Forum Archive Index - July 2001

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

Gerry - I was going to give the 'heroic' US consumer a holiday this week and not update his efforts due to July 4th activities and all that sort of stuff..

 

However seeing you asked.....

 

I am afraid that the 'heroic' US consumer is losing his battle in keeping the US out of recession. Even sadder is that 114,000 lost their jobs in June. Who's next they keep asking themselves.

 

In my opinion it is only what defines a recession that has avoided the US saying they are actually in recession.

 

I am convinced that this is now the case. The poor presenters on CNN and CNBC this morning were really down and out. Even the most optimistic of guests were worried. Nothing to suggest good times for a while and a declining sharemarket.

 

A sharemarket where the S&P 500 is at a P/E ratio of 28. According to TheStreet.com the Nasdaq 100 index has a market-cap weighted price-to-earnings ratio of 102.

 

And that is after the prices have come down lately - except the earnings keep coming down as well.

 

Even Warren Buffett agrees. At the latest Berkshire Hathaway meeting, Warren sounded a warning that he thought stock prices were too high. "The probability of us achieving  15% growth in earnings over an extended period of years is so close to zero it's not worth calculating," said Buffett. "Nor do we think any large company in the United States is likely to (post such growth)." Of the Fortune 500 firms, he added, only two or three might be about to sustain 15% annual growth rates for an extended period. "Fifteen percent (return on stock investments) is a dream world," he  warned

 

So what happens to an overvalued US sharemarket in recessionary times?

 

Professor Robert Shiller in his book, Irrational Exuberance, says that investors have never shown a profit after 10 years once a sharemarket with high P/E ratio's starts correcting.

 

Then somebody on dailyreckoning.com said the other day that stock markets drop an average of 43% during recessions. History has shown that the never has a market bottomed at a P/E ratio of 28 which is nearly 100% ABOVE  average levels. If we were to get back to the historic average of 15, we would see the S&P 500 close to 600. They would be surprised if a bear market ever stopped at the historic averages -usually they blow right past them.

 

Where to for the NZ sharemarket? Over time we tend to follow the world so it is very likely there will be a weak (if not declining) NZ sharemarket for the rest of the year. Even though the NZSE40 has a PE of about 19 on forecast earnings I would say that these earnings forecast are pretty optimistic - are analysts in NZ much different from their US counterparts?

 

Ask yourself the following question. Which will affect your lifestyle more: not gaining 10% in your portfolio or losing 30%?

 

Pass up on all overpriced stocks.  

DR posted this from a newsletter he gets - "That means you have to be much more alert than in easier markets - the buy and hold strategy is unlikely to work - and you have to adopt a shorter term trading mentality that looks to ride such long term rising trends as are still available but also attempts to trade successfully within those trends and the more common sideways ones."

DR -maybe whoever wrote that newsletter has the right strategy.

Peter