Hey, TLC, hope things are well with you. Here's another
anecdote for "a top". By the way, the following is absolutely true,
and the guy had glassy eyes as if hypnotized whenever
I asked for factual support of his opinion.
During a recent flight, I used the Airphone to check market
activity in oil, gold, dollar, bonds and stock indexes. The
unfortunate result of this conversation was that my eavesdropping
fellow passenger in the next seat became quite animated and
engaged me in a mostly one-way conversation about how
much he knew about the stock market.
As it turned out, this insurance salesman by trade already knew
the day's high, low and close for the Dow. Moreover, he knew with
strong conviction that 10,000 was going to fall soon. And not only
would 10,000 be broken, but that I should then be prepared for a
pullback to 8,500 that would be the buying opportunity of a lifetime
since the Dow is "destined" to go to 15,000 in quick order.
I was, of course, "impressed" with his market acumen and wanted to
know why the market would expand another 50% after such a
good run. "Was it unanticipated earnings or falling interest rates
that would provide such a springboard?", I asked the guru.
The fellow passenger gave me a blank stare. After a moment of
reflective silence he responded that the market was going up
because of technical factors. Curious as to these, I solicited more
information which further flustered the gentleman. But he replied
with absolute conviction that PE's were going to expand to 50
for US stocks in general.
Now that surprised even me. And maybe my skepticism showed
on my face. So I asked him again, why would stocks go from a
current historically high 33 to 50??? Would the trigger be
unanticipated permanent tax cuts?, falling interest rates in an
economy exhibiting 4% real growth?, additional commodity deflation?
Doesn't a PE of 50 imply a 2% return and extraordinarily high
earnings growth rate for the overall market??? Even today's levels
are high, I told him, with stocks implying a 17% earnings growth
for the corporate sector when they barely grew at 2% in '98. Doesn't
2% EP seem low given 5.5% bond yields I inquired.
Again I was given a blank stare. This time the response was that
"stocks are going up because they can't go down."
I reminded him that, although accounting standards are quite
different, Japan averaged a 70 PE before it fell from 38,000 to
15,000 now.
His final response to me was a chastening, "Oh, you just don't
believe." The conversation ended with me telling him good luck
and to be careful.
So here ends my tale of the insurance salesman that has
hope, conviction and prayer that US stocks will reflect a
PE of 50. What do I know… he may be right. But this "long-term"
investor who knows the daily range doesn't even consider the
downside. Even my young son knows to look both ways before
crossing a street. And the lack of humility this investor showed!
Not only does he know when the market will break 10,000, he
knows the timing and extent of the pullback before the next
runup with absolute conviction! This market may end up teaching
an entire generation an invaluable trading lesson:
Humility, don't invest without it.
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