If you need a breather from the odorous Bullpen, spend a few minutes reading Mr. Arends' perspective on the Santa Rally. Granted, the U.S. Stock Market deems fundamental data irrelevant. Ben Bernanke has Wall Street flush with cash in an effort to bid up all asset classes regardless of the outcome from yet another round of irrational exuberance.
Kind of eerie how similar the behavior of bullish pundits is to the tech wreck of the dot-bomb era, merely 10 years ago.
The Wall Street Journal
12/29/10
It's been quite a Santa Rally.
The stock market has gained about 10% this quarter. That's the best fourth-quarter performance since 2003 and the seventh-best in thirty years. Wall Street is cheering. The shops had a good Christmas. The economy may be perking up. Investors are feeling cheerful again, and strategists are predicting a happy new year for equities.
Two words: Bah, humbug.
I can't cheer this Santa Rally. Call me Scrooge. But I'll give you ten reasons why not -- and they don't even mention the dismal economy.
1. Shares may be more expensive than they're telling you. Wall Street says the market is still reasonably priced, at about 14 times forecast earnings. But two other measures tell a different story. The "Cyclically-Adjusted Price-to-Earnings Ratio" compares share prices to average earnings for the last ten years, not just for one year.
And a measure called "Tobin's q" compares share prices to the cost of replacing company assets. These may seem off-the-wall measures, but for more than a century they have proven very good guides for long-term investors. Right now both say the market is about 75% above its average value: Not a bubble, but expensive. These don't mean the market will tank. But they do suggest your long-term returns from here may be modest.
2. Bargains are hard to find. Value investors are gasping for air. Looking for stocks below, say, 16 times likely earnings, and with a dividend yield of more than 3%? Good luck. Once you weed out shares of companies on life support or those with meager interest cover, you're left with a smattering of decent-sized names - mostly drug companies and utilities, plus a handful of others such as Chevron and Kraft. In a market that's reasonably priced, you typically find lots of stocks on the bargain rack. Not here.
3. Is that really it? The stock market is now where it was before Lehman Brothers collapsed. And if you exclude financial stocks, the market value of U.S. equities is now within about 15% of the October, 2007, peak. To believe that (non-financial) stocks are reasonably valued today implies that they were pretty reasonable then, at the peak of the bubble - and that therefore most of the last three years was little more than a bad dream. Do you believe that? Do I?
4. The dividend yield is dismal. As the market has rallied, the yield has tumbled. Today it's just 1.7%, very low indeed by historic standards. David Rosenberg at Gluskin Sheff says the long-term average has been about 4.4%. Of course, dividends aren't the only way for investors to make money: Stock buybacks and growth can also generate returns. But dividends have historically been a key driver of investment profits, and the current level is paltry.
5. Corporate debts are far larger than people realize. Wall Street is selling a story that corporate balance sheets are in great shape and U.S. companies are simply awash with spare money. It's misleading. Some companies, naturally, are fine. But overall, corporate debts have been rising, not falling. Federal Reserve data show non-financial corporations owed $7.4 trillion at the end of the third quarter - an increase of $250 billion in a year, and a new record. As recently as 2005 the figure was just $5.5 trillion.
The Fed says nonfinancial corporations now have debts equal to 58% of their net worth - compared to just 41% five years ago. And when you add these debts to the value of equities, the so-called "enterprise value" of public companies is now about 2.2 times annual sales, according to FactSet. That's an extreme level - far higher than in 2006 or 2007, and exceeded only by the madness of 1999-2000.
Brett's #6 through #10 and worth the read!
Brett Arends writes ROI, or Return on Investment, offering analysis on what the latest news means for you and your money. The column covers investments, spending and broader personal-finance issues. Brett writes from a value-oriented and generally contrarian perspective. He has been writing about finance, in Europe and in the U.S., since the 1990s. Before that he worked as an analyst at McKinsey & Co., the strategy consultancy.
By: Brett Arends
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