secular bear market?
 

pokerbabe made a reference to a secular bear market. not knowing what it was I read up on dow theory. drew a trendline for the overall market for the bottoms and the tops for the overall market for the last 200 years or so. highs trace right to the all time high for the s&p 500 and tracing the lows came up with anticipated future low for the s&p of around 300. seems unbelieveable doesn’t it? the chart I looked at seems to indicate that we are in a secular bear market. secular bear markets range from 8-20 years so accordin to dow theory we have to wait for at least 2008 for the next bull market. i defer to pokerbabe on explainin it better cause im just interpretin what I read.


heres the thing though. i see plenty of great performances by companies over the last year in both stock price appreciation and earnings growth. an age old question, is it a market of stocks or a stock market? certainly theres market risk but it seems that companies do trade a lot off of fundamentals i.e. if valuations are in line with anticipated earnings growth a change in earnings prospects does seem to drive valuations in the expected direction.

Re: secular bear market?
 

I think they got disconnected in about 1994 or so. After all, only when you have expectations of 20 or 30% growth in already multi-billion dollar companies can you get so caught up over missing estimates by a penny or two. If you are a 5% growth story and you miss by a penny, your long term price should change maybe 50 cents. Not these 10% sell-offs that have become all too common.


IMO, capitulation is close at hand. From a fundamental sense, stocks are getting cheap...especially the big names. They are the ones that can fund at these ultra-low interest rates. I mean 10 years ago if you told any big company they could issue long-term bonds and only pay about 6.5-7% on them they would have asked where do they sign up. After all, think of what that implies. Because of taxes, that means any of these companies could go out and borrow money and pay essentially 4% on it, after tax. If you are a big company with quality products and a good distribution network, how can you go wrong? There aren't many investments a quality company can find that won't give them at least 4% return. Above 4% and they have added shareholder value. This number is so low that often companies could take on mediocre business and just get that type of return from cost of scale improvements. This is unprecendented since the 50s and people are so caught up in the busted bubble that they are looking past this. Sure you might have gotten buried buying up a dot.com or even a survivor like Yahoo when it was over 200, but if you buy up a AAA credit rated company that has access to easy capital, you have to see that times were rarely easier to build market share cheaply and position themselves for the return to a positive economy. Fundamentally the investment world is ignoring things, they are caught looking the other direction. People will eventually get over Enronitis and the phantom double-dip recession and after a last bought of capitulation where the current trend of running out of the market into a house your really don't need for speculative purposes plays its course, the market will once again find its way. NASDAQ 4000 is likely many years off, but it will get there again someday.

Re: secular bear market?
 

"I think they got disconnected in about 1994 or so. After all, only when you have expectations of 20 or 30% growth in already multi-billion dollar companies can you get so caught up over missing estimates by a penny or two. If you are a 5% growth story and you miss by a penny, your long term price should change maybe 50 cents. Not these 10% sell-offs that have become all too common."


agree with points you make. i think a lot of the selloffs you describe were just looking for an excuse to happen. i noticed nokia warned today and the stock was up. if the stock was trading at $20 a share instead of $12 it gets hammered on the warning.


"IMO, capitulation is close at hand. From a fundamental sense, stocks are getting cheap...especially the big names."


i think that in the late nineties there was an overuse of the indexing strategy. this pumped up the big names too much. at least some of the big names still seem very expensive to me. probably wrong but intc, csco, and msft seem like three that are examples. ibm may or may not be but there is a lot talk about accounting problems there and imo ibm is over priced. lot of talk about accounting problems at ge plus the quality of a big portion of the ge financial units loan portfolio is very low. i know youve made points about cash flow vs. bottom line earnings before so points well taken. one thing i am certain of is that investors are going to be conservative in their valuations and demand a higher risk premium now for owning stocks. lot of words to say that i think we have a ways to go in the big cap indexes on the down side.


"They are the ones that can fund at these ultra-low interest rates. I mean 10 years ago if you told any big company they could issue long-term bonds and only pay about 6.5-7% on them they would have asked where do they sign up. After all, think of what that implies. Because of taxes, that means any of these companies could go out and borrow money and pay essentially 4% on it, after tax. If you are a big company with quality products and a good distribution network, how can you go wrong? There aren't many investments a quality company can find that won't give them at least 4% return. Above 4% and they have added shareholder value. This number is so low that often companies could take on mediocre business and just get that type of return from cost of scale improvements."


these are all great points and economically are right imo. my sense is that unfortunately many ceos arent exhibiting rational economic behavior at this point. could definitely be wrong about that and would be happy to get your point of view on that.


"This is unprecendented since the 50s and people are so caught up in the busted bubble that they are looking past this. Sure you might have gotten buried buying up a dot.com or even a survivor like Yahoo when it was over 200, but if you buy up a AAA credit rated company that has access to easy capital, you have to see that times were rarely easier to build market share cheaply and position themselves for the return to a positive economy."


i would think that investors should be looking at companies that are positioning themselves well. excellent points.


"Fundamentally the investment world is ignoring things, they are caught looking the other direction."


to be honest im playin it safe. i find many securities that i feel offer excellent risk/reward parameters. ive got a fair amount of cash but ive got money working on the long side too. the securities im invested in seem almost too easy. ive spent a lot of time studying stocks the past couple of weeks and there are a lot of companies that are doing very well that seem reasonably priced.


"People will eventually get over Enronitis and the phantom double-dip recession and after a last bought of capitulation where the current trend of running out of the market into a house your really don't need for speculative purposes plays its course, the market will once again find its way. NASDAQ 4000 is likely many years off, but it will get there again someday."


the economy is in a recovery mode so the chances of a double dip recession seem small to me. the enronitis problem im afraid is a problem that is going to be with us for awhile. to me the implications as i mentioned earlier are that investors are going to be very conservative with their valuations (lower pe ratios). im more than a little surprised to see so many focused on technology. maybe at some other time ill post some opinions ive got there. if you look beyond the universe of technology stocks there is more than a few companies that are doing quite well in both top line growth and bottom line growth as well as many alternatives to growth where the yields are quite high and imo offer very favorable risk/reward parameters.

Re: secular bear market?msft
 

i think msft is a premium company, that may still have some points to shed, but i would not put mister softy in with cisco and intel...jmho..gl

Re: secular bear market?msft
 

where im coming from is using a simple dcf model of msft earnings. used following params for dcf:


bottom line growth compounded 14% for next 10 yrs.


bottom line growth compunded 7% after 10 yrs.


discount rate of 13%


consensus bottom line for fiscal 2002 $1.83 per share.


used a discount rate of 13% using 10 year govt bond rate with approx historical stock mrkt risk premium.


of course modeling msft earnings isnt that simple however it might give some clue. with those params i came up with a stock value per share of $54.86. for fiscal 2003 consensus earnings growth for msft is $1.92 a share so a year over year growth rate of about 5% is anticipated for 2003. this is a far cry from 14% as well as a far cry from 7%. is 14% earnings growth compounded for msft too optimistic? yeah i think so. does msft deserve historical stock market risk premium? yeah i think so. basically msft is trying to change their business model and thats always a risky proposition. interestingly i did a dcf for a constant 5% growth rate and came up with something like $20 a share. now we are looking at a very high discount rate. what im sayin is that investors will demand the historical risk premium for stocks because they are going to be very conservative in their valuations. if im wrong then stocks, in particular msft, will have higher valuations based on parameters ive given. for instance


say msft has the following growth prospects:


bottom line growth compounded 10% for next 10 yrs.


bottom line growth compunded 5% after 10 yrs.


if I use a discount rate of 10.5% which implies a risk premium of 5.5% then a fair value for msft on a per share basis is $51.24.


if I use a discount rate of 13.5% which implies a risk premium of 8.5% then a fair value for msft on a per share basis is $31.99 a share.


the premise im making my market calls on is that the risk premium is closer to 8.5% than 5.5%. if im wrong im wrong about the market.

Re: secular bear market?msft
 

Problem with MSFT is they are in for a whole lot of growth problems. They are so big right now and mature in most areas. They can't be thought of as a tech company with its attendant growth prospects. As someone pointed out awhile ago, if MSFT were to grow 15% a year, they would be about 25% of the economy by the end of the decade. That certainly isn't going to happen. Add in their limitations due to all the anti-trust issues, not just those brought up but those in the future, and you can see its basically joining the GM and GE class, just a different business. Only way MSFT could really get growing is if they went a la AOL and bought up media companies, but I don't think that will pass regulator muster beyond one medium sized deal. Just think of them like the Magellan mutual fund. They have gotten so big that they need to take major stakes in any investment to make it meaningful, but regulators are going to prevent that. So they will just have to sit on their wads of cash and become a 5% growth company at best. Tough to call that a great investment, but by no means would I put them in the class of CSCO, a company that is in only a few limited markets where new technology is always competing to kill off their dominant share. Problem for CSCO is any new products they bring to market almost inevitably kill off the value of their old products. MSFT expands in ways where it adds customers and complementary products, not just improvements on what they did before.

Re: secular bear market?
 

I don't blame people for being cautious or safe, its just they aren't remembering their timeframe. Further, I don't think they really know what they are doing. Too many people make allocation mistakes and this is a time where it could hurt them. I know of too many people that say they are investing in the market and with the money they will use it as a down payment on a house or car. If the market goes well, they get a nicer pad or wheels. Yeah, great logic there!!! If they had any sense they would be in bonds or cash with that money. Then they have the other pile that is for retirement 20 or 30 years off. Why sit in cash? They are in cash because they want the market to get cheaper, but who are we kidding? These people are experts of what is cheap??? Its simple, figure out what horizon you are looking at and invest accordingly. If its short term, stay out of the market. If its medium term, balance your money out. If its long term, focus on stocks. Simple advice that everyone hears over and over, yet conveniently ignores. If you have a good understanding of the market and are a rational person that doesn't bet half your wealth on one or two growth stocks, then go ahead and try to work deeper on your strategy. However, for 95% of the public, this isn't true and they should just invest it and forget it.