No Crisis of Confidence Here
Robert Marcin
07/18/02 - 10:59 AM EDT
The current stock market malaise is a "Crisis of Confidence," contend the financial reporters, market analysts and fund managers that flash across my
CNBC screen.
According to them, the solution rests with a multitude of new corporate governance laws and a few televised ex-CEO hangings. Only then will investors feel secure enough in the financial system to re-enter the equity markets in a significant way.
That is nonsense. The current bear market is a result of egregious excesses built up during the past 20-year super bull market. This laundry list of excesses includes greedy, self-serving managements, ineffective and incompetent directors, lax government oversight, dishonest accounting and reporting, disingenuous investment banking and analytical practices, unprofessional and irresponsible portfolio management processes, and mindless, imprudent over-investment in equities by almost every class of investor.
And oh yes, one more wretched excess -- namely, a completely unjustified sense of superiority, both economic and moral, directly resulting from the foolish New Era and its stock market bubble. All of these factors contributed to the most significant overvaluation ever created in the U.S. equity markets! And that, my investor friends, is the root of this secular bear market.
Confidence, or a lack thereof, is not this market's major issue. In fact, with the
S&P 500 trading for 18-20 times normalized profits, many multiples of book value and yielding a measly 1.75% in dividends, there is a great deal of confidence in the quality of corporate earnings and their growth rate!
This does not mean investors are happy; they've been getting the tar kicked out of them on a daily basis. They are hurt and angry about the massive loses they have suffered. But the fact is that equities as an asset class are not being valued as though a significant crisis in confidence exists.
If you're looking for individual stocks suffering such a crisis, there are plenty, including
Tyco(TYC Quote - Cramer on TYC - Stock Picks),
EDS(EDS Quote - Cramer on EDS - Stock Picks),
HealthSouth(HRC Quote - Cramer on HRC - Stock Picks),
Cendant(CD Quote - Cramer on CD - Stock Picks) and
Halliburton(HAL Quote - Cramer on HAL - Stock Picks).
Single-digit P/E ratios for these stocks clearly reflect a lack of confidence in these stocks, but a market multiple of 20 times profits, or 1.3 times revenue, absolutely does not!
What to Do
So what should the average investor do? First, stop the incessant whining about "getting the crooks." And don't believe the "professionals" who blame this decline on unforeseeable corporate malfeasance. The crooks will be taken, but that itself will not put down this bear.
Prepare yourself financially and emotionally for this difficult market to continue. As I suggested in my
May 6 column, you'd be wise to keep a decent cash cushion and purchase very cheap stocks during market declines. No one knows where the bottom will be, but 18 times earnings does not seem low enough for a secular bear market trough.
Also, educate yourself about the stock market's valuation history. An understanding of the markets' past valuation ranges will put current prices into perspective. Though the worst part of the decline may be over, I don't think we have seen a capitulation bottom that represents cheap valuations.
Clearly the market is very oversold and could mount a decent rally at any time. But I would personally be more comfortable purchasing stocks with the market at 14-15 times profits and under one times revenues.
Remember, valuation is what this bear market is about. A crisis of confidence with the stock market at some of its highest valuations in the past 50 years? Hardly. A crisis of intelligence, prudence and sensible investing over the past few? Absolutely.
An Update on Dave & Buster's
In
past columns, I have recommended
Dave & Buster's(DAB Quote - Cramer on DAB - Stock Picks) stock. The management buyout group has raised its initial $12 per share bid to $13.50 and appointed a new board member to field bona fide, third-party interest in the company. Any outside interest in Dave & Buster's will manifest itself over the next week or two.
While I am disappointed in this bid relative to my own calculation of fair value, I will probably tender shares should no higher legitimate bid surface. I may even feed some shares to the deal arbs, since this represents my largest position and has limited upside without another bidder.
