THIS IS MY 121ST BLOG ON UNDERSTANDING MONEY
TOOLS
August 15, 2017
Every so often I like to do a blog on the stock
markets. I have a fairly heavy
background, although dated, in the analysis of these markets and how they
function. As a competitive person
I don’t like to be wrong, and I have been wrong with the markets now for the
past 3 years; not sitting well with me!
For one, I am a believer in cycles and
reasoning/analysis. The US should
have a correction in the economy, could be a recession every 5-7 years. This normally should carry over to
stock and bond markets as downturns and US/World economics impact bottom lines
in most companies. Market indexes are a compilation of companies, not a single
company.
Therefore, as I have been wrong for so long I am going to
set forth “givens” in this blog, and let any reader draw their own conclusions.
Broad statement to begin with: “it is not a question as to
“if” a major correction in the stock and bond markets is going happen, it is
“when” it will happen”. The US
economy has only averaged an approximate gross national product (GDP) of 2%
since the Great Recession of 2008-2009.
The lows for the DOW Industrials were about 6,800 and today it is
roughly 22,000. Over and over I
repeat that there is an inverse relationship between debt and growth, so what
does the future bear if we are reaching over $20 trillion in debt and won’t be
near balancing a budget?
Now, I will go through various components of analysis and
try to keep it simple and concise.
- Where
did I miss the mark on analysis?
With the Recession we entered into “Uber Keynesian” economic policies
creating a longer than normal low interest rate period and opening up the banks
to big corporations. This permitted the large corporations/institutions to borrow
money for essentially no interest rate.
Today corporate debt is 30% more than any time in history. Is this wise leverage, or stupidity if
anything goes awry? You would
never recommend this strategy to an individual in these uncertain times.
- We
had a dot com and speculative period of investing in the late 1990’s. People didn’t’ think the markets would
ever correct. I lost quite a bit
of money investing personally,
(stocks like General Electric, Motorola), and with the big funds for
high tech stocks I didn’t feel comfortable analyzing. With large funds they invested so much money into technology
they couldn’t sell off into the market place when investor appetite came to an
end. There were too many sellers and no buyers therefore losses were sometimes
double digits in a day or two.
Today, the same investor apathy exists, the general thinking that the
markets will just keep going up.
The VIX (volatility index) is the same, very low volatility in the
markets, a paradigm to the late 1990’s prior to the bust.
- Investing
has changed. From what I can tell
individual investors only account for about 13% of the money in the markets and
the rest is controlled by institutional investors (87%); these being banks,
investment firms and funds. From
my experience in the business all these major players know each other and how
they want to manipulate markets.
When I worked for some very wealthy families, the patriarchs now long
gone, we rarely made investment decisions without inside information from
credible sources to minimize risk.
- Today’s
average market price to earnings ratios (P/E’s) are about 25:1. (That is the price of the stock divided
by the earnings.)
- Historically
the average P/E is centered around 15:1.
I thought the markets were going to take a hit 3 years ago, or so, when
the DOW was at 18,000; wrong.
- I
didn’t take into account today’s trading with computers. Now, institutions are using IT and
trading with quantum theories (waves and particles, or stocks) in nanoseconds.
- Let’s
break down some true analysis formats:
1)
Price to earnings (P/E’s) as stated in previous blogs and
above.
2)
Projected price to earnings (PP/E’s) based upon company and
Wall Street expectations.
3)
Economist and professor Shiller’s “cyclically adjusted price
to earning” ratios over a typically 10 year period (CAPE). Perhaps more accurate than monthly or
annual P/E’s.
4)
Warren Buffett’s measurement that a market should not be able
to rise faster than the gross domestic product of a country. They should be
related. As mentioned above, we have grown at 2% annually since 2008 and yet
the DOW has risen 350%!
5)
Ex-Chairman of the Federal Reserve Board, Alan Greenspan,
recently stated that the bond market is a bubble and that will bleed over to
stock markets. The Federal Reserve
sets interest rates, and therefore his comments should be taken seriously in
regard to bonds and the artificially created low interest rates for far too
long a period. In the long run
free markets should reign.
There you have it.
Are we in such a new world order that rationality no longer plays a part in the
equation? Perhaps this is just a
long epistle trying to justify my mistakes and incompetencies!
