The world is so full of optimists, pessimists, realists, reactionaries, critics and gurus. The only thing certain is that no one really knows where the market is going.
Book value has never been an adequate mechanism for valuing stock. It has on occasion been a great argument for the floor when market despair has set in and precious few want to be shareholders. On those occasions there is a proclivity for companies to go private, for supply to diminish and for demand to gradually take the upper hand. We are far, however, from approaching this kind of despair and may not get there for decades, if ever. So much depends on both liquidity and what alternative investment opportunities exist.
Thus far the chicken littles have yet to convince everyone that the world really is coming to an end, this time. Not that they haven't tried. I can't help but marvel at the masterful way these self anointed pundits piously espouse their religion. They are so indignant at those "fools" who refuse to convert to the only true religion. It reminds me of a similar conviction (albeit an opposite position) in early 2000 asserting a new era of market valuation. "Earnings didn't matter".
The market is and always has been a confidence game. If folks believe that things will get better they will take discretionary money and buy. When money is tight and prospects are dim they don't buy. Simple. After all, what is a 100 shares certificate really worth? Nothing, if there is no one willing to buy it, priceless if demand cannot be satisfied.
For every chicken little there is a Pollyana ready to affirm that the next bull market is right around the corner. For every seller there is a buyer. There always has been and, likely, always will be. Ted Jones, managing director of Edward Jones and son of the founder, once remarked that "the stock market has never failed and never will."
What appears true is that the economic paradigm has shifted. Often, when money supply is bloated (as it was early in 2000) the FED restricts until the backs of investors are broken, alternative investment vehicles are far more attractive, and stock markets become a dirty word. The mere fact that this hasn't happened in the light of one of the most sensational market swan dives (NAZ), the economy falling off a cliff, a mammoth catastrophe in NY City, and a real threat of our very way of life makes one wonder if indeed it is even time for the great implosion so widely heralded. Let there be no doubt that some stocks remain severely overpriced by any reasonable standards and their prices will continue to fall as earnings fail to achieve parity with those prices. But, until there is a viable alternative to the market place, Money will switch from sector to sector and company to company as opportunities dictate. Value spent years in the doghouse while growth grew to ridiculous valuations and then some. Now value has taken center stage and will be reluctant to relinquish that role. Then, when you least expect it, a new technological breakthrough will catch the investors imagination and the paradigm shifts anew.
Markets never fully satisfy either the most ardent bear or bull. They confound the masses. Our economy continues to enjoy pleasant consumer sentiment surprises even as some of the dinosaurs of the past lay off great numbers of their employees. As one pundit remarked, "never underestimate the American consumer's ability to spend his income and then some".
As money meanders through the sinewy market and prices evolve to their lowest common denominator, the rhetoric will not abate. Will the markets go lower? I would assume so. Will they reach book value? I sincerely doubt they will even come close. Will they go higher? Undoubtedly. Will fortunes be won and lost? Of that I am certain.
In the end, the treasures we have stored on this earth will pass to our beneficiaries and our real treasures will become far less palpable and not at all quantitative. You can bank on that! |
