. Madoff potentially pleading out, 2. a potential moderation of mark-to-market accounting, 3. maybe more discussion of bringing back the uptick rule. With all this said, I am fully prepared to buy another round of equity if the market falls to 5000. In fact, I would welcome the opportunity. It is in the darkest days when fortunes are made and lost.
I've heard lots of great arguments for why stocks can't get much lower. The points made in this article are, for the most part, reasonable. However, when people are behaving irrationally there's just no limit to what might happen.
ziggy
Investors are calling this the Obama Bear Market and have been since summer because the president thinks "profit ratios and earnings ratios" are different.
We have a president who doesn't listen to the markets any more than the professional money managers who helped create this mess.
The prospects of higher taxes, soaring deficits and Obama's clueless clique blowing it has smart investors scared out of their skins.
That GM, GE, Citi, BAC and other institutions are in so much trouble is feeding the panic peddlers. We're all panic peddlers. The market is a panic peddler. And everybody in the world but the Obama clique are listening.
Until Obama and his team get it, we're going to continue losing it.
If they were so good at predicting the market they'd be investing their own insane wealth, not running an increasingly archaic newsprint business.
Constructe now Moon Kil Woon
Stop looking at the past to predict the future. This event is in no way like any in the past, only may be the thirties as the cause of both was excessive leverage.
It is really absurd that these financial gurus constantly look at their past charts to predict the future. The basic investment warning is that past is no indicative of future, but yet we are bombarded with all this goobledegook (sorry if spelled incorrectly).
The blaming and all this cheap prediction does not reverse the course. What is needed is swift actions by the government in all areas to restore confidence. Getting people to work is by far the most important single factor to restore confidence.
Forget about banks being too big to fail nonsense and stop pouring money into these bottomless parasites. Let them fail. If there's money to be made in the areas they operate, surely their "vacuum" will be filled by current and new participants - after all did anyone compensate you for the money you lost on your stocks? Aren't all of us together much larger than anyone entity to fail?
Lack of confidence as measured by various indices indicates the market may very well turn lower and unless there is massive selling and huge exodus, the contrarians won't be coming on to take advantage.
PS: The 2009 forecast is so abysmal I"m ignoring it.
What we might be seeing is a deep U-shaped curve in the stock markets. With all of the pessimism surrounding the markets, a trigger to alleviate all of that could send the markets flying. Until then, we might be heading down for quite some time -- and in force. I would not be ruling this out. Perhaps an unintended bubble may be created a few months out - and another slight burst before we go marching on our way.
This ain't over yet!