Rational EXUBERANCE-DOW at 8000 is a steal of the century-What correction! Are you out of your depth. Monday, July 28, 1997
I think we are going to see plethora of some strong economic numbers as we get into a post-earnings week dominated by a lot of economic data. Market has a built in aura of optimism emanating from Alan Greenspan's last week testimony, although market seems to take cue from Fed Chairman on state of US economy and diminishing chances of inflation creeping up, it does not seem to understand the fundamental ingredients of the 'big picture' that forms the backdrop of Alan Greenspan bullishness.
DOW 8000 is a number if it is overbought here it was overbought at 6000 too, the reason of markets resiliance is not hype but underlying productivity and profitiblity of companies like GE DUPONT IBM INTC DELL CSCO MO C and others. Market is fully primed based on 'non-inflationary growth' and is ready to move ahead if economic figures confirm that economy is trudging along with unemployment at 5% or ideally 5.1% and NAPM numbers confirming no heating up.
The kind of earnings we have seen for last quarter would lend me to err on side of caution and think that economic numbers may not provide satisfactory evidence of what market calls data confirming 'non-inflationary growth'. Logic and reason would warrant that market previous fears should now all be answered with good earnings and growth prospects posted this quarter by most of the companies, but market still is not prepared to dump outdated economy and is unable to drive a final nail in the coffin of 'Phillip's curve'. It is this pre-occupation with 'dead economy' that we will wittness fluctuations for wrong reasons and unwarrented sell offs.In all liklihood I would think lie after every previous highs, markets will interpret this week numbers as strong and will tend to sell and test previous supports nearly 885 on the S&P. Naturally you will ask me why I think this is possible?
Everyone expected that AG will drop a 'spanner in the works' and it was these fears that market remained soft until after his testimony and took off from there. AG had a reason not to spoil the party he now perfectly understands far better than his last gaffe of 'irrational exuberance' that these markets are for real, based on 1996 figures of Global Fortune 500- I would tell him that a 1995 comparison of reveneue/profits of largest companies of US UK Japan France Germany which are part of Fortune's Global 500 will reveal how mistaken he was last time when he talked about 'irrational exuberance':
Fortune 500 Revenues Profits $Profit every $ Revenue
US 153 3,200Bn 158Bn 1$ every 20.25$
Japan 141 3,900Bn 30Bn 1$ every 132.8$
France 42 880Bn 3Bn 1$ every 293.3$
Germany 40 1,050Bn 17Bn 1$ every 67.0$
UK 32 515Bn 38Bn 1$ every 13.5$
If you look at the above table based of biggest companies in the world and compare $ profit with revenues you will notice that figures convincingly indicated that US and UK companies in comparison to global equities were yielding far higher profits, these undervalued US assets had to take off, there was a huge discount in the US equity prices and it needed to gap up.
If one looks at the numbers closely one can draw interesting conclusions, DOW at 5500 was a biggest sale of the century and I doubt we will ever see those levels again it will remain a sweet part of our recent memories of biggest creation of wealth. People who were paid to do the job and should have jumped to take advantage could not really read the underlying strength of the US economy and profitiblity of US corporate sector they remained out of the action far too long at their own peril.
DOW crossed 3000 on 17th April, 1991 it took five more years for DOW to double, the time DOW was trading at 5000 it was far undervalued, comparing the revenues, profits and capitalisation of Global 500 with those of US 153 top companies part of Global 500 reveal that although Global 500 total revenue was 11.4 trillion$'s out of their total profit of 323 billion$'s - 158 billion$ was being made by 153 US companies with a market cap of only 2.8 trillion$.
If any markets are overvalued and correction is needed it has to come within those markets where 315 non- US&UK Fortune 500 companies reside. These 315 companies make only 127billion$ of profit on revenues of 7.6trillion$'s, approximately a $ profit on 60$ revenue with a total asset base of 27Trillion$'s, compare them to US where 153 companies in 1995 made 158billion$ profits on a revenue of 3.2trillion$'s, a $ profit on every 20$ sale.
Just imagine how undervalued US assets were in comparison with profitiblity of Fortune 500, despite of contributing 48% of profits their market cap of 2,8 trillion$ was only 8.75% of total Fortune 500 market cap of 32 trillion$'s whereas alone on profits US corporate sector demands far bigger share of global market cap instead of peety 8.75%. Present level of DOW is a belated recognition and much needed correction of highly skewed structure of global equities.
The fact is that DOW at 7200-7500 is fully priced without any premium, if you add on a 10% premium for productivity, efficiency, and global reach, and good will of Corporate US I can say DOW is rightly priced at these levels. The market unfortunately does not understand these facts and is 'jittery' but for me DOW 8000 is number like any other number as far as underlying fundamentals earnings and profitiblity are supportive any correction will be a good chance to own most profitable pieces of corporate US at hugely discounted prices.
Opinions are welcome- IKe |
