THIS IS MY 187TH BLOG ON UNDERSTANDING MONEY
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March, 2020
Regarding our government, let’s begin with the premise, “if
it’s too good to be true, it is too good to be true”!
The stock markets are in a correction mode from a normal
rebalancing of value assisted by the Coronavirus. The week of March 23rd was very volatile, new
lows then days of correction.
Why? The government was
again buying stocks to support markets, and they were issuing new bonds to
raise money, and printing more money.
The Federal Reserve buying these assets now holds well over $5 trillion,
according to recent news reports.
Another reason the government is buying heavily in stock
markets is to eliminate the “short sellers” who bet the markets will further
deteriorate. When the markets go
up “short sellers” need to cover their loss positions and come up with cash;
they get killed on the strong “up tick” days.
In my estimation,
it would be very stupid to buy into this market, it should go
significantly lower. As stated in
my last blog, the unknown factor is the government. How far will they reach financially to support free market
downward movements? Federal
Reserve Chairman, Jerome Powell, stated “they will go to any degree financially
to help”; this leaves a lot of guessing room.
Another reason for my theory the free market should retract
is that corporate earnings should be significantly lower, thus many
corporations will have fewer available dollars to buy back there own stock.
Many people are going to cash positions and low risk, so
banks are flooded with money, this includes money markets and our short-term
Treasury Bills for 30 days and 90 days, that are now at negative rates of
interest. This is quite common
with the G-8 countries. This again
reiterates the fact that the only buying going on in the markets today is the
government, further supported by an election year.
How has this affected mortgage rates? Mortgages compete financially with
bonds, especially the 10-year bond.
If you hold an “adjustable rate mortgage”, adjusted annually, you find
that the new rate is 3.25%, which is the same as the “prime rate”.
Stock markets?
Well, the DOW closed at 22,208, March 30th with a price to earnings
ratio of 23.5 to 1. Granted, I’ve
been beating this to death the last 3 years of writing these blogs however, it
is so important to note that the average P/E (price to earnings) should be 14
or 15 to 1, proven by history since 1896.
This means the markets are still way over-priced. This includes the
NASDAQ at 7,500 and the S&P at 2,550.
I will repeat from my last blog that if the government was not stepping
in with trillions of dollars a normal “free traded market price” for the DOW
should be 14,000. Also, with the
Coronavirus added in, Goldman Sachs is predicting a GDP of negative 24% instead
of our most recent positive 2%.
This means earnings should be way off and buying of stocks should be
based upon earnings, especially in the DOW Index of the most solid
companies. This factored into the
equation should result in a DOW pricing at 10,000; (14,000, the norm, minus
25-30% drop for the Coronavirus effect).
What investors don’t seem to realize is that a price to
earnings ratio of 23 means that you would not see your invested dollars back in
a company for 23 years. Also, that
computes to your buying a company with a 4.2% return on investment; pretty
lousy considering risk/reward. (That is computed by dividing 23.5 into
100.)
When buying stock or a fund consider:
- Price
paid.
- Earnings.
- History
of growth in earnings.
- Good
management.
- Company
bringing forth new patents, products, advancing in new areas.
- Variables
that might upset future growth.
Consumer’s wants/needs of products.
- Commissions
charged by money managers and funds.
I truly hate to see this, but it will happen again and
again. The wealthy started selling
out of risky investments like the overpriced stock markets over 3 years ago
raising cash. When solid corporations
and countries around the world start getting into trouble, not being able to
pay on bonds and debt, the wealthy will step in and buy the best assets for
pennies on the dollar. They did
this during our Great Recession, and the very obvious situation when Greece
could not pay their debts to the International Monetary Fund and World Bank a
few year’s ago.
Remember, fear is a stronger emotion than greed. Our lives have changed with the
Coronavirus. Our new daily habits
our becoming ingrained including lifestyles, wants and investing. It will be a long time for “us” to
return to the old, if we ever do.
That’s it for this blog.
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