Hello Mike
I'm not very bullish on stocks. And I thought I might post some of the issues and concerns I have so that the highly talented and generous members of this thread could offer comment (you know, show me the error of my ways). Oh, and, uh, you can comment too!<g>
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(None of the ramblings below are purported to be original. This offer void where prohibited).
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Ever get that feeling that we're at the top of the Cycle? (or actually on the other side of it heading down?). When looking at the general economic/financial/investment environment, it pays to ask, "How much better can things get"? If things "couldn't be better," they probably won't be in the near/intermediate future; this tends to produce a very skinny "margin of safety" for investing in equities.
Unemployment Rate: We've stabilized at about 4.3%, lowest rate in a jillion years; this is happening while we have a low cpi and low measured wage inflation. I'd rather have the unemployment rate at 6% or 8%, trending down. The pool of potential additional workers and consumers would be larger. With so many employed, what will drive growth in consumption. Very likely that this rate moves up; less likely, the rate stays the same or decreases while wage inflation picks up. Things can't get any better.
Earnings Growth: Earnings have flattened - Ok, they've decreased slightly (or they've decreased significantly if you believe those crazy bears and their flim-flam accounting conspiracies). I'd rather be at the beginning or middle of the earnings cycle; not at the point just prior to the Great Swoon. What's that?? Earnings could go up? Yeah, I guess so. I mean, Companies do have great pricing power. You hardly see any sales or rebates or incentives or stuff. And, its not like the entire universe is on the web comparing prices! Geez! Plenty of people aren't on the web yet! Anyway, we're a Service Economy, dude. Things can't get any better.
Trade Deficit: It's high and likely to get worse. Good thing the price of oil dropped - deficit would be $2B/month higher. Having birthed the new era Global Financial Architecture, the US is stuck keeping the sucker alive, and that includes being the market of last resort (it also includes funding the IMF so they can provide a helping hand to those hapless countries unfairly afflicted with that contagion thing.) This deficit goes down if?? the dollar tanks or … we limit imports, making it tougher for our trading partners to service their debt. Things could be better.
Budget Surplus: Ok, I'm not even sure we have one (the debt is still going up, yes?); that's not important - the politicians THINK we have a surplus and, get this!, they think the surplus will grow as FAAARRRR as the aye kin SEE! Yes Sir. This is not good. We already have plenty of non-emergency Emergency Spending. I'd rather have a deficit with the politicians having to work a lot harder to increase spending. The only way this surplus is not a mirage is if (1) taxes from capital gains continue at their frenetic pace and (2) unusually low inflation persists, keeping the two biggest budget items (interest payments and social security pensions) under control. But, continued low inflation probably means continued deflation, and those groups suffering (farmers, other commodity producers) will likely ask Congress for a helping hand. Things could be better.
People Think the Market's Performance last August and September Was a Bear Market: O My!
General Investing Attitudes: There was a time, not all that long ago, when equities were deemed unsuitable for a wide range of investment purposes. Seriously, dude. They were considered much too risky. Today, bonds are for dorks -- equities are the only place to be. Where else can you get that kind of return? Have we sucked in every last possible available investment dollar yet?? People credit the continuous flow of 401(k) funds with much of the market's performance, and see that ongoing flow continuing to push the market higher. But, besides the large portion of new equity dollars which came from overseas investors or from employers buying back their own stock, a sizable portion of the cashflow from 94-96 was simply the reallocation of existing 401(k) balances or defined benefit pension assets. Plenty of defined benefit pension plans have increased their equity allocations from 35%-45% up to 65%-75%. Plenty of Plans I worked with were increasing the equity allocation in 94, 95 and as late as 96 - and many of these plans were over-funded, meaning it would be years before any additional contributions would be required by the sponsor. I don't see how this pace can be sustained.
Financial Media (esp. CNBC): The Clueless Facilitating the Fleecing of the Sheep. God help us and preserve us!
Management of Earnings Expectations: I don't want to get started.
Gee - We Sure Could Use Another McDonald's Around Here: or a WalMart or Wendys or Blockbuster or Borders or BurgerKing or or or How about another giant shopping mall. Whose gonna buy all this crap. I guess they'll steal market share from the e-tailers.
Inflation/Interest rates - best environment in 30 years - assume this will continue for 30 more. Ratchet PE multiples up accordingly. Project budget surplus indefinitely. Have everyone refinance and throw in one those 125% equity loans. Still not maxed out? Lease a $35,000 SUV w/ 8 mpg.
Competitive Environment: Looks fierce and harmful to profit margins. Margins made worse by internet for many companies. Will probably improve once bankruptcies increase.
Taming of the Shrew: Have heard a fair number of politicians discuss the need to smooth out the business cycle, that some way must be found to tame the brutish cycle of boom and bust. This scares the hell out of me. Was it Xerxes who commanded the tides to obey him?
Trading Partners: Would all those partners who are NOT currently in recession or depression please step forward? Ok, I see, there's, uh, Iceland, and Monaco, and uh select counties of Euroland. Things could be better.
Indexing - the Source of Bad Breadth: Last year, as documented in Business Week a couple months back, we had Fidelity eschew stock picking and enthusiastically embrace indexing, and they were so proud they turned things around (except its better since they get to keep their old fee structure). This Year, Merril Lynch canned all of their equity honchos and I bet they go the indexing route also. This trend must ultimately lead to institutionalized mediocrity, or to MSFT market cap of $6.1 trillion.
Ok, enough. Where's my margin of safety for investing in equities?
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