Hi Iqbal. I've been busy over on the TXN thread, but I'd like to
answer a few of your questions for this thread. Of course no two
of us really agree about anything...
First of all, we have a lot of history of corporate profits dropping
and US bond yields dropping. When stocks are unsafe, people
sell stocks and buy bonds, lowering their rate. In addition, the
Federal Reserve lowers short term rates. This was observed
both in the market's response to the 87 and 29 debacles.
I agree that GM, F, and C are unappreciated. They should
be trading much higher. Their exports will surge when the
US trade deficit finally reverses and the $ goes south forever.
And I am sure this will happen eventually. The last time it did
was when the government decided to monetize debt due to
the Vietnam war. The next time will occur no later than when
the government has to monetize debt run up from the baby
boomer retirement. The republicans have not reduced
spending at all, and more and more people will have to rely
on the working of fewer and fewer.
Corporate profits have also had temporary increases in profits
before. Most notably during the 20s. Eventually they go away.
It is impossible for corporations (as a whole) to produce 20%
returns (after inflation) on equity indefinitely. If the market did
this forever, it would result in an excess of wealth. By forever,
I mean for periods in excess of 25 years. Excess of wealth
results in insufficient labor due to retirements, and eventually
increases the return to labor. And US companies have taken
their profits out of labor's hide. This is now the easiest labor
market for as long as I can remember, and it will not last.
Microsoft's multiple scares me, as a computer generation is too
short to be buying a company in the business at 50 times annual
earnings. Surprises happen, and the stock price doesn't account
for it. But Microsoft has been growing like gangbusters. The
rest of the market has been growing about as fast as the US
GNP, and that is not anywhere near the 16% (after inflation?)
that stocks have returned for the last 10 years.
I personally will not buy bonds. The reason is that there have
been circumstances where people who did so got completely
creamed. On the other hand, the positive gain available is not
that much, maybe a double. I'll just sit that one out. But I am
more afraid of deflation than inflation. Deflation is what has
happened to the Japanese market, and they are still way
down.
So stocks and bonds can diverge. It's called a flight to quality,
and has been seen several times during this century. When
corporate bonds get downgraded, investors jump to the US
bonds, increasing the spread to businesses. This further
erodes business profits, causing further downgrades. Just
like market momentum, stock/bond divergence has positive
feed-back. The fact that the a BK would tarnish the US
credit rating would keep rates higher than they would otherwise
go, but rates right now are much higher than they should be for
a non-inflationary environment. The sad fact is that for all those
investor's money, bonds are the only safe port besides cash.
And when the federal reserve forces cash down to 2%, investors
will go for bonds. If you want a current example, again, look
at Japan. Their companies are in deep doo-doo, but the
goverrnemnt bonds are mighty pricy.
Many thanks for keeping this thread honest. It gets very tiring
listening to each other post the same ideas. And having a real
difference means we won't tear each other up over minor
technical differences of scriptural interpretation.
-- Carl |
