Wayne, But you have to keep track of all your winnings with a good computer. <g>
Seriously, I think this discussion so far has ignored the tiger at the party, debt. Easy credit at relatively low rates is the only thing keeping the American economy and stock market from collapsing and both the consumer and the corporations are more in debt than at any time in the postwar era. Since we are already at overcapacity in most goods, this debt is being used to finance speculative activities. How does that relate to Graham and Dodd?
1. Speculative activities are of many types. For example, corporations are speculating recklessly by buying out other corporations and taking on huge debt burdens to do so. These are the companies that will be spun off at bargain prices at the bottom as the larger firms get lean and mean. Throughout history, corporations have been the worst investors in the world. They buy tops, sell bottoms.
2. Corporations are buying their own stocks. Forget for now the part of this that is a scam to rip off shareholders and line managements' pocket. Many corporations are buying shares to boost eps, pure and simply. It is one of the few tools they have at a time when pricing power has disappeared. Of course, they are reducing book value and the corporations safety net by doing so, but buying at the top does help the insiders earn their bonuses.
3. Activities #s 1 and 2 are mostly being conducted at "growth" companies. They are growing, temporarily, and are reluctant to see the gravy train sidetracked. So, corporate buying of shares adds to the demand, pushes up prices and draws in momentum investors and others in need of psychiatric help.
4. The consumer is going into debt to buy overpriced housing and securities. Next to the corporation, Joe Sixpack has been the worst investor in the world. Most use some sort of momentum process, or, they turn their money over to fund managers who buy what went up yesterday. Again, the "growth" stocks and "sure thing" stocks get bid up to silly prices in this environment, and we are way past silly. No wealthy individual in his right mind would buy any of our nifty fifty stocks as ongoing businesses at their current market prices. Not with real money. With funny money, overpriced stock in another corp, for example, this might be viable. But nobody would buy these companies as operating businesses and expect to come out whole on an internal rate of return basis.
5. Value stocks have been shunted aside because they aren't sexy. However, even they are overpriced in this easy money environment. Though probably safer than the nifty garbage, they are also likely to fall if the debt balloon ever pops.
The question is, does the debt balloon cause deflation or inflation to kill the economy and the market? Tough question. America is naturally an importer of inflation, due to our trade deficits and the mass of our debts. That would argue for inflation. But long periods of excessive credit creation have almost always ended, everywhere else, in deflation. So, I am not sure how the economy will die. I just know that Greenspan is doing his best to send it into a depression.
Best,
MB |
