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Strategies & Market Trends : Ask DrBob -- Ignore unavailable to you. Want to Upgrade?

To: Dr. B. ® who wrote (41896)	8/4/2001 6:22:05 PM
From: jpdunwell	Read Replies (2) \| Respond to of 100058

dr_b, good to see you back. Always enjoy your posts and sense of humor. I appreciate your market perspective, though I disagree. The economy will eventually be fine, but I don't think we've turned the corner yet. But even if we have, I don't believe this market is going anywhere fast, unless it's down. I've hashed over my reasons for this before, but check out the Jeremy Grantham interview in Barron's (sorry, don't have a link handy) for an interesting take on how he thinks this will play out (note: he does predict an immediate bear-market rally). Through price (quick correction), or time (long trading range), I think market valuations will be corrected. Here's an excerpt from the interview: <<Q: Then the worst for those stocks is not behind us? A: The Internet-telecom-tech bubble was the biggest by far in American history. Bigger than the railroads, bigger than anything. To put it in perspective, the S&P peaked at 21 times earnings in 1929. In 1965, in the other great cycle, the post-war cycle, it again peaked at 21 times earnings. Both cycles were built on incredibly strong earnings and productivity gains. In this cycle the index peaked at 33 times earnings, and as we sit here the S&P's P/E is at 26 times earnings. So, how can you believe that there is going to be a permanent low at a P/E higher than the previous highs? There isn't much hope. My colleague Ben Inker has looked at every bubble for which we have data. His research goes back years and years and includes stocks, bonds, commodities and currencies. We found 28 bubbles. We define a bubble as a 40-year event in which statistics went well beyond the norm, a two-standard- deviation event. Every one of the 28 went back to trend, no exceptions, no new eras, not a single one that we can find in history. The broad U.S. market today is still in bubble territory at 26 times earnings. Q: What P/E represents the old trend- line for the S&P? A: The long-term average is 14. I believe the P/E will come back to 17½ sometime in the next 10 years. A level of 17½ recognizes the world is a better, safer place and therefore we can pay more for it. We think the P/E will trend down gracefully. If it happens more quickly, it will be a lot more painful. If it happens in 10 years, there will only be a modest negative return. Q: Is the Nasdaq overvalued? A: The Nasdaq is not any more materially overpriced than the S&P. We think 1250 is fair value for Nasdaq. That said, we have been buying some tech stocks in our large-cap value portfolios. In March we started buying Intel and Microsoft. We added Compaq this spring, and we have been buying Xerox, though that may not be considered a tech stock anymore. Q: You say we're still in a bubble. Everyone else thinks this is a bear market. A: The peak was March 2000 and the market has come down a lot, but it has a whole lot further to fall. Great bear markets take their time. In 1929, we started a 17-year bear market, succeeded by a 20-year bull market, followed in 1965 by a 17-year bear market, then an 18-year bull. Now we are going to have a one-year bear market? It doesn't sound very symmetrical. It is going to take years. We think the 10-year return from this point is negative 50 basis points [a basis point is one one-hundredth of a percentage point] after inflation. We take inflation out to make everything consistent.>> JP