As outlined in Part One of this thread (see below 1/25), the
fundamental environment for stocks remains markedly risky
reflecting the Fed's reluctance to liquify the economy as It
cuts rates. Rate cuts may eventually coax broader credit and
liquidity growth, but liquidity is now not sufficient to
support meaningful economic expansion. This does not mean that
the stock market must decline. It is a discounting mechanism,
and if enough players see growth not too far down the road,
stocks can advance even if the current environment carries
significant risk. I am not just curious about this current
unusual environment, but cautious as well.
After topping out a touch over 1600 in July, 2007, my SP500
Tracker has declined to the 1360 - 1380 area. Higher inflation
has suppressed the multiple, and the consensus earnings estimate
for the "500" for the twelve months ended 3/31/08 has dropped
nearly 14% to about 84.80. As it turns out, speculation the Fed
will again cut the FFR% and DR% at tomorrow's FOMC meeting has
brought the "500" composite back up to levels near the Tracker.
I have to confess I have some longer term concerns about the
stock market as well. These concerns have to do with the longer
run growth potential of profits and dividends. With the low
dividend payout of the "500", profits need to grow at 8-9% per
annum to hold the current p/e range. Since the US demograhics
no longer support robust consumer spending and housing investment,
earnings sources will have to be continually diversified both
to other sectors within our economy as well as abroad. So far,
corporate US has done admirably well moving earning capital
abroad, and US managers will need to remain strategically alert.
One key to US success here will be if countries with rising
wealth and high savings rates program acceleration of domestic
spending and rely less on export growth. Such is no wise assured.
In addition, if a falling US dollar remains a wellspring of
offshore growth for US companies, the US equities market may not
be much of a beneficiary as lower levels on the dollar will
prompt higher inflation and could lead eventually to overwhelming
demand for currency realignment.
Returning to the present, I am likely to be stuck in caution mode
for a while longer. I think my views on liquidity are idiosyncratic
enough that the market could well ignore them. I do not mind being
wrong as long as I catch on before it's too late.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!