re: Year 2002 seems to be more of the same
IMO, the stocks are discounting flat fundamentals until mid-2002, and a sharp-to-moderate rebound in the second half. That means current stock prices are being supported by the expectation of capex increases beginning around June 2002. Yes, I know, the market expected a turn in the fundamentals 6 months out, in January 2001, and again in April 2001, and because they were wrong, stocks went on to lower lows. This time, I think the market is right.
Specifically, I think semi-equip stocks will not see the October 2001 trough prices again. They will be in a wide horizontal range for a while, and then start a pattern of higher highs and higher lows, sometime in 2002.
It's really hard to get a handle on whether current valuations are reasonable or not, because:
1. The market's E/P (inverse of PE) historically equals the inflation rate. As inflation approaches zero, higher valuations are justified. How high? I don't know. High, but not approaching infinity.
2. Even well-managed companies, especially in capital-intensive industries, or industries requiring high R&D budgets, found themselves oversized in this recession, with zero profits. Hard to use PE ratios at all, when E comes in 31 flavors and is approaching zero.
3. Companies with strong franchises, like EMC, have had to compete on price, for the first time ever. Is this a permanent change, or just a temporary effect of the sudden supply/demand imbalance that happened when business spending fell off a cliff? The answer is probably company and sector-specific. But, in general, I expect companies that had strong franchises before this recession, to get pricing power back once the recession is over. And, when that happens, a sharp rebound in profits happens, for those companies.
4. this rosy scenario is dependant on winning the war, and debt loads being bearable, and no collapse in consumer spending. And not too many more Enrons and Argentinas. All of which I consider probable, but not certain. |
