Forum Archive Index - October 2001

["Brian & Fiona Brakenridge" <pohuenui.island@xtra.co.nz>]

Gerry:

 

Relating to your comments.......

 

Solid and well chosen types of infrastructure companies will reign! These will be in control of price setting- or at least will be able to greatly influence it! 

 

It is just as well that interest rates are still trending down, internationally. If these are low enough, then, at some stage cash will go back into the equity markets.

 

......following is another interesting commentary you might like to read that touch on the topics raised by you and Peter in this thread.

 

Where are you putting new money?

We still like all three of the aforementioned areas, tech, healthcare and financials, but in light of the severe correction in tech stocks, we are focusing new purchases in that sector. In particular, we think networking, storage, and some of the semiconductor stocks look quite attractive. What about valuations? Aren’t they still high? First, we’ll discuss the market, and then the tech sector. You may have read or heard that valuations are still high and need to revert to historical averages. The problem with this is that there are many factors that determine stocks’ valuations. Investors’ willingness to pay a given price for a given stream of earnings (which, in effect, is valuation) is dependent on various factors. Two of the biggest variables are inflation and interest rates. If these are low, as they are today, then valuations will tend to be higher for two main reasons. First, if rates are low, then the returns on competing investments (such as bonds or money-market funds) are low. So investors bid up the price of stocks to a level at which future return potential is reduced, which in turn restores the appropriate balance between the instruments. Second, lower interest rates and inflation reduce the rate at which future corporate earnings are discounted back to the present, which raises the value of that earnings stream, which is the value of the firm. So, if inflation and interest rates are low, stock valuations should be high. This relationship has existed throughout history.

As far as technology stocks are concerned, arriving at an appropriate valuation is very difficult at the present time because earnings are so depressed. With earnings so depressed, of course a price/earnings ratio is going to be high. But it is important to remember that the value of a company is its future stream of earnings, not just one-year’s worth of earnings. We think that technology sales will eventually return, and given the operating leverage of many of these companies, earnings should rise dramatically when this occurs.

We realize it is getting old hearing about maintaining a long-term time horizon, especially given the swift decline this year and the uncertainty in the aftermath of the terrorist attacks. But that is exactly what our focus as investors needs to be—the long-term. Will the economy recover? Will the stock market ever go up again? With a long-term focus, we can definitely say yes. What lies ahead in the short run regarding the markets and the economic fundamentals? When will the market turn? We don’t know. Nobody knows. But we do know that the Bush Administration, the Federal Reserve and Congress are doing what is necessary to position the economy for the future.

Patience is difficult during times like these. There is a crisis of confidence that is occurring that has frozen investors and consumers. But it will pass as it always has. Fact will overcome fear. History is replete with examples of dark times, be it market-related or not, that seemed to signal the end of the American way of life. They never have. This time will be no different.

 

 

All good ingrediants to throw into decision making pot.

 

Cheers

Brian