JDN, here's one for you. The same applies to SUNW and all the other kinky gogo stocks.
I had this same debate with an internet bull analyst the end of January. The trend has turned and what made the market go up is going to now destroy it. Don't fight the Fed might work when we are in a recession, but we are dealing with a debt crisis that has nothing to do with interest rates. The fundementals for stocks have stunk for years, yet the mania went on. To make a point, you ever study finance or did you go straight to PHD school and skip the fine points of monetary economics? One company, Cisco Systems highlights to insanity that has gone on. The question you have to ask yourself right now, is Cisco cheap at $15. Well if you liked it at $80, you will love it at $15.
At $80, this company was capitalized at a price that would require it to earn over $30 Billion a year if the same amount of money was invested at the time in 10 year treasuries. What is the most profitable company in the world? I heard it was Citigroup and it made around $12 billion last year if I recall correctly. So, we have a minimum of overvaluation at the most optimistic point of 2.5 times. But there is more. The risk premium on a stock like this has to be another 1% if it is conservative and 3% if you are going out on a limb this far. So, the profits would have to come in at $64 billion in order that you take that kind of risk. We are now at a figure that is 20 times what Cisco earned last year, with fancy book keeping that paid employees massive amounts of stock, thereby diluting ownership of existing shareholders and calling that profit. I think a better term is additional paid in capital by employees. And we were at the top of a business cycle!
The truth is that the quality of stock ownership is about 25% of what it was when the pundits of buy and hold started these trends. Stocks pay no return to shareholders and many of them take ownership away from shareholders and disguise losses with dilution. We are in a tulip mania today, not a true securities market. The Fed cannot put value back into these companies when the missing value was never there in the first place.
What we are really faced with is a pile of debt that cannot be paid, misapporpriation of capital like has never gone on before in history and stocks that offer almost no return. We are not unlike Japan in this matter, but really much worse. Unlike Japan, we are in debt to our ears and there is no mathamatical solution. Which one of these companies you like? I don't believe things in financial math have changed that much over the years and there are few that make sense. There may be some smaller companies that have value, but going into the mess that always follows a mania, I don't believe a lot of them will survive.
There has never been a market in history with broad public participation that didn't end in a mess. This time will be the same as the last times, except we have come to the end of a long trend and it will probably be worse. Valuations are so extreme compared to the 1929 fiasco that we cannot even compare the two. Though the margin requirements are higher today, the result is the same. The market just has to fall more to wring out the money that has to come out, once the amount of capital to support the markets has become insufficient. Then, there is leverage today that was unheard of in 1929, like using credit cards to get money to buy stock, home equity loans, 401K's where the subsidy is close to 40% at times. I am afraid for our country because unlike 1929, we are in servitude to foreign states and at their mercy. I don't believe there is a solution outside of Weimar Republic inflation.
Some day economists will teach people about risk and the rules of supply and demand. Stocks have never produced on supply and demand, but like any other financial instrument, rest upon risk and return. Stories are coming out now how Wall Street has feathered their investment banking nests by offering nothing but high evaluations for stocks. You rarely see a sell recommendation until the company is headed for Federal bankruptcy court. Who would offer a buy on Cisco above about 15 who had a clue about financial valuations? When the profits are insufficient for the valuations and the growth is given away in stock ownership dilution, how can the investor really make out? This is nothing more than accounting slight of hand and the real cash flow has been additional capital paid in by employees through sale of additional stock. There are only 3 places for someones life savings at this time, short term treasuries, insured banks and maybe very strong life insurance companies. There may be only one in a few years, gold.
Last, but not least! The trend has now turned in the bond market. The last I checked stocks were capital instruments, not money market instruments. I know people have been conditioned to believe stocks are like a money market and that their funds will be there when they need them, but this is not the case. I know the blip up in bond rate has only been a few days, but that few days broke the charts and we are probably headed much higher. The bond market is sending the Fed a signal that we are low enough and that the actions the Fed is taking is not good and is very risky. I believe we are entering into a capital crisis in America and this is one of the first signals of one. Bonds have been leading the Fed for years now, not the other way around, like maybe the 1980's. This is one time it will pay to fight the Fed. The Nasdaq was at 2800 the last debate I had with a bull on this subject and the Dow was at 11,000. We won't see those figures for some time, as the charts are shattered to pieces. We are going much lower than we are. I know from experience that the Dow generally bottoms at 14 PE. That is the mid 6000's. That is a starting point. But, GM and INTC probably won't be adding any earnings to that index this year, so back to 1995 we may go in price. You know it has happened before and it will happen again. Next stop, back below 1000 by the time all this stuff shatters. It will shatter because it always has. Man makes the same mistakes over and over again and expects this time it will be different. Every generation gets its time in the barrel and the 1970's allowed us to skip one so we had 2 making the same mistakes together and we made a big mess. My father got burned by the stock market and he kept his money in t-bills and banks. I just couldn't get him interested in the mid 1990's. He was smarter than I thought. He quit work at 46 and died with quite a bit of money. Tight, but he wasn't going to lose it. |
