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Lately there's been a lot of bruhaha circulating about where the Market is heading. King George has been sending a lot of horses and men all over the kingdom. King George may not be able to put this Humpty Dumpty back together again. Everybody is talking all around the problem as usual, including Sam and Cokie and their ostensibly knowledgeable guests on the ABC program, This Week. Here's the heart of the matter which nobody seems to want to talk about:
Qwest Says Used Improper Accounting in 1999-2001 Euphemism: Bush, Cheney: Cheshire cats of reform, As private citizens,
did they do what they now disavow? Closing the barn door after the horses have gone out? "Clinton Rips Bush on 90's Fraud The Blame Game. He is responsible. No, he is responsible. Baloney. Bill tried to stop it? Great. At least somebody knew about the corporate malfeasance well before the bottom fell out of the market. How did their party stop it? Harvey Pitt? One guy stopped the entire United States government and corporate America? C'mon Bill. That Pitt guy must be one real mean hombre.
As anyone can see from the upper graph, redrawn from an interactive chart at Bigcharts.com , the Standard and Poor's index has been in a down channel since it peaked at around 1600 early in 2002. Few Americans are unaware of this. Most Americans are aware of how the Markets have behaved in the last decade. The DJIA and the NYSE have shown similar patterns during the last three years, although the peaks did not occur synchronously. We use the SPX because it is the best Market index. The SPX includes the broadest range of the largest 500 companies in America. The SPX is the one broad index which includes a P/E ratio. It is a broad average value and when utilized in the context of an entire index or market it is very useful. It is this P/E ratio which indicates whether stocks are relatively cheap or relatively expensive. The two blue arrows in the lower graph point to sudden jumps in the P/E ratio of approximately 50% in each case. These sudden increases occurred as stock prices were going down rather than increasing. They were due to restating of cooked books. That gives an indication of how many trillions of dollars were affected by the cooking the books underwent during the bubble years. In fact the record high P/E ratio was recorded when the S&P 500 had come down 40% from its peak. Had legal accounting practices been followed, the S&P 500 and its P/E ratio would have peaked simultaneously since the two are directly proportional. Here's how LowRisk.com
describes P/E ratio: The P/E ratio can be viewed from other perspectives. Each
unit of the P/E ratio represents one year of earnings. Guess what jelly bean? A lot can happen in 28 years. In 1998 and1999 some companies had P/E ratios of 800, 1,000 or even 1,600. Sixteen hundred years is a long time. Some companies had only losses. How did pump and dump professionals make the unbelievable believable? Negative earnings gave negative P/E ratios. Negative years before earnings equal price doesn't compute so it was just listed as NA. If companies with stock prices of hundreds of dollars double earnings, the expected wait time can be cut in half to say only eight hundred years. If only that 100% growth could have been sustained for a few years... Some companies used that gullibility test method. Others cooked the books. Dozens and dozens of paper billion dollar babies went belly up before the silly suckers had a chance to think about how long it would really take the stock prices to equal the earnings. VeeJay said she can remember when all the execs of great American companies behaved like good boys and girls. They reported losses as losses, earnings as earnings, and profits as profits. When they didn't report losses as losses, earnings as earnings, and profits as profits, they went to jail. They didn't pass go. They didn't collect 200 million dollars. They didn't laugh all the way to the bank. They weren't popular. They weren't United States presidents.
The graphs directly above represent a ten year chart of the S&P 500 on top and on the bottom, a chart of all the data which is available from Bigcharts.com for the P/E ratios of the S&P 500, which begins in late 1999. Sunnyside up, over-easy, or charred and broiled?
The cookers who cooked the books knew how much they had cooked the books. It was massive. So massive that there would have to be a great movement in stock prices if and when an adjustment were made. The adjustment could have been either rough or it could have been kind and gentle. A rough adjustment would have resulted in a crash, lots of folks going to jail, and missed opportunities to extract as much of the $8 trillion largesse as was humanly possible. The perfect president, George Bush had a much better idea. A kind and gentle adjustment. A frog doesn't jump out of a pot which is slowly warmed to a boil. No crash, extraction of as much of the $8.2 trillion as humanly possible, and only a few token bad guys are pilloried. Tate Mae is preserved. You gotta love it. It's perfect. So what's the big deal if the P/E is 60 or 600? It's all just a bunch of numbers anyway, right? The fuel, or fodder, depending on one's perspective, for the whole stock market concept ultimately rests with the decisions made by Jane and John Q Public, the puny individual investors. The longer they can see that they will have to wait for their invested cash to equal the expected earnings or increase in earnings, the harder it will be to sell them on the idea of putting that precious cash at risk. That's the problem in a nutshell. Real earnings. Do real earnings matter? Stocks can be traded quickly and investors can be in and out of them several times daily. Who cares what the silly P/E ratios are? In a commercial for Hanes underwear a fat mean old lady says, "They don't say Hanes until I say they say Hanes." Just as seemingly arbitrarily, someone has said that real earnings matter now. When real earnings matter, the P/E ratio matters. That's how you know if a stock or the market as a whole is priced right. A P/E for the S&P 500 of 20 means that a hypothetical 20 years must pass before earnings equal price. It's hypothetical. It's imaginary. But when the fat lady says that earnings matter, P/E's have historically headed for the fifteen year level or lower. As of July, 28, 2002, the S&P 500 is at 850 which is equivalent to the 35 year wait level. If the S&P 500 dropped into the twenty year range for P/E, we would see it at around 600 or less. This then begs the question of how badly you want to see corporate malfeasance cleaned up. The more you clean it up and get the accounting books in order, the more the poverty effect of stocks will be felt. The more you ignore the cooked books, the more of the wealth effect of stocks can be experienced. In either case the NNPC taxpayers will pick up the tab. They will either foot the bill for illegal tax dodging as they did in the Savings and Loan Scandal. Or they will experience the poverty effect of the bear market. Pick your poison. An S&P at 600 will have wide ranging nasty effects that will hurt. You can bet the farm on that. As CEOs are threatened with increasingly draconian penalties, it is possible that more companies will follow the precedent set by Qwest. If there is further significant restatement of accounting cookbooking, that would push the P/E levels up yet again. This would require a frightening fall in share prices to get back down to the historical precedent of fifteen or twenty year levels.
The chart above shows the average P/E ratios of the S&P 500 for about the last 57 years. During the time period between 1943 and 1991, it can be seen that the value of the P/E ratio rose above 20 only three times. The amount of time which the value remained above 20 represents less than 6% of that total time span. 55% of that time period saw the value of the P/E ratio less than 15. Vee Jay likes the Washington Post very much. She lives in an upscale neighborhood outside the Beltway in a state outside the District of Columbia. So the Washington Post is considered to be an important and influential source of information for her. VeeJay reads it almost every day. She was concerned enough about some Washington Post articles to send them to us for comment. One such article came out about July, 24 2002. Some excerpts: The Market Pendulum
"The biggest danger is a corrosion of consumer confidence and buying, which have buoyed the economy. The June unemployment rate of 5.9 percent, though above the recent low of 3.9 percent in late 2000, isn't high by post-World War II standards. If production and jobs continue advancing, they should halt the market's slide. But the opposite could easily happen."
" Undeniably, stock losses have been huge. As of yesterday, the market's "capitalization" (the value of all traded shares) had dropped 48 percent, or $8.2 trillion, since its March 2000 peak, says Wilshire Associates. Of that, about $3.7 trillion occurred this year, including $2.1 trillion in July. Economists estimate that every $1 change in stock market wealth ultimately results in a 3-cent to 6-cent change in consumer spending: up in a rising market, down in a falling market. People feel wealthier or poorer and, as a result, spend more or less."
"The stock market got wildly overvalued -- making its ultimate fall unavoidable -- because Americans became hypnotized by silly stories of the Internet and the 'new economy.'" Most Americans fear the Market enough to make some attempts at due diligence. Americans were equally fooled by cooked books which led to false economic indicators. "Now the danger is a swing to a stubborn and senseless pessimism. That, too, could become self-fulfilling. People dump stocks, even though prices now are more reasonable than two years ago." Not senseless, Robert. Check the P/E. The P/E is the same as two years ago, therefore prices are not more reasonable. "Consumer spending suffers, because stock-ravaged savings need replenishing. Production and profits worsen, triggering more job losses and stock market declines." "The economy seems destined to suffer further setbacks, because the boom left real problems. For instance, office vacancy rates have soared as bankrupt companies threw millions of square feet of surplus space onto the market. In the past 18 months, vacancy rates have jumped from 9 percent to 15 percent in Chicago and from 3 percent to 20 percent in San Francisco, says the real estate firm Cushman & Wakefield. But all the economic damage could be compounded if the press, politicians and public figures in general poison the climate through a relentless demonizing of business and a one-sided obsession with economic casualties." "Mood matters. If the 'down' is as hyped as the 'up,' where we're headed won't be pleasant."
Mood? Hype? If? "Mood matters. If the 'down' is as
hyped as the 'up,' where we're headed won't be pleasant." Here's what we think...
Mr. Samuelson wrote, "Undeniably, stock losses have been huge. As of yesterday, the market's "capitalization" (the value of all traded shares) had dropped 48 percent, or $8.2 trillion, since its March 2000 peak, says Wilshire Associates. Of that, about $3.7 trillion occurred this year, including $2.1 trillion in July." Do you really believe that $3.7 trillion vanished down the toilet this year? What a rube. News Flash: In the Market one simpleton's loss is the shark's gain. Unimaginative simpletons hold stocks as they plummet in price. Someone else can "borrow" those same shares, selling them short, and pocketing the loss as a gain. There are many other ways to profit from downward movement of stocks. Short selling is just the most obvious. Movement creates gains. It doesn't matter if the movement is up or down. The only thing that matters is that everybody can not be allowed to know the direction of the movement. Somebody always knows beforehand in which direction movement will be. VeeJay doesn't check the P/E averages of the stock exchanges, AMEX or Nasdaq. Why? Key information is not available to individuals. She doesn't check the P/E of indexes like the DJIA or SPX. Why? She can't see the relevance. However, VeeJay is a relatively savvy investor. She always checks P/E ratios for stocks. VeeJay was out of stocks and into bonds at a stodgy 8% before Bush usurped office. OPTIONS? People squawking about a bear market definitely don't trade options. Options traders are far to experienced, far too cynical to squawk about something like that. What a perfect opportunity to have sold some covered calls, the longer the better. Not those cheapie out of the money strikes, at the money strikes or even in the money strikes. Called out? Wouldn't you have loved that? Or to have bought some put LEAPS, out of the money, of course. The QQQ was above 100 after the split. The Nasdaq was off its absurdly ridiculous 5,000 high but, was still between 2,800 and 4,000. Each put contract on the QQQ could have cost about ten dollars for a 100 share contract, plus commission. Commision charges are negligible if you buy or sell a bunch of contracts in a single trade. Today those QQQ put LEAPS would be way, way in the money; depending on the strike price. QQQ last traded around $22. VeeJay can see why we were so bullish on put LEAPS back then. Hillary did a similar thing with commodities futures, turning one thousand dollars into one hundred thousand dollars. But futures are not as simple as options. And commodities futures require a lot more insider information. VeeJay has never wanted to experiment with options. Not even to sell calls against stock she owned. Go figure. On the brighter side, channels have ups. Why? So that put buyers and short sellers can get better entry points. Who day trades the short side of stocks? The same crowd that buys put options. Like the put LEAPS on American stocks before Bush was appointed. OTM options can make penny stocks out of any stock. Pleasant is a relative term. It could depend on the entry point of one's short position. It could depend on how many three year put LEAPS one scarfed up in 2000 and 2001. Those who did so should be worth millions today and more if they have more time to expiration on some of their put LEAPS. How many people are inside that cozy crowd? It was widely known that short interest on stocks was at the highest level in sixty years before Bush was appointed. It was no secret. Short interest. Have you ever wondered about short interest? If you knew that, you'd have some darned valuable information. That's why you can't get that information. Sure, you can go to Yahoo Finance and look up the short interest on any stock. You will see the short interest from last month. Great. That's worthless. BigCharts and other websites also have lists which are also worthless. It doesn't help to know what the residual short interest total was for last month. Sudden lucrative movements happen within time scales of much less than a month's duration. A cumulative total of residual short interest gives no trace of evidence as to the shorting activity which had taken place. The most important point on any chart is always, the next point. Who knows what the short interest is right now and all the time? The guys who keep the records. The Market Makers and Brokers, the guys who work the pits, and the guys who bankroll the commissioned day traders and give them marching orders. It's their business to know their business. Because if they didn't know their business, they'd be out of business. They don't guess. Are they going to tell you their valuable information? What do you think, stupid. Of course not. The market always goes where nobody expects or necessarily wants it to go. Otherwise everybody would always win in the stock markets. It's real simple. Everybody doesn't always win in the stock markets. A bear market is a sweet honeypot for the OPC. It's a place where sharks make out like bandits. Get it? Is it possible that any of the $2.1 trillion "lost" in July of 2002 found its way into the bank accounts of hypocritical Democrats pretending to be concerned about the bear market and its effects? What do you think, silly. Remember the Savings and Loan honeypot? Peanuts. The Savings and Loan scam was trivial by comparison. This Stock Market honeypot beats the pants off of that. $8.2 trillion up to the peak and $8.2 trillion down and all the interim ups and downs. Now that is a sweet honeypot, indeed.
We asked the Market savvy Kabu Sensei whether he thought
that anyone knew the Market would take a significant 50% drop. His answer was
short and unequivocal. "Certainly," said he. Who? "For starters book cookers
knew, of course, in addition to the other groups who direct Market activity
daily. So you can see that nobody of any importance has to go to jail. What
for? For being obedient? For helping in a truly herculean undertaking? For
doing their job? Their job was all and severally to contribute to the world's
largest SHORT SQUEEZE. Step one,
create dummy companies, get long, hype the upside to the max, cook the books.
Step two, get short stepwise for the ride down. Step three, uncook the books,
hype the downside to the max. Takes ten years to set up and execute. Spans the
tenure of both a Democrat and a Republican president. Everybody gets involved
but nobody knows what happened. Corporate malfeasance is 'cleaned up.' Wait a minute. Huh? That's just plain goofy. This gigantic Market bubble was nothing but a great big humongous SHORT SQUEEZE? Who planned it? It couldn't have been the Democrats. They really care about the little guys. We can't buy into that one.
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VeeJay asked us to comment on this little article from the NY Times. We thought, "Out of stocks and into tennis?" Exerpts from: "Though most investors seem to be nervously holding to their
belief that shares in American companies remain the best long-term investment,
many others are looking for alternatives as the worst bear market in a
generation deepens almost every day." "'It scares me that it might be in a bubble,' said Harold Evensky, the chairman of Evensky, Brown & Katz, a financial planning company in Coral Gables, Fla. 'We've had a lot of clients buying property in Colorado.' Relatively few investors seem to share Mr. Evensky's concern, however.'" "'I realized that single stocks are gambling; it's like going to the casino,' said Mario Ruiz, 46, a consultant to the music industry who lives in Miramar, Fla., and lost about half of the $250,000 he had invested in Cisco Systems, Philip Morris, WorldCom and other companies two years ago. But do I believe in mutual funds for the long run? 'Absolutely,' Mr. Ruiz said. 'They've taken a drop, I know that. But I don't need that money now. In another 20 years, I think it will come back.'" nytimes.com/2002/07/24/business/24INVE.html Here's what we think...
Mutual fund schmutual fund. If you haven't become cynical enough to be an options trader yet, what's it going to take? What does every options trader know very well? 85% of stock movement is market movement. So mutual funds are just as much a crap shoot as single stocks. The best way to learn this is to "invest" in a mutual fund. Or better yet, in a bunch of them. That way you'll see and really pay attention to the fact that when the market goes up and down, both stocks and mutual funds will also go up and down. Let's assume that you either heard the exceptionally loud warning signals at mid summer of 2000, or that you had the same excellent investing advice of VeeJay and the Kabu Sensei. You would have done as she did and cashed out of stocks completely between September, 2000 and February, 2001 when the Nasdaq had been between 4,000 and 3,000. Check the chart for Verizon, that was Veejay's last substantial stock trade. VeeJay bought shares when it was at $42 and sold when it was around $53 before the end of 2000. Then she was into bonds at a stodgy 8%. Maybe she's way ahead of you or your friends, maybe not. If you are still holding VZ and haven't checked lately, Verizon last traded for $28. VeeJay can probably be best described as a market timer. You have probably heard the phrase, "It's not timing the markets, but time in the markets." VeeJay doesn't necessarily believe that bunch of baloney. But it's necessary baloney. If a great many didn't believe that baloney and act on it with cash, nobody could make money with equities, options and other financial instruments. Anyway even market timers buy and hold. They just hold for shorter periods than retirement investors. VeeJay doesn't follow the herd. The main difference between herself and the persons represented by statistics in this article is that she made the switch from stocks to bonds in the fall of 2000, not in the summer of 2002. If you are still into some stocks you'll just have to ride this out even if it takes years. And it just might. Why? Global 24 hour instantaneous electronic trading. With global 24 hour internet trading stock values were bound to level out sooner or later. So when things level out stock prices may change as slowly as the dollar-yen exchange rates which have had global 24 hour instantaneous trading for some time. Wouldn't that be boring? The exchange rate moves only about 1 to 3 pennies per week. Information technology is already good enough to provide accurate analysis and information about companies. Pretty soon everybody may have all the information necessary to make money in the Market. Except that everybody can't win in the Market. Get it? Some say that this is just a correction. Heard that before? Just a correction. Correction doesn't sound so bad, does it? Fibonacci made some pretty famous calculations regarding corrections. His most famous numbers are 33% and 67%. What if the market corrects the year after you retire. A 67% Fibonacci correction might sound bad in that case, wouldn't it? Some say that this is a bear market. What is a bear market?
That's when the charts channel down for months and years.
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A Washington Post article VeeJay read. The Boomerang Economy, by David Ignatius, July11, 2002
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