The Stingy News Weekly (06/23/02)
The Markets This Week
DOW 30: 9,254 -2.32% with a median P/E of 30.6
S&P/TSX: 7,139 -1.52% with a median P/E of 34.2
The Value View
Dow at a P/E of 20: 6,048 (-34.6%) Poor Value
Dow at a P/E of 15: 4,536 (-51.0%) Fair Value
Dow at a P/E of 10: 3,024 (-67.3%) Good Value
S&P/TSX at a P/E of 20: 4,175 (-41.5%) Poor Value
S&P/TSX at a P/E of 15: 3,131 (-56.1%) Fair Value
S&P/TSX at a P/E of 10: 2,087 (-70.8%) Good Value
"A fierce debate is raging between economists over whether the authorities should try to let the air out of the market, risking a global property crash and possibly a world recession, or whether they should let the market continue to expand, which risks creating a bubble that would inevitably burst."
Siegel and Shiller debate
"Just as Siegel's book had seemed to predict - perhaps even to help create - one of the greatest bull markets in U.S. history, the book by Shiller, an economics professor at Yale, was dead-on in forecasting the stock-market plunge that began in the spring of 2000. With two years to test these dueling views against real market data, which holds up best?"
An economy singed
"Almost 1,000 American companies have now restated their earnings since 1997, admitting in effect that they had previously published wrong or misleading numbers. As the Securities and Exchange Commission cracks down on creative corporate accounting, more such admissions lie ahead, even among household names. Phoney accounts mean that much of the profit growth of the late 1990s, the ostensible justification for Wall Street's bubbling up to its ephemeral heights, was equally phoney. It is hardly surprising that investors are so anxious."
Boom-era valuations are creating fake stock bargains
"To the simple price of stocks and (relatively) low price-to-earnings ratios, you can add price-to-book value to the list of metrics that are down from the peak, but shouldn't automatically be assumed to be attractive."
The quirky nature of credit
"The state of American credit is already weakening. There are only eight AAA-rated companies left in America (General Electric, UPS, AIG, ExxonMobil, Johnson & Johnson, Berkshire-Hathaway, Pfizer, and Merck), compared to 27 in 1990 and 58 in 1979. The first quarter of 2002 was one of the worst quarters on record for corporate bonds. Some 47 issuers defaulted on their debts, for a total of $34 billion in bad debt."
Indexing works better elsewhere
"In the encyclopedia of index investing, the Canadian stock market should be listed under F for freak. Indexing works very well for exposure to U.S. stocks, and this applies even to the lamentable past 12 months. There's also a convincing argument for using index funds to invest in international markets. In Canada, the case for indexing just isn't nearly as strong."
Intel proves there's no such thing as a safe tech
"The bottom line is that here we are, two years after the peak, and people still don't seem to realize that "it's the price, stupid," to paraphrase a former president. Price is the single biggest determinate of the ultimate rate of return on your investment. Price quantifies how much risk you're taking. Price has some relationship to the underlying business, earnings, dividends, book values, revenues, etc."
The trivia questions this week are:
Q1. By how much did a low P/E strategy outperform the market from 1970 to 1996?
Q2. By how much did a low P/Book strategy outperform the market from 1970 to 1996?
Q3. By how much did a low P/CashFlow strategy outperform the market from 1970 to 1996?
The answers for last week's trivia questions are:
Q1. How far has the S&P/TSE60 fallen from its peak?
A1. 43% based on the XIU ETF
Q2. How far has the S&P500 fallen from its peak?
A2. 36% based on the SPY ETF
Q3. How far has the NASDAQ fallen from its peak?
A3. 79% based on the QQQ ETF
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