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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Axel Gunderson who wrote (706)	8/31/1998 7:16:00 PM
From: Freedom Fighter	Respond to of 1722

Today's Action and my thoughts: First and foremost, expect Abby Cohen to be on television on a relentless basis trying to convince the world (the middle class that is, the rich have been cashing in for the last year or so) that stocks are undervalued at present. Here are the facts on which you should make your decisions: The S&P500 now trades at 25x trailing earnings. The long term average is 15X earnings. The average in low inflation environments like we have at present is 18X earnings. The average in fully employed economies operating at close to capacity like now is 12X earnings. S&P500 reported earnings are lower now than they were in 1997. S&P500 reported earnings are barely above the 1996 level. A company by company comparison of businesses with similar prospects now as they have had in the past (over the last 35 years) indicates that most businesses are selling at or close to their highest price ever on the relevant valuation criteria. Some are higher. In order to believe that stocks as a group are undervalued, it is necessary to believe that stocks have never been overvalued in the history of the universe. The only way to come to that conclusion is to believe that risk premiums no longer apply for business. At present risk premiums throughout the world are rising on all financial assets where the measurement is clear. This reflects the fact that approximately 30% of the globe is in severe recession bordering on worse. Approximately another 10%-20% of the world is also under very severe currency, stock market, or economic duress. The rising risk premiums reflect the fact that there have been substantial losses on many investments throughout the world that were thought to be part of the now totally discredited "new era" of permanent prosperity where risk did not exist. They also reflect political uncertainty in some areas. The dramatic fall in interest rates on TREASURY securities reflects the potential significant global deflationary forces that are being unleashed around the globe at present. In my view, lower interest rates almost always justify higher equity prices. In this case they may not. They do not reflect improvements in the fundamentals. They reflect flight to quality and uncertainty about the seriousness of the potential deflation and credit contraction. This is easily verified because interest rates on all types of paper other than treasuries are simultaneously rising around the globe. Including high quality U.S. corporate bonds. None of this can tell us where the market will head next or how severe the ongoing crisis is. It can tell us where the risks and rewards are for investment (as opposed to the reckless and unprofessional speculation that has become fashionable.) Blue chip stocks remain at unprecedented levels in most cases. In my view the long term returns from these levels still do not justify the current and long term risks and rewards. This is especially true with the current unchecked global financial storm still in progress. That said, the broader market and many secondary issues have now already experienced a full fledged disaster. Very many stocks are now trading 40%-50% or more below their highs. Some are at quite attractive prices. Value investors of all types should welcome this opportunity and be well positioned to take advantage of the carnage. The overvaluation and risks that preceded it were obvious. In my own portfolio, I am now getting ready to close out a few short positions that have become very profitable. I will retain some. I am also very close to starting to ease my way into some of the undervalued positions that are available. I REPEAT EASE! Wayne Crimi Value Investor Workshop members.aol.com

To: Axel Gunderson who wrote (706)	8/31/1998 7:29:00 PM
From: Freedom Fighter	Respond to of 1722

One thought on tomorrow. There is an enormous amount of smart money that has been shorting this market. At some point, sooner rather than later, we can expect a significant short covering rally. Even bear markets do not go straight down. In addition, the rapidity of the current decline will probably prompt the Fed to add significant liquidity and reserves to the system if the decline does not stablize on its own. Again, sooner rather than later. For traders only: One should not base any trades on any rally in the next few days. Continue to pay close attention to the fundamentals though. They have not deteriorated that much in the U.S. as of yet. So there should be some support in here somewhere as we stand. The hot spots continue to be South of border (Brazil, Mexico, Venezuela), Canada (is in worse shape than commonly thought), and a few other well recognized and discussed places. Action in the above places will indicate the spread and severity of the ongoing selloff and its economic impact. Canada and Mexico are the most significant dominoes.