Gold Attractive.....
Hoover Institution porfolio manager says gold is attractively priced
Houston Chronicle Interactive
Section: Editorial
Marotta is a research fellow at the Hoover Institution at
Stanford University and portfolio manager with Marotta Asset
Management.
Be prepared for market storms that surely
will come
By GEORGE MAROTTA
The six-year bull stock market, matching our steadily improving economy,
has added much wealth to stockholders. Common stocks, however, are
extremely overvalued, and the roughly 3 percent drop so far this month could
be just the beginning of the long-overdue corrective bear market. The
conclusion that stocks still are overvalued is based on the facts that prices of
stocks are too high in relation to companies' earnings and dividend yields are
too low.
Our country has come a long way since July 15, 1979, when President Carter
gave his famous "crisis of confidence" speech. Poor Carter suffered from one
of the highest "misery" indexes: rate of inflation plus the rate of
unemployment. The Arab oil embargo had driven inflation to a hyper level,
causing the Federal Reserve Board to raise interest rates to unprecedented
levels, which caused widespread unemployment. Around that time, on Aug.
11, 1979, the Dow Jones industrial average was 750. That would have been
the best time to buy stocks because they were so cheap by common measures.
The price-earnings ratio of stocks was nine and the dividend yield was 6
percent, compared with 21 and 1.7 percent, respectively, now.
The tenfold increase in the stock market over the past two decades has, in
Federal Reserve Chairman Alan Greenspan's lexicon, created a state of
"irrational exuberance." I agree with him and believe that the conditions are
ripe for a huge stock market correction. There are many factors supporting
this conclusion:
ú We have not had a correction greater than 10 percent since 1990 ( because of
the Persian Gulf War ) , which in itself is a record. Twice before, the market
has had a similar string of advances. One of those times ended in the crash of
1929, which gave us the New Deal and the beginnings of our welfare state.
The second was the short-lived correction of 1987: The market dropped 36
percent in less than two months, but regained higher levels within one year.
Most of today's investors do not remember the grinding two-year correction
of 1973-74. The stock market gave up 45 percent of its value, and it took a
painful eight years to recoup that loss.
ú Many analysts believe that things are different now because of low inflation
and the fact that foreign competition in a free trade environment will keep
wages under control. I disagree. The General Motors and United Parcel
Service strikes show that labor wants a bigger piece of the economic pie
created in our booming times. In 1987, many analysts pointed out that the
then 22 price-earnings ratio for U.S. stocks was not really that high when
compared with the 66 price-earnings ratio of Japanese stocks. The Nikkei
average then proceeded to go down from about 40,000 to 15,000.
ú The "wealth effect" of the rising value of stocks, added to the record high in
consumer confidence levels, puts pressures on the price of goods and
services.
ú What additional good news is there to propel the market forward? The
agreement to reach a balanced budget by the year 2002 is in place and the
deficit is now approaching $36 billion. Everyone knows that the balance
would have occurred earlier without the agreement and that the deficit will go
up over the next few years. Does anyone remember that the deficit at the end
of the Gramm-Rudman-Hollings plan was higher than at the beginning? Can
today's inflation and unemployment rates go lower? How much better can the
good news get?
ú The U.S. stock market has had little competition from other forms of
investment, but it will not always be that way. Bonds, foreign stocks and
U.S. real estate currently are less expensive than U.S. stocks. Precious
metals, after their 10-year slide, are attractively priced.
ú The booming world economy will put pressure on the price of commodities,
especially petroleum, which with higher labor costs eventually will fuel a bout
of inflation. Quote from Carter's speech: "Beginning this moment, this nation
will never use more foreign oil than we did in 1977. Never." Oh yeah? Some
unpredictable foreign event ( conflict in the Middle East ) will again
demonstrate our huge dependence on foreign oil.
ú Baby boomers investing in tax-deferred plans for their retirement are fueling
this stock market boom. They are heavily invested in stocks because they
have learned that stocks are the best investment vehicle. Although stocks are
volatile, the boomers claim that they have the stomach to hold onto their
investments through market declines. I don't believe them. They experienced
the short-lived '87 crash but not many of them remember the long-lived one
of 1973-74, when they were twentysomethings.
Can't we find some middle ground between a "crisis of confidence" and
"irrational exuberance"? As students of the stock market, we cannot predict
what it will do tomorrow. But each of us should study the past and be
prepared through diversification to weather the storms that surely will come. |
