Jay....further to a comment you made a couple of days ago and probably the reason most people on this thread are on this thread....here's something from Grant via the FT:
ft.com
BULL MARKET: Brave new world for small, slow and old
The gap between winners and losers in today's bull market is widening as more money pours into fewer and fewer stocks, writes James Grant
In the Old Economy edition of the stock market phrase book, "up a quarter" meant a rise of 25 cents, or pence, per share. In the New Economy edition, it can also mean a rise of 25 per cent, the stupendous kind of move achieved by Yahoo!, the US web navigation company, last Wednesday.
No change in the company's business prospects, which were not significantly more brilliant on Wednesday than they had been on Tuesday, can explain the leap in stock market capitalisation to $91.6bn from $73.9bn. The true proximate cause was rather the admission of Yahoo! to the S&P 500 index, the stock-market equivalent of Valhalla, or the Baseball Hall of Fame.
All over the world, more and more money is crowding into fewer and fewer stocks. "Big Banks Up, Small Down Puzzling Wall Street Analysts", said a recent headline in The American Banker. A variation on the same theme could appear in almost any trade paper in almost any industrialised country.
Analysts aren't the only ones to be puzzled. This year, for the first time since 1980, the legendary Warren Buffett will fail to keep up with the S&P 500, according to Wall Street's Buffettologists, a commentary either on the ageing master's acuity or (more likely) on the index with which he competes. It's hard to keep up with the Joneses when the Joneses are half demented.
Actually, the dementia is symmetrical and very nearly complete. There is equal absurdity on both ends of the equity valuation scale. Telecommunications, internet and computer issues are, of course, preferred in all nations, especially if they are big and liquid and moving up briskly in price.
Bigger is better, unconditionally, in the eyes of the global equity market. Yahoo!, for example, does not suffer from the fact that its shares trade at 612 times net income, 95 times book value and 194 times revenues. Conversely, nor does it seem to count in favour of Tenneco Automotive - to name just one orphaned Old Economy issue of many - that its shares trade at five times forecast net income, 0.4 times book value and 0.1 times revenues.
The disparity between big and small, liquid and illiquid, New Economy and Old is remarkable worldwide - remarkable but usually unremarked. In Japan, for example, the recent sharp rise in DoCoMo, Softbank, NTT et al has masked a fall in the share prices of scores of profitable but mundane businesses. "The market" may be up, but the market is becoming thinner.
It is sometimes said that equity valuations deserve to be higher because the world is casting off its old-time cyclicality. The investment world, at least, is doing no such thing. The cycle in investment ideas, to name just one cycle, is spinning faster than ever.
From approximately the 1930s until the mid-1960s, observes A. Alex Porter, a New York hedge-fund investor, book value and dividend income formed the bedrock concepts of investment value.
Investors steeled by the Great Depression looked for a margin of safety, and they found it in tangible assets and current income.
By the mid-1960s, Porter continues, investors were collectively bold enough to shift their focus to corporate earnings. Presently, as the market moved higher, they dared to shift their attention away from earnings to the rate of change in earnings. Courage receded in the long ensuing bear market, 1969-74, but returned in the decades of the 1980s and, especially, the 1990s. It being demonstrated that the market always goes up, investors began to capitalise revenues, then the rate of change in revenues, then the hoped-for rate of change in revenues. Lately, they have adopted an even more visionary metric - the valuation of the "conceptual possibilities", as Porter puts it.
The US bull market, although mighty, is not so all-consuming that a thriving bear market has not taken up residence next to it. It is in this growing sub-sector of outcasts and dwarfs that Tenneco Automotive is quoted. The company, indeed, might serve as the emblem of speculative excess (as surely as there is excess on the up side, there is also excess on the down side).
What commends Tenneco to the student of markets is, first and foremost, why it came to be stigmatised. As Yahoo! was recently admitted to the S&P 500 so was Tenneco recently removed. It was dropped in connection with the break-up of the old Tenneco conglomerate. What had been a blue-chip stock with a $2.7bn market cap suddenly became (among other things) a value stock with a highly leveraged balance sheet and a $250m market cap. Investors were thunderstruck. "Funds that now own us find that we might not fit their parameters," says a Tenneco spokeswoman, not exaggerating one whit.
Automotive technology, of course, dates from an earlier boom (the one of the 1920s), so the Tenneco story would seem to lack all the necessary winning digital attributes for 1999. But the company is a market leader in its principal products, mufflers and shock absorbers, and it sells them in 100 countries. Its managers have had new stock options presented to them, and they promise to walk the straight and narrow in corporate accounting, from which they admit to straying when they were a mere cog in the conglomerate machine.
The coincidence of global booms in equity indexation and high technology has produced not one but two crazed stock markets, one resembling the year 1973 (when only the select few shares went up) and the other conjuring up 1974 (when almost everything went down). Probably never before have tangible assets been cheaper in relation to purely intangible, or intellectual, ones. Nothing against the human mind, but is mankind really that smart?
James Grant is the editor of Grant's Interest Rate Observer at www.grantspub.com |
