Uncle Frank:
Thanks for the gentlemanly comment. My syntax could have been better.
The NAZ stocks indeed enjoy a higher PE today than they did a year or so ago. This is based on the use of recent First Call analysts' estimates for the current quarter (although it sure is a moving target as they are reducing their estimates almost daily). I know that this may strike you as incredible but as we are all well aware, earnings (real earnings, not the nonsensical pro-forma sleight-of-hand) have been in free-fall for some time now.
Over the last two to three years, many publicly traded companies (especially in the tech sector) have systematically played every trick in the accounting book to make their deteriorating earnings look good, but now, things are catching up with these banditos and they are being forced to take huge write-downs (which is as close as we are likely to come to having them own up to their past misdeeds). Over the past two or three years, I authored several articles that detailed many of these accounting scams (in particular with respect to IBM, GTW, INTC, DELL), so it is satisfying to see the general business press finally catching up with and digging into this nonsense.
Pro-forma earnings are pure drivel and the SEC should have clamped down on this when it first started to get out of hand three years ago. While they are finally performing a few public hangings, it is far too late for the huge number of folks who lost 50 to 70% of the value of their portfolios as a result of taking the reported "pro-forma" results at face value rather than doing serious homework via the 10-Qs. Incidentally, while on that topic, it never ceases to amaze me how powerful a tool those 10-Qs are. The detail mandated in those reports allows one to spot the nonsense.
Frank, I am neither a market timer nor a believer in T.A. In fact, I regularly poke good natured fun at many of my T.A. friends ("a trend continues until it doesn't" sums it up for me). Yes, I pay attention to charts, but only to acquire a feel for what the general herd is doing. In this day and age, far too many "investors" rely on T.A. rather than doing the serious digging. Obviously it's nice to have both the fundamentals as well as the charts on one's side when taking a position, but most of the decisions at this end are pure and simply based on a company's fundamentals and my field work with respect to same, as well as on our view of the global scene.
From my perspective, it is going to be extremely difficult to make any dough on the long side because both the U.S. and the global economic scenes are deteriorating at an accelerating pace. Greenspan has been printing at a full panic pace, but he is running into exactly what the Fed experienced in the early thirties.... "pushing on a string" (plenty of cheap money available to be borrowed, but lay-offs cause debt encumbered consumers to cut back on both borrowing and spending). Two major things power the U.S. economy...consumer spending and corporate capital expenditures. The latter has virtually imploded, so we are now totally dependent on the consumer. The consumer has lost a bunch in the markets and has watched his neighbours lose their jobs. He is slowly but surely cutting back. It is simply not possible for a decent "rebound" to occur under such circumstances, hence the analysts calling for a second half rebound will be forced to reduce their estimates (or be embarrassed) as the year progresses. We are all familiar with what occurs when those estimates shrink.
Over the next few quarters, most stocks will take two further additional hits. The first hit will result from lower earnings. The second will emanate from PEs being brought back to more normal levels as investors factor in reduced or non-existant growth. Historically, the latter has been the "grim reaper" and it is not likely to be much different this time around.
Best, Earlie |
