Mohan--now I don't want you to see this as an instance of turning on my guru:)
Re your comment about my comment about the excessive focus by bears on the averages
>>Could be, but that doesn't make a bull-case for the market overall. I agree with you, the indexes are masking the damage underneath<<
I agree that the excessive emphasis on the averages by the bears does not of itself argue for a bull case and that is not the point that I was seeking to make. I made a categorical statement that the bears had already won the day based on the magnitude of the declines that various sectors/stocks had already seen--the real question is how much additional down-side there is at this point.
On the US economy's health you stated:
>>Of course I part with both of you on this issue. I am sure you agree with me that the Asian problems will not be wiped out overnight with one statement from Rubin and another from the Korean Fianance ministry, followed by an IMF bail out<<
I agree with you that this is not an overnight problem any more so than the Mexican crisis was an over-night crisis--and no amount of jaw-boning is going to change fundamental problems. The real questions are whether the potential decline in earnings caused by the Asian crisis has been fully factored into the prices of stocks and whether the problem is likely to spill-over to other countries like Japan, China and Europe and thereby impact the US. I don't know the answers to either of these questions.
>> But the markets are acting as if it is the case. Regarding their impact, did you talk to any company in specific? I did. I think the techs are going to be the hardest hit. Cheap labor in dollar terms will not be enough to compensate for the double whammy of price declines and the reduced demand. IMHO.<<
I am amazed at your statement that the markets are acting as if this is an overnight problem--and therein lies the danger in focusing on the major averages as opposed to the performance of individual stocks and sectors that are going to be most affected by the Asian crisis. Just look at the damage that the techs have already suffered with many of them down 40-60% -- now if the tech stocks were at these very same levels and the indices were 40% lower than they are would that suggest that the market has factored in the crisis, any more than it has already done?? Of course not!! But as I have repeatedly acknowledged -- the unknown to me is what the full impact on earnings is likely to be and how long this is likely to last.
As far as talking to tech companies--I have talked to individuals who work in tech companies and what I hear is that there is no slow-down, no lay-offs, they are still hiring and finding it difficult to get skilled help, no rampant concern about losing their jobs and a certain amount of puzzlement as to what all this hysteria about the Asian crisis is about. I was in the Washington DC area over the Thanksgiving break and tech companies are having such a problem getting help that they are offering SUBSTANTIAL "sign-on" bonuses for technical help and large referral fees for employees who introduce staff who are hired. Not exactly the environmemt that one associates with a significant down-turn.
>>1. favorable interest rates: Yes, that is what a major factor in the earnings strength we have seen with several large companies with a lot of debt. [IBM, G, KO, PG.] Not a boom in sales. How far will this lower interest rates take you without much of a boost in sales? Also, you have to consider the fact that companies with profit grown in mid-teens have appreciated in triple digits. How can one make a futher bullish case for most bloated stocks in the S&P? <<
Does it matter in the SHORT-RUN what the reason is for the improvement in profits?? If sales had increased substantially and interest rates were rising sharply would that have made for a more impressive profit picture? I think that your argument about top line growth being stagnant in some companies is almost like my saying that in the companies that you named, the strength in the dollar has impacted international operations and that one should factor this out. Earnings are earnings--whether it is the result of top-line growth, interest rates, costs, margins or exchange rate fluctuations. The only relevant thing is to look at whether forward earnings are likely to be adversely affected by any of these items. I would question whether the selective use of a single factor to the exclusion of others is a valid approach in assessing the earnings outlook.
>>2. no inflation: so is lack of pricing power for many companies, if not deflation<<
So given this can it be argued that we should be looking at significantly lower rates?? With the long bond at 6% and inflation not a factor and deflation a possibility, the real rate of return is well above historical norms.
>>3. sentiment is turning decidedly negative? on which planet? I am sure you know better than counting the number of posts on Mohan's thread as your bearish indicator!
Well let me see: II reports bulls in the high 30s(%)-- thelow 30s is usually associted with a significant bottom, EPC ratios at over 40-50% day in and day out---much higher on some days, most financial commentators/advisors seem to be advising caution, SI bull/bears ratio reaching levels associated with major bottoms based on past experience, the "bullish" threads that I follow have lost their optimism about the market being able to rally--with the exception of Iqbal, who IMO has fallen into the same mindset as the perennial bear who looks on every event as justification for his/her position, except that he uses it to justify his bullish views.
>>4. if you see any long term values, please let me know, I want to by. Seriously! <<
I shall do that--though I suspect that you will not see them as values. Remember that there are a myriad of companies that have nothing to do with Asia--so unless the down-turn spreads to the US in a big way, the impact on these companies will be negligible.
>>5. continued inflow of funds: don't count on the staying power of the same american public. The same janata who were buying far east funds with both hands at the beginning of the year {about $14 bil in assets] have taken the money out in Oct, Nov time [now about $7 bil in assets - source WSJ.] Besides, compared to the leverage in system, the fund-inflows are peanuts<<
I disagree with you completely on this--I think that we will not see any major shift in this for at least another 7-10 years or unless there is a change in the tax-laws that is adverse to the flow of funds. I saw a very interesting statistic that the average investor's funds in 401K and other pension funds has a cost basis predicated on the DOW at 4000+ and unless the averages decline to that level, it is unlikely that one will see any major shift in sentiment.
>>Trust Rubin, he says all is well. -g- I am sure the falling yen will make Detriot sweat in the palm. Underneath the current sugercoated surface, supposedly the Japan banks have more than $100 billion bad loans. Not a paltry sum for even the world's second largest economy<<
I think the bad loans are a problem--but I remember the same thing being said about the US banks when they had exposure to Latin American debts--and Citicorp was then trading in the low teens!! I think the Japanese will, in a controlled manner, safeguard the depositors and let some banks go under.
>>What happens to US profits when the Koreans and Japanese of the
world try to export their way out to recovery. We are already seeing the effect in DRAM and otehr chip pricing. Ask Micron, ask Texas Instruments!<<
Yes that is a risk that has to be taken into account--but to what extent will lower prices improve profits at companies that are a beneficiary of this phenomenon??
>>I also feel that the obsession of the bears that we need to see a significant decline in the averages shows a certain mind-set that clouds their judgement.
You just have to substitute bulls for bears in that line to see things differently. <<
I think that bulls who focus on the indices are equally at fault--I said that in my posting to you. So let us agree that one should stop emphasizing the indices unless one is an index player and look at sectors/stocks.
>>One more - from a macro-economic point of view, the so called "strong" economy was not entirely driven by end-user demand. This
is also an expansion led boom rather than just end-user demand boom! Without some heads rolling, things will not comeback to "bargain" levels<<
Not sure I understand your point here
>> The survival of the fittest hasn't happened yet. IMHO!
The survival of the fittest is happening all the time--that is why stock prices get devastated when they don't deliver--unless of course your notion of the term calls for companies to go under. |
