Contrarianism for Everybody!
"It dawned on me that just maybe the buy-and-hold mantra of today’s generation of stock market investors might at long last be destined for the ash can of history…" said the chief investment officer of Wells Capital Management to Jonathan Laing of Barron’s, "and that a solid stock-market recovery might not be just around the corner."
The Laing article appeared last week. It disturbed our peace over the weekend. For the first time in many years, the major financial media has provided an analysis of such clarity and perspicacity you might have read it right here in the Daily Reckoning, if we had been capable of such writing. There, on page 19 of one of America’s leading financial publications, was a summary of nearly our whole oeuvre…almost the same cussed analysis – or much of it – that we had almost all to ourselves over the last few years. What are to do now, we asked ourselves? What will happen when the yahoos read this and turn bearish, we worried?
"The stock market seems to be drifting ever lower toward the panic lows it set in September, just days after the terrorist attacks," Laing notes. Then, he begins to wonder…
It is customary for stocks to be up, not down, this long after a major series of "adrenaline jolts" from the Fed. But even after 475 basis points, stocks are down about 15% since the beginning of this year. Whatever is going on, it is not a typical cyclical bear market.
"Nor does history offer any comfort to today’s stock investors," Laing continues. He describes three incidents of "stock market mania" in the last century: in 1901, 1929 and 1966-68. Each of them was followed by 15 to 20 years of miserable returns for investors. Returns averaged between 2% to 5% during these post- mania years, unless you adjust the misery for inflation, giving you a real return of zero to minus 1.8%.
Putting the recent mania in perspective, Laing includes a handy chart, showing that even in the mania of ’29, P/E ratios never exceeded 32.6. Compare that to the 44.3 registered in January 2000 by the S&P composite. The world had never seen anything like it. Nor had they ever seen the kind of cuisine being served up in corporate accounting lunchrooms. As investors are beginning to realize, while the Ps were as transparent and simple as jello, the E’s turned out be like German sausages; you were better off not knowing what went into them.
Grinding out the numbers in the late ’90s, American corporate management fed the multitudes of investors with the meat substitutes it wanted. Those were the years of the American ‘miracle economy,’ you will recall. Never before, or since, had the chefs prepared such a feast. Earnings rose each quarter, ‘a penny more’ than expected. And when investors looked at the menu for the future, their mouths watered like fire hoses. What a wonderful time to be young, free and American…for who could not retire rich when stocks shot up more than 20% per year for 5 years in a row, as they did between ’95 and ’99?
Then, when the multitudes began turning green and slumping in their chairs, it seemed only appropriate to open up the corporate wieners and see what they were made of. Good grief! Convene a hearing…get out the handcuffs…and call the TV networks!
You don’t have to imagine the shock and indignation, dear reader; it is a regular feature on the evening’s news. But the disappointment over corporate earning and falling stock prices is only part of the problem, Laing notices. In addition, he sees what we see: sagging sales, still-expensive stocks, aging baby boomers, debt- saturated consumers, terrorism, and a falling dollar. And he comes to a similar conclusion:
"The bull market was exhilarating and all-consuming for many. It brought none of the pain and disappointment that has been visited on investors since early 2000. One suspects that the hangover from the years of unparalleled returns and speculation is far from over. Huge binges require long convalescences."
Laing provides some advice too: Don’t buy the dips. Avoid technology. Instead, go for yield; you might need the money.
We read Laing’s piece on the train, while going to join the family out in the country for a summer weekend. (Like Jack Lemmon, we stay in the city during the week to work, and sit out on the balcony on hot evenings…waiting for a pot to fall.)
"A long, hard market lies ahead," Laing had written. We tossed and turned on this subject Saturday night and, failing to pay attention, banged our head on the roof rafters while pondering it again on Sunday. How can we remain contrarians now that everyone agrees with us? How can Daily Reckoning readers make any money, now that the mainstream press is giving the same advice we are?
But Monday morning, we looked at the headlines and realized – we are saved! The yahoos bought the dip on Friday. And survey results show that they are as bullish as ever. The most recent numbers from International Strategy and Investment, for example, show bullishness at record levels.
"These survey results absolutely astonish me," says Yale economist Robert Shiller. But why not? Investors were mad in the last millennium; why shouldn’t they be mad in this one?
July 8, 2002
"It is a time for soul-searching," wrote Stephen Roach last week, on how to use the national holiday.
We wondered, too…not so much about their souls, but about what might be passing through investors’ sudsy brains over the 4th of July holiday weekend. After nearly 3 years of falling stock prices, how long would they continue to believe in the promise of "stocks for the long run?" Sooner or later, we think, if investors finally locate their souls, they will find them fearful. And it wouldn’t surprise us if the whole bunch suddenly got spooked by one thing or another and stampeded out of equities.
But the few lonely investors who took action on Friday seemed convinced that this was not the middle of a bear market, but the beginning of a bull.
We don’t cite the following fact as an explanation, but merely as a decorative detail: during the most recent reported week, the money supply rose by nearly $40 billion. At that rate, about $2 trillion of new M3 money would be added to the system in a year’s time – an amount equal to 20% of the entire GDP!
We know what you’re thinking: all this extra loot is bound to show up somewhere. And yet, while the money supply is exploding, long-term mortgage rates are falling (more below) and the world’s wealth is contracting. A Reuters report last week tells us that the "Rich Lost $2.6 Trillion" in 2001. Rich people own most of the world’s stocks. And stocks took a beating in 2001.
Of course, no one cares about the rich. But "trickle down" works in good times as well as bad, we would imagine. Our master-plasterer, Mr. Goupil, figured this one out a long time ago.
"They tax the rich so much in France," he explained, "people can no longer afford fine craftsmanship. So they just slap some sheetrock on the walls. They think they are taking money from just the wealthy people….but we artisans suffer too."
Here at the Daily Reckoning, we don’t really think "money makes the world go ’round." But we don’t deny that it puts a spin on both rich and poor alike. If the rich have less money to spend, they spend less. In the present situation, they seem less inclined to build new factories or buy expensive equipment. And thus, as Eric reports, unemployment rises.
Reporting the recent jobless figures, Labor Secretary Elaine Chao advised Americans to "take a deep breath and don’t panic."
We agree with the deep breath idea. Why not, it’s free…But we part company on the "don’t panic" part. Any day investors are fool enough to run up the Dow by 325 points, in a bear market, is a good day to panic and sell. As of last week, you could still do so without running into a lot of heavy traffic. Take advantage of it.
Eric, tell us more…please…
Eric Fry from New York…
– The stock market opened for less than four hours last Friday, but the bulls put in a full day’s work. The Dow jumped 325 points to 9,379, while the Nasdaq soared nearly 5% to 1,448. It’s nice to see stocks rally for a change. Watching them fall day after day was starting to get pretty tedious.
– According to the Bureau of Labor’s report last Friday, the unemployment rate edged up to 5.9% last month – the highest rate since 1994. You wouldn’t think that job losses are bullish. But then, to judge from Friday’s rally, you’d be wrong…Maybe you simply lack imagination…Let’s see, rising joblessness is bullish because…ummm…the growing ranks of unemployed consumers will now have more time on their hands to go shopping, and rising consumer spending is bullish, right?
– The bulls could be deriving some comfort from the fact that the dollar has been firming over the last few days, while gold has been fading. In other words, fear is ebbing from the US financial markets and confidence is returning…temporarily, at least.
– The stock market put a lot of points on the board last Friday. But despite the robust gains, the Nasdaq still managed to close out the week with a loss of almost 1%. Furthermore, Friday’s swift, sharp advance looked a lot like a garden-variety bear market rally.
– Stocks might string a few more winning days together, until the forces of darkness (i.e., accounting scandals, punk earnings and overvaluation) subdue it once again. Reasons to rush into the stock market remain in very short supply.
– More than likely, the corporate-accounting scandals will continue percolating to the surface like bubbles of foul-smelling methane gas, and it’s not easy stepping into a stock market that reeks of scandal.
– "The luminous financial results of all manner of formerly high-flying companies have been found to be partly mirages created by sham sales, hanky-panky with reserves and balance-sheet games designed to hide operating losses and debt," writes Barron’s Jonathan R. Laing. "Supposed defenders of investor interests – outside directors, accountants and Wall Street securities analysts – often appeared only too eager to aid and abet the efforts of corporate management to drive their share prices higher in order to pump up the value of huge executive option and stock positions."
– This insider’s game has been played very well for very many years. "In just the past several decades," says Laing, "average CEO compensation has soared from just 40 times the wages of median workers to over 400 times." By itself, such unbridled greed isn’t illegal, of course. But it is fairly repulsive. Common shareholders might not find this state of affairs very attractive from an investment standpoint…and that’s what makes for an enduring bear market.
– Although the Great Stock Market Bubble of 2000 has lost a lot of air, share prices remain grossly overinflated. Even now, the S&P 500 sells for 26 times estimated earnings, or more than 85% above the stock market’s long-term average P/E of 14. After prior bubble peaks in the US stock market, investors faced 15-20 years of sheer misery.
– From August 1901 to August 1920, for example, the stock market produced a miserly return of 0.10% after inflation. Similarly, between September 1929 and September 1949, it gained only 0.63% per year after inflation. Worst of all, during the 16 years from January 1966 to August 1982, the stock market delivered an annualized loss after inflation of 1.79%.
– "Two-and-a-half tough years in the market have cured many investors of their preoccupation with stocks," Laing observes. "Televisions in hotels and bars have switched back to CNN and ESPN from CNBC. Cocktail-party chatter has turned to other topics."
– And yet, quietly, many investors still believe in "stocks for the long term" and they continue to "buy the dip"…which means that the bear market hasn’t finished its work.
Back in Paris….
*** Our mistake. Last week, we passed along a brief history of what happened to the signers of the Declaration of Independence. The popular history, entitled "The Price They Paid," has made the rounds of print and electronic media for several years, reminding us of the suffering the Founding Fathers endured on our behalf.
*** Well, now we discover that the ‘history’ is mostly nonsense. "No signer was killed outright by the British," writes E. Brooke Harlowe of Susquehanna University. According to Professor Harlowe’s research, the British conducted themselves decently throughout the war…prisoners were not intentionally tortured nor abused, nor were the signers especially targeted for punishment. Several signers died penniless, but their own mismanagement was often as much to blame as the war. British troops did loot the homes of several signers, but not of others.
*** Henry and Jules helped me over the weekend – as I repaired a gable end of the chicken house. Jules steadied a ladder as Henry passed me tools:
Henry: "Jules, don’t let Dad fall."
Jules: "Why not, Henry?"
Henry: "Because my birthday is coming up and Dad said he’d get me a PlayStation II."