Barfing.com: The Road Less Traveled
24-Jul-02 08:49 ET
[BRIEFING.COM - Robert Walberg] When the stock market becomes the lead story on the news, you know that it is close to a turning point. A few years back you couldn't turn on the news, read a magazine or go to a cocktail party without hearing or reading about the great bull market. Making money - and lots of it - was just oh, so easy during the "new paradigm." But that was then, and this is now.
Now, after a 2 1/2 year long bear market, we have come full circle. The stories today are not of new found wealth or of early retirement. Just the opposite in fact. Today's headlines are of corporate scandal, Congressional hearings, bankruptcies, debt downgrades, financially strapped retirees and poor retirement planning, greedy CEOs, and, of course, the relentless market decline. Given the sheer volume of these stories, is it any wonder that investor psychology is so bleak.
Well, just as excessive interest in the market presaged the top, Briefing.com contends that the current torrent of negative news suggests that we are very near a bottom. We don't know if that bottom will be come today, tomorrow, next week or next month, but at today's prices we think the risk/reward ratio is finally attractive enough to justify buying.
That's right, we said b-u-y-i-n-g, buying. Aside from the general sensation that pessimism is so high as to suggest that selling is nearly exhausted, Briefing.com is encouraged by the following:
Despite all the negativity, the economy continues to gain momentum. Assuming the market doesn't pull the economy down with it, investors will eventually take notice of fact that business investment is steadily improving, as are corporate profits.
Interest rates remain at historic lows; consequently, the consumer is unlikely to crawl into a hole as many economists/pundits now fear.
The brutal efficiencies of the market, as our Director of Research Greg Jones put it in a recent Stock Brief, means that we will work through the accounting concerns sooner than currently feared; and with that monkey off its back, the market will enjoy a nice relief rally.
Companies are finally beginning to take stock out of the market in aggressive fashion, with numerous firms announcing sizeable buyback programs. Merck (MRK) is the latest example, having announced just last night that its board has approved a new $10 billion stock-buyback program.. This activity is a positive for two reasons. First it reduces supply, and second it indicates that managements now see their stocks as cheap.
One positive about the big declines - valuations are considerably more attractive... S&P 500 now trading at roughly 16x estimated FY02 earnings.
At 919 days, this is now the second longest bear market in history. According to the Stock Trader's Almanac, the longest bear market ran 959 days (1939-42). Even if the most bearish of investors has to admit that we are much closer to the end of this bear market than the beginning. Admittedly, the bear could go out with a bang, but with the DJIA, S&P 500 and Nasdaq already down from their bull market highs by 34%, 49% and 76%, respectively, we think it's fairly safe to assume that most of the damage is already done.
Going into yesterday's session, in which another 692 NYSE stocks set new 52-wk lows, only 22% of the NYSE stocks were trading above their 200-day moving averages - a level historically associated with market bottoms.
Major market indices trading at deep, unsustainable discounts to their long-term (200-day) moving averages.
The biggest risk to our assumption that the indices are sufficiently close to a bottom to warrant buying is, appropriately enough, a psychological one. If the market declines and various scandals have breached investor faith in the marketplace, much as Watergate did for politics and politicians some 30 years ago, then a) the additional downside risk is greater than 3%-5% and/or b) the potential upside off the eventual bottom will be relatively modest. While a consideration, Briefing.com doesn't see enough evidence of such to keep us from taking the road less traveled and jumping back into the long-side (see Core Insight page throughout session for more specifics on our investment candidates of choice).
Now, we triple-dog-dare you to join us.
Robert Walberg, Briefing.com |
