Forum Archive Index - June 2001

["Peter" <pmaiden@xtra.co.nz>]

Gerry - I agree with your thoughts that staying away from indexed funds and keeping up cash reserves could be the best play in the short term.

 

But spare a thought for the poor yank. The 3 month T-bill is down to 3.5% and inflation is running at 3.9%. Those putting money away in cash deposits are likely to earn less than the rate of inflation.

 

The PE of Dow stocks is said to be in excess of 24 at the moment. In view of the number of profit warnings and the decline in earnings either the PE goes up or the Dow comes down - give you one guess what I think will happen.

 

The ongoing Fed cuts over the nineties has not only boostered consumer spending  but it has encoraged corporate America to borrow like never before. The S&P 5000 companies total debt to equity ratio has gone from 84% to 116% in the last 15 years. What a cocktail - increasing debt with declining earnings.

 

The outlook is not that good and I think this week was the realisation for many over there that the American economy is not as robust as they thought.

 

No doubt the Fed will lower rates again. Some dude (wasn't Maria) this morning  on CNBC was saying 50bps soon.

 

That will give some respite and the Dow and Nasdaq will bounce back a little - for a while. The recent cuts haven't held the market up.

 

Same sort of trends on the NZSE as well. The Evening Post publishes earnings forecasts of the Top 40 each week. Since Feb the average PE of these stocks has steadily moved from below 17 to over 19. Convince me that company earnings are growing to such an extent to support this increase.

 

Too complicated (on a Saturday) to work through all the ramifications for us poor Kiwis,

 

But you might be right Gerry - staying away from indexed funds and maybe keeping  the cash in the mattress for a while might be the best move.

 

Cheers

 

Peter