View Full Version : question about stocks

03-24-2002, 10:39 PM
Javelin made an interesting statement in a post below. He said stocks have fully priced in a recovery, and I would agree this is more than true. But what I think he meant is that they have priced in accelerated earnings growth into the indefinite future, given some reasonable relationship of discounted earnings to interest rates.

What I don't think Javelin meant is that they have priced in a recovery in the ridiculous demand to invest we saw in early 1998 and early 1999, for instance. And so my question is, what is to stop stocks from trading way ahead of earnings, even if earnings do pick up? Is it just because the venture capital machine is waiting to be kicked back into gear, is it because so many companies are eager to sell more equity?

Why should stocks stop going up here, this time, when they didn't last time?


P.S. I am itching to predict Nasdaq 4,000 - and then a drop back to these levels - but I'm not ready to do it yet.

03-24-2002, 11:53 PM
Why should stocks stop going up here, this time, when they didn't last time? elroy asks.

well they cant go too high as alot of capital was wiped out in the last crash. plus stupid people didnt realize that stocks cant be worth 100 plus p/e ratios. now they have been stung.

lastly we wont have .com stocks that seemed at the time to have this false unlimited potential earnings possibility. the tech revolution is here but its not going to be an overnight exposion of earnings.

03-25-2002, 12:20 AM
It depends on the institutions. They have all the money. If they determine, collectively, that the market is the place to be, then they will put all of their excess cash (and they have a ton of it) to work in the markets.

What you are seeing now is the institutions gearing up for a move. They are rotating out of tech and into the smokestacks. This may or may not drag tech along, but I wouldn't count on it too much.

Institutions have most of the money. Where they go with it is the key.

03-25-2002, 09:49 AM
If they build the money into buildings, or price it into bonds, people's rents will go down, and their mortgages will get cheaper, and eventually it has to find its way back into the stock market, right?

Can't smokestacks get "overpriced" too?

Assuming we need more durable assets to meet the demand to invest, doesn't the price have to be "too high" to stimulate the supply of durable assets, and long-term projects?

Isn't it possible that demand will pretty much go up in a stiaght line, and that supply will only occasionally overshoot it, but that in an effort to avoid the costs of overshooting and cyclicality, will tend to undershoot it, on average, by a larger and larger margin?

Meaning, nobody wants to get stuck with VerticalNet again. So isn't it possible we could have all the demand we had in 1999, but without even the junk stock to absorb it?


03-25-2002, 07:12 PM
I very much doubt that we'll be seeing Nasdaq 4000 anytime soon but your point is well taken. People have short memories and the only thing we learn from history is that we don't learn anything from history. The tech bubble has burst and with hindsight it is obvious how stupid and greedy investors were but this too will one day be forgotten amidst the next hot sector and bull run. The bulls will argue once again that the old rules no longer apply... that things are really different this time and the good times will never end.

I don't pretend to know what the market will do and equities are not at all my specialty. But the market is very rarely a rational, efficient mechanism(espeically equity markets!). It is a duel between bulls and bears, a war between greed and fear. So returning to your point, you may very possibly be correct. I would say that the market has fully priced in the recovery. But who's to say the market is or will remain rational? Right now there is still the element of fear, of another enron, more accounting disasters, a strike on Iraq, an agressive fed, a weak rebound in earnings, etc. However, the economy is definitely on the upturn and it may soon be that greed gets the upper hand on fear.

That being said, i would still bet against a substantial rally in equities in the near term and certainly against Nasdaq 4000. After being burned by the tech bubble, people are going to be more careful, at least for a little while longer.