Jay:
Greed and fear are the magic ingredients that make the stock market so interesting. here's an example of how seriously overpriced this market is. These numbers are close to correct: the Dow has a price to book of 5.55, a p/e of 21.2 and a dividend of 1.7%. In 1982 you could buy the dow at close to book value, a p/e of 8 and dividend, oh around 5%. I don't have 1982 numbers but I recall this as being close.
Now, a close real estate equivalent is
1982: pay $100,000 for a house, cash, no debt. house has to appreciate 8% next year to get your money back. you can rent it for 5% a year, or $415 a month. But you can get 15% on a government bond, and to take out a mortgage is 17% interest, so you don't.
1997: pay $100,000 for a house, you own 18% and the rest is ious and loans. Gov bonds pay 6% and a mortgage is 8% so you take the 82% mortgage. house has to appreciate 21% next year or you don't get your money back. you can rent it for $140 a month (1.7% of $100,000) It's OK because you KNOW, because the real estate agent told you so, that the house will be worth 21% more next year.
Now, compare with something like this listing in a nice northern california beach town.
members.aol.com
For $77,000 you can buy real property that gives an income of $900 a month. (I'm going to have to take a trip up to Eureka and look around!)
Boston chicken bottomed at half its book value, if someone bought the chain the stock price would double. Apple is close to book value. The end of manias historically end like this, with emotional valuations attached to businesses. If you buy a stock at 10X book it implies that temporary loss of its business can cause the stock to lose 90% of its value. P/es are elastic but book values are not. And yields are an indication of cash flow and real profitability.
Now, gold is below the price that industrial users are willing to pay for it. Like oil, clean water and natural gas, there is a point where the producers will be undercutting their profits if the price is too low, and the price will rise to meet demand. A scarity of goods or services generally creates price support. When there was a shortage of pentium computers the price was kept high. When there is a glut of new and used pentium computers the price goes down, profit margins go down, profits go down, p/es go down. etc.
I'm bullish on real property and bearish on paper assets. I really think REITS are worth buying as it's easier to buy paper than take care of the gingerbread on that cute little Victorian.
Sorry to be so long winded. Hope these thoughts help explain my perspective. |
