Treasury Secretary Paul O'Neill has weighed in with his investment strategy, telling CNN he felt the Dow could approach new records within 18 months.
This idiot just doesn't know how to shut the fu*k up! The piece below was already linked earlier by another poster.
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biz.yahoo.com
Thursday September 27, 10:12 am Eastern Time
Got Half a Century?
By Jonathan Hoenig
LET'S BE HONEST: Even before the atrocities of September 11th, the widely owned
names were in bad shape. Now, given the dramatic declines we've seen over just the past few weeks, many strategists are calling the market a bargain. Goldman Sachs's Abby Joseph Cohen recently raised her equity allocation, as did Tom McManus of Banc of America. Uber-bull Tom Galvin of Credit Suisse First Boston also urged investors to buy, and even Treasury Secretary Paul O'Neill has weighed in with his investment strategy, telling CNN he felt the Dow could approach new records within 18 months.
The country isn't just patriotic — it's bullish. From Joe Sixpack to Joe
Battipaglia, most people aren't questioning a rebound, but just waiting for it
to occur. As we often point out, two sides make a market. Many investors
feel as if the worst is over, while others expect more downside to come.
While I am not a roaring bear, I am a realist. And besides rising or falling,
the third scenario for stocks — one it seems bulls and bears alike have
completely forgotten about — is that the market might go absolutely
nowhere for quite some time.
Most financial planners, market analysts and mutual-fund companies like to harp on the idea that the market returns about 10% a year. And while it's true that the long-term average return on stocks has been approximately 10%, to suggest that an average year sees the market up 10% isn't just misleading, but just plain wrong. Indeed, as we first pointed out a few months back, there have been long periods of time where the market has done absolutely squat.
For example, in 1903, the Dow traded at 42, only to hit a lower low of 41 some 29 years later. In 1959, the Dow hit 685, not too far from where it traded in 1974, some 15 years later. And if this all sounds like ancient history, keep in mind that the late 1990s have now joined this notorious roster of dead-money periods for equities. At 1500, the Nasdaq trades back where it first crossed in July of 1997, and even the much-celebrated Standard & Poor's 500 index funds have gone nowhere for three years.
The only reason to invest in anything is to make money. The point isn't to be right, but profitable. So as the talking heads, most of whom have been unflappingly bullish for the past 18 months, fall all over themselves to pound the table for what a steal the market is at these levels, let's revisit some basic high-school mathematics. Because if you're still holding stocks for ``the long haul,'' it might be nice to have a sense of just how long the long haul really is.
There's plenty of evidence to suggest that most people were, in fact, buying stocks sometime near March 10, 2000, when the Nasdaq hit its all-time high of 5132. The largest-ever cash inflows into equity mutual funds came during the first quarter of 2000, with the lion's share, over $55 billion, coming in February. So for argument's sake, let's assume that most investors, either individually or through mutual funds, ended up buying the high — not necessarily the highs of their own stocks, but around the top of the overall market.
The unfortunate reality is that stocks tend to fall a lot faster than they rise. And once they've fallen, mathematics really begins to work against you. Consider: When a stock falls from $100 to $50, it registers a 50% decline. But getting back to ``even'' would require a 100% increase. And if you think it's unlikely that a stock can double in today's tough economic climate, a 100% rebound is a pittance compared to the gains needed to revive some of the washed-up favorites of the Nasdaq 100. So as tough as it might be to hear, the frustrating truth is that even a substantial rally might not make it worthwhile to keep the faith, especially compared to taking the tax loss and moving on to some better-performing ideas.
Take the case of Oracle (NASDAQ:ORCL - news), just one of the stocks that white-shoe Goldman Sachs identified as a ``core holding'' back when the market was near its peak.
At its current price of $12.25, Oracle would need to rise approximately 233% to achieve the $40.81 it traded for on March 10, 2000. Assuming an annual return of 10%, as the long haulers often do, it will take Oracle approximately 13 years to make it — and that doesn't even factor in inflation.
Or Lucent Technologies (NYSE:LU - news), which PaineWebber analyst and regular Wall $treet Week elf Mary Farrell recommended in a March 12, 2000, speech ironically titled, ``The Bull Market Continues: Outlook for 2000 and Beyond.'' At $5.75 a share, Lucent needs to rise roughly 1,010% to get back to its March 2000 levels. Assuming the 10% return, and you're talking about 25 years. Factor in 3% inflation and it's more like 36 years. By that time, Ms. Farrell will be well over 90 years old. Makes you wonder how much Lucent is stuffed in her retirement portfolio.
Back in March of 2000, Morgan Stanley called DoubleClick (NASDAQ:DCLK - news) an Outperform, reiterating a price target of $150 in an enthusiastic research report titled, ``The Right Thing to Do.'' At its current price of approximately $6 a share, the stock needs to rise 2,421% to reach that lofty goal. At 10% a year, it will take over 34 years. Factor in inflation at 3%, and the stock should hit Morgan Stanley's price target sometime in 2050.
And while Merrill Lynch's Henry Blodget quietly dropped coverage of CMGI (NASDAQ:CMGI - news) last June, at one point he had slapped a (split-adjusted) $150 price target on the stock, which I'll admit it kissed not long after. At current levels, however, the stock needs to rise 11,365% to revisit its March 11, 2000, close. Assuming the 10% return, it will take approximately 50 years before inflation, and factoring in a 3% rate, 72 years after. I guess while the visibility for next year isn't too great, it's crystal clear 288 quarters from now.
The math isn't much less depressing for more established names. AOL Time Warner (NYSE:AOL - news) needs to rise 81% to reach its March 11, 2000, price, while both Cisco Systems (NASDAQ:CSCO - news) and Sun Microsystems (NASDAQ:SUNW - news) need to gain approximately 441%.
With the market down so sharply as of late, and still plenty of money on the sidelines, it's very possible we could see some major rallies in stocks at some point. Cisco, for example, could easily get back to its early summer highs of around $20 a share, which would represent over a 50% increase from current levels. That would constitute a massive return by any standard, so if you're overweight in tech, I wouldn't dump my entire position in one trade. As we've discussed in the past, effective trading isn't black or white, but shades of gray.
But revisiting Cisco's glory days of March 2000, when it traded at $80? That's a 534% move, so don't hold your breath. After all, if Cisco ever did rally back to within hailing distance of that high, most people would sell. Wouldn't you? And in the final analysis, that is precisely what will keep it from getting back to $80.
Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund. At the time of writing, his fund was short shares of Cisco and Oracle. |
