A review of the vaunted "Money Magazine" (August 1997) cover
article entitled "Sell Stocks Now!" yielded certain items of potential
interest.
Item- "Money Magazine"(MM) predicts that the DJIA will decline
by 20% over a period of 6 months to DJIA 6200 beginning ?
Item- MM is recommending that investors now prune portfolios by
20%, concentrating on those stocks with P/E's over 22 and those
in the technology sector.
Item- MM believes stocks are overvalued by 15% to 20%.
Item- In periods of low inflation, the P/E's of DJIA stocks
average between 16 and 17, according to MM. As of publication,
the DJIA was trading at circa 20X 1998 projected profits.
Item- Historically, after periods when valuations have reached
current levels, the average return for stocks has been less than
1% over the next three years.
Item- MM believes corporate earnings will decline by mid 1998.
Item- MM posits that corporate earnings are overstated due
to various "fluff factors" such as mergers and write-offs.
Item- MM's self described record of predictions:
1) Issued warning in July 1987 that stocks were overvalued.
2) Issued a warning prior to the 1990 bear market.
3) In its "boldest market call in its 25 year history"
MM proclaimed Buy Stocks Now! on its June 1994 cover;
predicted that the DJIA, then at 3700, would rise to 5000.
Item- Signs of froth, according to MM:
1)Mutual funds drew in record $191 billion during past 12 months.
2) Over past 12 months, DJIA gained 35.3% compared to 15.1% for
"small stocks."
3) MM's proprietary "Small Investor Index" gained a record 9%
in first half 1997 alone- compared to average annual 9%
gain since 1970.
Item- A chart, long on colorful graphics and short on a precise
legend, illustrates that corporate profits and the DJIA have paced
each other from 1982 to the end of 1994. At the start of 1995, the
chart shows a dramatic divergence between the DJIA and corporate
earnings. It would appear from said chart that while the DJIA
has doubled (4000 to 8000), corporate net profits have risen only
about 20%. (Subject to revision. Ed.)
-----------------
Even a cursory reading of the MM article reveals a composition at
once inchoate and disjointed. The aforementioned chart, seemingly a
powerful argument for DJIA overvaluation, suffers from a precise
explanation of the graphed variables. However, in spite of its
journalistic shortcomings, the MM article nevertheless presents
a case of some substance made all the more significant given the
magazine's impressive track record (presuming the article speaks
true) and its vast readership.
|
