HI Ray, I hear what you're saying about the present psychology of our equity culture. I've in the past gone through
charts of both individual stocks, indexes and commodities, month by month and quarter by Quarter focusing on
the price action of the first half of the 1970's, and especially focusing on the period after the DJIA and NYSE
made there tops in Jan 1973, and then worked relentlessly lower into Oct 1974 and then again in Dec 1974.
Do you realize that in Japan, the current stock asset allocation of the citizens is all the way down to 10%. (
a nice little statistic from yesterday's NYTimes.) It has been postulated by several savvy market historians that
after an asset class is so universally loved, as we witnessed in the 1990's, we tend to see a multiyear
period, where the asset class becomes a temple of fear and even moreso, Profound Loathing.
However, we have to remember that in working our way out to 2003 or 2005, we should see at least one or two
real whiz bang rallies, to reinvigorate the dying embers of Stock Market Bull Culture. It's easily possible that
the NASD has a 40% or even 60 to 75% rally over the coming six months from the upcoming autumnal low.
The Nikkei in Japan was able to have several rallies every few years in the 1990's that just about doubled the index
's value from it's lows of 1992, 1995, 1998 etc. The DJIA had very large rallies off of the 1970 and 1974 lows, and
even in the depth of the July 8th 1932 DJIA low at 41.26, the DJIA was able to double in a vigourous oversold
buying campaign.
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have a friend, now deeply underwater in her tech stocks, but doing fine with her real estate
seguing back to your opening comment about your friend and real estate, I'm certainly leaning way over in the
School of thought that Doug Kass of Seabreeze partners and Bob Farrell have been mentioning regarding US
real estate prices being the next phase of the bubble to unwind. Here are some great comments from last
week's Barron's.......
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interactive.wsj.com
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...What isn't being entertained in the collective psyche is even the possibility that perhaps this time is different, and that, just as the economy is acting in a way profoundly different from what we're used to, so the market may be undergoing a sea change that will confound expectations.
As Bob Farrell notes in his latest commentary for Merrill Lynch, the signposts of significant change are cropping up in some quantity. Among them: the biggest drop in stocks as a percentage of household assets since the early 'Seventies, the first drop ever in the value of 401(k) accounts, one of the biggest declines in margin debt, the first time since '74 venture funds have had two losing quarters in a row, and the biggest decline in the number of investment clubs since the late 'Sixties.
All of this and more connote an investment climate much at odds with the wild and invigorating days of the mid- and late 'Nineties. We think that the bulk of investors have yet to recognize, much less adjust, to this new and unfamiliar climate. As they're inexorably forced to adjust, alas, the impact on share prices will not be benign. But until the process runs its painful course, pure and simple, the bear market won't be over.
The following chart, which compares the trends in home and stock values, we lifted from Bob, who muses on a subject we've speculated on more than once in this space: Is housing the next bubble to burst? He notes the paradox of brisk homebuilding and climbing house prices at a time when layoffs are rampant, the economy is struggling and the stock market is down. And he's patently skeptical that, save for a dramatic recovery in the economy and stocks, which we infer he doesn't foresee, the boom in housing will continue.
Doug Kass, a hedge-fund manager with a smashing good record these past few difficult these years (he's up some 20% in 2001), and who was right on the money in urging one and all to short the techs when they were still very much worth shorting, is also concerned about the roaring excesses in housing.
In fact, Doug cites the probability that this last great asset bubble will pop as his greatest concern for both the economy and the stock market. He points to the massive rise in existing home sales, from a yearly pace of around two million back in '82 to over 5.3 million currently (a stretch during which new starts have fluctuated between 900,000 and 1.4 million annually), along with exploding prices, as clear indication of mounting speculation.
He fears that the rate of turnover, increasingly quickened by gushing prices, will hit the inevitable wall, sales will decline with sudden sharpness, house prices will plummet and the consumer will fold his spending tent, just as corporate America has done.
What makes this prospect especially scary, Doug notes, is that consumer retrenchment would add heavily to the strains on the economy, which, in turn, would bring fresh pressure to bear on house prices. And home owners, with a steadily shrinking equity in their homes -- about 55% today, compared with 68% 15 years ago -- are unusually vulnerable to a soft housing market and weakening prices.
Doug's analogy is that today's homeowner is very like a heavily margined stock trader in a dangerously overvalued stock market. Compared with stocks or most anything else, houses are a notably illiquid asset.
We might note, here, that affordability, as measured by the National Association of Realtors, remains pretty favorable, but slipped in the second quarter. And the combo of surging prices and rising layoffs can only erode affordability. In the past, such erosion has caused severe slumps in housing, as witness the late 1970s-early 1980s.
Doug has put his money where his concerns are by shorting a clutch of leading homebuilders: Centex, D.R. Horton, Pulte and Toll Brothers. Even though each is somewhere in the middle of its price range for the past year, the stocks have handsomely outperformed the market as a whole. Over the past 12 months, the average homebuilding stock is up some 70%. while the S&P 500 has declined 9%.
Doug's convinced growth will slow markedly for the homebuilders in the years immediately ahead as the bursting of the bubble takes its toll on sales.
The multiples on the homebuilders are -- as always, because of the cyclical nature of the business and its sensitivity to change in interest rates -- comparatively modest. But Doug's estimates for next year are more than a notch below consensus reckonings, and he predicts a very sharp decline in earnings growth for the next half decade or so.
More specifically, he sees Centex, whose per-share profits averaged 24.5% over the past five years, suffering a slowdown to 5% annual gains over the next five; Horton's rate of gain in yearly per-share earnings falling from nearly 34% to 8%; Pulte's from 39% to 5%, and Toll's from 23% to 8%.
For 2002, he expects Centex to earn $5.10, down from around $5.55 this year and, most conspicuously, down from the consensus estimates of $6.25. In like vein, he's looking for $3.10 for Horton next year (versus about $3.30 in '01 and a consensus $3.65); $5.70 for Pulte (versus maybe $6.30 this year and the consensus $6.75), and $4.75 for Toll (versus around $4.95 in '01 and the consensus $5.47).
As for the stocks, he sees Centex, now $44, going to $30; Horton declining from $24 to $18, Pulte from $36 to $25 and Toll, from $35 to $27. |
