Dang! I sent my PM off to you after your request before I read the thread. I could have saved my fingers from typing so much about Coke and the Nifty Fifty that you requested.
Popular stocks like the 'nifty fifty' in 1972 tend to follow economic expansion and peak at the point when all the euphoria and enthusiasm for that expansion is just about to roll over into the pitfalls of what reality is - the business cycle. I guess we could certainly say the same thing happened this time around in terms of the popular large cap, highly liquid stocks in the market. The highly liquid issues (nifty whatever) attract the attention as the mutual fund inflows are healthy. Once that rolls over, the small-cap sector becomes the prime target for capital flow as the large-cap issues are distributed by the funds and share prices fall. In spite of that, as techreports points out, buying some of the nifty-fifty at their peaks in 1972 and holding those issues to date with the dividends would not have turned out all that bad compared to a benchmark index such as the S&P, the Dow or even the Nasdaq. That's not to say some of the most popular issues bought at their heights during the bubble are going to be decent returning investments over the next 30 years, but we'll know then if Intel, Microsoft, Cisco, Pfizer, Merck, Walt Disney, Coke, Home Depot, Wal-Mart, Phillip Morris, etc... hold their own as investments between now and 2030. Some will, some will not.
At a time when the S&P was trading around 18-19 on a P/E basis, the PE multiples in 1972 of some of the Nifty-Fifty members were:
Sony = 92
Polaroid = 94
McDonald's = 83
International Flavors = 81
Walt Disney = 76
Hewlett-Packard = 65
As I posted on this thread before, interest rates during 1972 and heading into 73-74 and beyond were quite high (as well as heading into the incredible inflation period) and of course, dividend yields on equities were much higher than today. So one factors all of that into the equation of just how high those Nifty-Fifty multiples were trading. In addition, the Rule Maker at TMF took a look at some metrics last year of a couple of those Nifty Fifty members:
fool.com
Not much to conclude from all of that, but just commenting on what happens during the expansion phase of the business cycle and the subsequent contraction phase of the economy. It's not confined to technology stocks. The Nifty Fifty in the early 70's, the biotechnology stocks in the 1980's and of course the technology mania at the end of the 1990's. No doubt we will see a similar multiple expansion in the future of some group just as in the past.
I don't know at the moment what the entire S&P is trading at in terms of trailing and estimated earnings, however you can calculate the S&P by dividing the current index figure by the trailing 12 months earnings as well as the forward estimated earnings. A partial historical chart of S&P earnings:
lowrisk.com
Problem is on the forward earnings estimates which includes a lot of crystal ball reading as to when and what recovery earnings will be, the range is far and wide. Not to mention, those estimates are still being slashed, chopped and dashed by an analyst industry that doesn't have a very high batting average at predicting short and intermediate term earnings. In a subsequent post that techreports wrote it was quoted I had mentioned that the S&P forward estimates, ex-technology, was around 15.5 in mid August. Those estimates were not my estimates as I am not spending my time attempting to determine the earnings estimates of the S&P 500, but they are estimates from Wall Street strategists. Who knows if they are right or wrong? The 15.5 figure (ex-technology) was August 16th when the S&P traded at 1181. It now trades at 1085. Of course, part of that correction has been the continued lowering of estimates and technology companies share prices in the S&P falling, but non-technology shares and estimates falling as well. At some point, the market will reach a parity where some sort of an agreement on fair value is reached. Likewise, at some point in time, the correct signals will come together to anticipate a sustained recovery in the economy (economically sensitive commodities such as copper, cotton, etc... as well as the action in the bonds). So, the market watches for those types of commodities to reverse towards an upward pattern and for the bonds to top and reverse in a downward direction (of which Bill Gross at Pimco anticipates is coming) to signal a turning of the economic ship. In other words, it's like watching paint dry at the moment. Or watching water boil.
I linked an article here back in the spring from MarketPlayer.com which was interesting then and still is interesting as the market searches for a 'fair valuation' of the S&P index. Since March, earnings estimates have been trimmed and trimmed and trimmed again, but the method used in determining a fair value remains:
marketplayer.com
On to important matters:
Bonds breaks the Roger Maris mark and sits at 63 'dingers' after yesterday.
BB |
