So Where Do We Stand Now, and What Comes Next?
Wringing Out the
"Wretched Excesses" of the Latter Nineties
The Dow has dropped 32%, the S&P 500 has declined
45% (in other words, by a factor of almost two), and the NASDAQ has shriveled by
74%. And that has put stocks at the tops of fair market values! In other
words, the carnage that Wall Street has experienced over the past two-and-a-half
years has only been sufficient to undo the unprecedented overpricing of the
latter nineties.
After Dropping Nearly
in Half, the S&P 500 is Still Near the Top of Its Normal Price Range
Most stocks are still fully priced, thanks to their hidden,
un-expensed stock-option obligations. So stocks are only now at the
peaks-of-the-bull-markets tops of their normal ranges. Their earnings may still
look good, as measured by price-to-earnings ratios, but Money Magazine has just
advised its readers that earnings on the S&P 500 are 23% overstated when
corrected for the expensing of stock options. And even after correcting for
stock options, the distortions described by Warren Buffett that were introduced
by a 1987 corporate-engineered change in FASB rules that allowed treating
pension fund income as earnings are still embedded in everyone's earnings
reports. Warren Buffett mentions
that GE got 9% of its 2001 earnings from pension fund income, versus a 20%
pension charge in 1982. If that ever hits the fan....
The Trend Channel
Approach Is Independent of Market Manipulations
Fortunately, the trend line approach to stock valuations is
independent of financial manipulations. It's based upon the fact that the entire
U. S. economy grows at a certain (slow) rate. And there's no way that the
underlying value of the S&P 500 can grow faster than that. We may shift from
a manufacturing economy to a services economy to an information economy, but
this is all reflected in the Gross Domestic Product, and as long as that's
growing at a percent or two a year, that's how fast the underlying value of the
stock market (as in "The S&P 500") can grow.
"How Come No One
Else Is Talking About This?
You remember that in early May (How High Can the Stock Market Go From
Here?, What Goes Up Must Come Down),
I was wondering why I was the only one who seemed to be concerned that the stock
market had become so overpriced in March, 2000? Now we know. My guess is that
the financial media knew all too well about it, and were hoping that the stock
market would overlook it, and would resume its climb. But now, it's all coming
out in the wash.
I just caught a few moments of an investment advisory show on
TV. One of the panelists represented "The Motley Fool". He had a
banner that said, "Stocks selling at half price". He didn't mention
that at half price, stocks are still selling for as high a price as they've ever
previously reached other than during the recent stock market
mania.
These gurus were also recommending that people buy bonds.
When the moderator observed that bonds are selling above par, and that their
yields are very low, the gurus backed up a little bit. But nobody told the
listening audience that the time to buy bonds is when interest rates are high,
and the time to sell bonds is when interest rates are low (as in
"currently"). Of course, their companies would probably fire them if
they revealed those trade secrets to the public..
Is the Stock Market
Predicting a Double-Dip Recession?
It's interesting to note that the plummeting stock prices of
the past few weeks may have been rooted in the financial data that was announced
last Friday. The stock market may be forecasting a double-dip recession.
How Well Did I
Sidestep This Sand Trap?
Not well at all.
A week to chill about the economy
Will SEC crackdown go beyond made-for-TV arrests-
Stocks can't shake off the blues
Half Empty or Half
Full?
Weekly Bond Brief
Economic growth slows to 1.1 % in 2nd quarter
GE says options will be expensed
High-tech companies facing comedown in market values
Market Stress Pressures Economy, Fed
Foundations are in Place for Martial Law in the US
More Internet Information Means More Disinformation
"Bear markets decline on a 'slope of hope'," veteran options trader
Bernie Schaeffer, who is chairman of market tracker Schaeffer's Investment
Research, said in a note. "Over the past six to eight weeks there has been
a mad rush on the part of Wall Street analysts and strategists and the financial
media to call the final market bottom," Schaeffer said. "Was this the
final bottom? Perhaps. But probably not." For one, he argues, stock prices
are in the stratosphere relative to what is usually seen at market bottoms. And
this fact is being ignored by the vast majority, he adds.
Stocks Choppy as Wall St. Fireworks Over
- Reuters