Lars: Call our agent today. We can take these guys! Hey, can you reconcile the two highlighted excerpts from these guys. What a joke!!!!
Imagining the Dow at 36,000
By JONATHAN FUERBRINGER, the Sunday New York Times
Is the sky the limit?
The answer from James K. Glassman and Kevin A. Hassett, the authors of the new
book "Dow 36,000," is an unqualified yes. And many investors may be too ready to
agree, with the Dow Jones industrial average seemingly heading for an unprecedented
fifth consecutive year of double-digit returns.
In their analysis of why the stock market's bull run should only get faster, they sweep
aside the naysayers and assert that 36,000 is a perfectly reasonable level right now for
the Dow, which closed on Friday at 11,078.45. And, they say, the rest of the stock
market could join it in such a takeoff. "Stock prices could double, triple, or even
quadruple tomorrow and still not be too high," the two write in excerpts of their book in
the current issue of The Atlantic Monthly.
Their contention raises a question that has troubled market strategists and investors
since the bull market hit high gear in 1995: Is the stock market overvalued and, if it is,
will it fall?
The issue is of immense importance. The valuation of the stock market is a guidepost on
which the market's best strategists depend to decide if stocks can climb higher. But
valuations are hotly debated, and many of the traditional measures have been dismissed
-- rightly -- as flawed during this bull market.
Over the last several years, fear that the market was overvalued led many analysts to
pare back their exposure to stocks. One who did was Charles I. Clough Jr., Merrill
Lynch's chief investment strategist, who just announced his retirement.
At the same time, Abby Joseph Cohen, the market strategist at Goldman, Sachs &
Company, has employed her own valuation methods to conclude the opposite -- that
stocks are fairly valued and still have room to rise.
Now, though, the Dow Duo -- Glassman is a financial columnist and Hassett is an
economist -- have decided to go boldly where no man has gone before. Their assertion
that the Dow could be beamed up to 36,000 makes another new book, "Dow 40,000"
by David Elias, look downright stick-in-the-mud.
Elias, the president of Elias Asset Management, expects to get to 40,000, but figures
that it will take until 2016. "It will take time, patience, and wise money management by
investors, corporations, and government entities before the economy and the market can
support price levels of that nature," he writes.
What is especially provocative is Glassman's and Hassett's view of how to value the
stock market -- and how that affects the outlook for stocks. They reject the generally
held Wall Street belief that the sharp swings that characterize the stock market make
equities more risky. The authors contend that over the long term, stocks are no more
risky than bonds, because the returns from stocks match or outdo bonds.
Using the research of professor Jeremy J. Siegel of the Wharton School of the
University of Pennsylvania, the Dow Duo point out that over the worst 20-year periods,
the inflation-adjusted return for stocks was an increase of 1 percent while the worst for
Treasury bonds was a decline of 3.1 percent. Looking at a wide range of returns over
many years, Siegel's data indicate that the risk of owning a portfolio of stocks falls to
that of bonds at around 20 years.
Because investors are willing to pay more for less risk, Glassman and Hassett say
stocks can go much higher than previously assumed before they become too pricey or
overvalued.
Investors, they contend, could be comfortable even if price-to-earnings ratios, the
traditional valuation barometer for the stock market, were now nearing 100. The P/E
ratios for the Dow and the Standard & Poor's 500-stock index are currently around 30,
well over the historical average of 14 to 15..
And while they know that the Dow really can't get to 36,000 tout de suite, they think it
will be there pdq. In an interview, Glassman said he and Hassett saw Dow 36,000 in
three to five years, which assumes annual returns even greater than the unmatched
performance of the last four and a half years. They did not inform their readers of this
caution, however, in the Atlantic excerpts, leaving them to think that warp-speed gains
are possible.
Wow! Three to five is still fast. If true, it means that millions of investors who missed
some of the stock bonanza since 1995 still have a chance to strike it rich.
So what should investors think?
Clearly there is a need to look at stock market valuations in new ways. But it's not likely
that even those who favor some sort of adjustment to the usual methodologies are as
exuberant as Glassman and Hassett.
In a speech late last month, Alan Greenspan, the chairman of the Federal Reserve,
endorsed a new way to account for software investments in figuring P/E ratios. That
change makes the stock market look only slightly overvalued compared with history,
rather than extremely overvalued.
But in the same speech, Greenspan sounded what could be taken as a warning about
assuming that investors will always be focused enough on long-term returns to believe
that stocks are no more risky than bonds, the key to the "Dow 36,000" theory. "History
tells us that sharp reversals in confidence happen abruptly, most often with little advance
notice," the chairman said. "Panic market reactions are characterized by dramatic shifts
in behavior to minimize short-term losses."
Ms. Cohen of Goldman has adjusted her valuation methods to bring them in line, in her
view, with the way the economy works today. Lower inflation, she has argued, both
improves the quality of corporate earnings and makes higher valuations less threatening.
"You have to make sure the valuation approach is meaningful," she said.
Although Ms. Cohen has lowered the risk premium for stocks compared with bonds in
her computer model, she has not eliminated it, as Glassman and Hassett have. And her
analysis shows that the stock market is "fairly valued" now -- not undervalued.
Siegel of the Wharton School applauds the Duo's work but disputes the conclusions; the
authors, he says, assume that all stocks can be given P/E ratios that should be reserved
for Internet stocks.
But leave this debate over P/E ratios of 100 to the experts, who will clearly disagree;
that is what makes a market. There are still good -- if not new -- lessons to learn from
"Dow 36,000," published by Times Books.
What Glassman and Hassett tell you -- especially in the rest of the book -- is that being
a long-term investor in stocks is smart, because it reduces the negative impact of the
short-term volatility of the equity market. This is an argument Siegal has been making
since 1994, when the first edition of his book, "Stocks for the Long Run," came out.
Glassman has done the same in his columns for years.
But the converse is also true -- and that is another lesson not to forget. If an investor has
a shorter-term view, the risk of stocks rises, compared with bonds. That means that
high P/E ratios become a problem much sooner. In other words, "Dow 36,000" and
P/E ratios of 100 are not for short-term investors.
There are reasons -- even if they are not the ones the book spends the most time on --
to think that the stock market can go higher. If the Fed can keep inflation in check and
the economy growing, the market can move higher over time, even if Fed interest-rate
increases cause temporary downswings. But don't bet on the Dow hitting 36,000 soon.
"I worry," Glassman said in an interview, "that people will get carried away with the
notion that the Dow will be 36,000 tomorrow and assume they need to be in the market
only six months to cash in.
"The message of the book," he said, "is be a long-term investor -- and that the stock
market is undervalued, so you can be comfortable being a long-term investor."
That's a good message. And just the kind of cautionary tone the Atlantic excerpts
needed.
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Yah, Glassman, you are worried that your royalty check won't clear and that is about all you are concerned with. |
