Rodney(Tod?): I'm actually lean to your side on the book value issue. It is an important measurement of what a company is worth, but in the case of many companies, not that important.
I am familiar with FMAC, a highly leveraged lender to financially marginal car buyers. Yes, it had lots of book, but it had even more debt, and when its customers didn't pay it, the company still owed on its debt. That is why it went under. That was exactly Bob's point - leverage is great on the way up, but don't forget the risk on the way down.
The key thing is what people believe future earnings power will be. For many years steel companies sold well below book, sucking in "value" players. But they were terrible investments, because their plants were incapable of producing consistent profits. The risk in the stock market, IMO, is not that prices are too high relative to book, but that people have overestimated future earnings power, and don't realize how a bear market could reinforce economic weakness, which would make the bear worse, and so on.
As to Bob's prediction from last March about where the market will be 12 months later, I think it is still 6 months early to declare that he was wrong.
As to your argument that gambling (excuse me, we are supposed to call it "gaming") is countercyclical, why do you think so? If we get a bear market, deflation, and a bad recession or depression, who is going to be gambling with what money? What happened in the 1991 recession, or how Las Vegas did in 1984, is not relevent to what may lie ahead. |
