Barron's Calls a Bottom

by: SA Eli Hoffmann

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:

  1. 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.
  2. 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.
  3. 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.


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.