Stocks Stink!

Ethel the Blog points to Stocks Stink from Rumor Mill News. Worth reading.

Following are verbatim excerpts from Bill Gross: “STOCKS STINK…Stocks are way over-valued…the Dow’s fair-value is about 5000.

“…stocks stink and will continue to do so until they’re priced appropriately, probably somewhere around Dow 5000, S&P 650, or NASDAQ God knows where.”

When you hear ANYONE talk about “the bottom” of the market, see if they mention the key word – VALUATION! The valuation of the market is still remarkably high. It is currently at the level that inspired Greenspan to make his famous “irrational exuberance” remark. I read somewhere that they are currently at the valuation that the market crashed FROM in 1929, but I haven’t had time to research whether that is accurate. What was the average PE ratio in 1929, and what is it now?

When someone tries to talk to you about the market having a certain return over the long run, here’s the catch. If you buy stocks at a certain valuation (P/E ratio — stock price per dollar of earnings of the company) several years later the stocks should have a higher price AT THAT SAME VALUATION because over time average corporate earnings have risen and therefore should rise, over time. But RIGHT NOW stocks have a very very (very) high valuation – the P/E ratio is much much higher than the historical P/E ratio. Usually the reason for a high P/E ratio is expectations that earnings are going to go way up, and soon. But are there reasons for such expectations at this time? Companies had been screwing with their books to make earnings appear higher, they are likely to stop screwing with the books (for a while), so earnings are certainly not likely to rise (as they had been doing) due to that factor. On top of that the economy is no where near solid so we should not expect any big boost in earnings due to a bug surge in the economy. So \there is no explanation for this high valuation that is based on expected good news. Unless you think that war with Iraq will be good news. Usually in such circumstances you should expect P/E ratios to start falling. If you expect they are likely to they fall to historic averages they have a LONG way still to fall.

Let me put it another way, people think because stocks prices have fallen they are therefore low. Look at this chart to see if you think they have fallen enough to be “low”. Now, if you can think of some reason for stocks to be really really high, buy more stocks. Otherwise, run for your life.