Monday, August 30, 2010

Where Should Stocks Be Priced Right Now?

I saw an article today that asked: Are stocks cheap yet? Then I saw another titled: P/E's dropping, but still not cheap yet.

I can't find the articles now, but I imagine they were probably the same story. It got me thinking though... when will stocks be cheap? Or to put it another way, where should stock prices be today?

My thought is that stocks would probably be valued somewhere around where they were shortly after the bottom of 2009. Here's why...

  1. Stocks were over priced in 2008, before the recession, and market crash came to town.
  2. The market oversold in the Nov. 2008-Feb. 2009 timeframe due to an excess of panic.
  3. The only economic growth since the recession started has been the fictional kind that stems from government "stimulus" spending, but this only borrows money (and growth) from the future and shifts it to the present. This is evident in the fact that the stimulus has not created any real economic growth, leading the government to constantly revise the GDP downward.
  4. Companies have improved efficiencies, and cut costs so they have raised their intrinsic values somewhat, but the prospect for revenue growth in the next year remains dim at best for most companies.

Using the S&P 500 as an example, I'd say it's probably got a fair value around the 900 mark. I think this chart helps illustrate that:

But, I'm just an amateur, so what do I know?

Tuesday, August 24, 2010

Investors Still Living in Housing Dreamland.

I don't know about you, but I'm getting tired of seeing stories like these:
Stocks drop after sharp fall in July home sales
Stocks stumble after existing home sales plummet in July; Dow off 134


I mean what are people thinking? Housing sales were artificially high in the second quarter because of the federal tax credit. I don't understand how so many people mistakenly believe that such government meddling actually creates anything other than an illusion.

Think about it - is an $8,000 tax credit really going to make someone buy a home when they wouldn't otherwise?

Of course not.

It simply makes prospective buyers more eager to buy. It creates an incentive to buy the house they were going to buy anyway a little sooner, so they can take advantage of the tax credit.

Yet, here we are. The Dow drops 134 because investors were somehow expecting that there wasn't going to be a huge vacuum created by all the people who bought a house in June instead of July.

Home sales have fallen sharply since a homebuyer tax credit expired at the end of April, despite mortgage rates reaching record lows. A stubbornly high unemployment rate of 9.5 percent has been keeping home sales down, and banks have also been cautious in making new loans.

BINGO. No job, no income - no new house. You could make the rate on mortgages 1% and you'd still have a huge part of the population who can't afford to buy a home.

If you're one of these investors who get spooked or surprised by such housing figures, try to keep these points in mind and don't expect any meaningful changes until the unemployment rate and housing prices come down.