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Strategies & Market Trends : P&S and STO Death Blow's -- Ignore unavailable to you. Want to Upgrade?

To: farkarooski who wrote (15759)	11/19/2002 3:24:53 PM
From: Softechie	Read Replies (1) \| Respond to of 30712

Major Themes In The Market 19-Nov-02 09:47 ET [BRIEFING.COM - Robert V. Green] From a long term investment perspective, it pays to look for the largest themes driving the market. They clarify what the market will value and why. Here is a brief summary of the major themes. The Return to Traditional Valuations This theme has been in place since the beginning of the collapse of the bubble era - which started on April 14, 2000. We first highlighted this trend as far back as March 2000 when we began listing the stocks with the highest Price/Sales ratios as the riskiest stocks in the market (30-Mar-00 P/S Ratios and the 24 Riskiest Stocks). It is hard to believe that major technology stocks routinely carried price/sales ratios over 100 just two years ago. What this means is that investors should not count on multiple expansion as a significant driver for prices. A highly valued growth stock that is not showing much growth (and there are still plenty of them) simply faces too much resistance for valuation increases. Any increase in the stock price has to come from earnings growth - and for many that is anemic today. Often when it happens, the stock simply grows into its valuation, meaning the actual price does not move much. This trend has almost fulfilled itself - but it is not over. It remains as a restraint against high valuations. Price/sales ratios above 10 and price/earnings ratios above 40 are almost impossible today. Most stocks carry ratios much lower. You will probably never again see price/sales ratios of 1,200 like Red Hat carried after its IPO. Here are more past Stock Briefs on this trend. 13-Mar-01 The Right Price (Part I): A Short History of PEs 20-Feb-01 Price/Sales Ratios: Trends 14-Aug-01 Four Major Trends The Search for the Right Earnings Numbers Since the bubble era collapsed, the market has been searching for the "right" earnings metric on which to focus. After a series of dubious "invented" metrics, ranging from EBITDA (earnings before interest, taxes, depreciation and amortization) all the way to "page views," the market has been searching for the right earnings calculation that everyone can agree on. This trend will take some time to work out, as a certain amount of trial and error over time is required to get the millions of investors to focus on new concepts. EBITDA was obscure when it first was postulated, but when the market realized that investor attention had shifted to EBITDA trends, it became a leading metric for value. The next candidate for "leading metric" is still being determined. Standard & Poors has attempted to create a unified standard of an earnings calculation, called the core earnings concept. Although it is hard for a vendor to push a standard upon any market, S&P has virtually no competition and will probably succeed in at least establishing core earnings as a basic measure. Some of the prior Stock Briefs on this topic have included the following: 01-Jul-02 Earnings Confidence Problems - Part II - S&P Core Earnings 11-Nov-02 The Continuing Struggle To Define Earnings The Desire for Dividends and Cash Flow All investors want a return on their investment. Historically, you got your return from a dividend. It is only in the past 30 years that the focus shifted to a return from a higher stock price alone. Dividends are becoming more fashionable and will probably become even more desirable if the market remains in a trading range. Prior Stock Briefs on this topic include: 13-Dec-99 A Brief History of the Market 19-Nov-01 Dividend Stocks 07-Oct-02 Make Dividends Tax Deductible To Revive The Market The Decline of the Secular Trends Driving the Market This trend requires a 20 year perspective of the marketplace. The remarkable bull market that started in 1981 had a series of huge secular trends that helped drive stock prices. Unfortunately, all of these have played themselves out. These trends were: The Decline In Inflation The Decline In Interest Rates The Rise of the 401(k) and IRAs The Rise of Technology The Rise of Stock Ownership The Shift From Bank Savings This topic was summarized in the Stock Brief of 07-May-02 Six Secular Trends Working Against Stocks. The Collapse of Technology Dot-coms collapsed in the summer of 2000, but most never really had a market anyways. The technology sector, on the other hand, was a real market. Technology stocks made up 32% of the S&P500 index in Q1 of 2000. Remarkably, nearly every industry in the technology sector saw sequential revenue declines at the same time - Q2 of 2001. They became growth stocks without growth. This trend is still not over - nor is the end in sight. Without a major new technology advance, the technology market should probably be viewed as a maturing market, not a growth market. That has implications for valuations (should be lower) and selecting the winners (larger is better). There are far too many Stock Briefs on this topic to list them all. Here are two of a general nature from the archives. 26-Jun-01 Where Have All The Growth Markets Gone? 13-Aug-02 Technology Is Good Enough; Won't Be A Growth Engine Other Trends There are other trends of lesser importance that we also sometimes make reference to. They include: The shift in value creation from technology vendors to companies that apply technology The declining role of the individual The collapse of the telecommunications industry - the beneficiaries being the RBOCs (regional Bell operating companies) The coming collapse of the airline industry - and the value shift to someone The Implications Understanding the major themes is important. Picking investment premises that are in conflict with the themes simply makes your investment riskier. For example, picking a highly valued technology stock that does not pay a dividend on the hopes that an increase in sales will also help drive the valuation metrics is a premise which is in contradiction to three of the major themes. Why pick investments that have uphill battles? Another benefit of understanding the themes helps clarify risk issues. For example, if the market itself is going to stay in a trading range for years to come (a distinct possibility), why buy mutual funds, particularly index funds? There is a real possibility that 3 year Treasury bonds will outperform the general market, particularly the Nasdaq, over three years. But there will still be individual stocks that will create a lot of value. The risk is higher, but for those willing to select investments in harmony with the largest trends driving the market, higher rewards are still possible. Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com