I don’t know if you have been watching, but the Discovery Channel has been featuring a six-week documentary entitled “Everest: Beyond the Limit.” The program chronicles the journey of eight men who are attempting to scale Mt. Everest.
Many climbers suffered from oxygen deprivation which caused brain swelling, insomnia, digestion problems, and even death. The extreme cold has caused frostbite, and one man attempting to scale the mountain lost both legs below the knee to frostbite 24 years ago. He is attempting to climb Mt. Everest on two false carbon legs with spiked feet.
Are all of these risks are worth losing your life? Stupider things have been done. For example; Listening to the Wall Street spin machine has got to top the list. Don’t you find it odd that since the July lows that the market has gained over 1500-points, and about 1300 points have come during only 12 sessions? Keep in mind our story about the Plunge Protection Team- October 26th.
We are clearly facing some facts that just don’t add up;
For example, here are this week’s comments from Jeff Saut;
Speaking first to valuations, we have often stated that the best representative index for the average stock is not the S&P 500, but the ValueLine Index. At its peak the median P/E ratio of the ValueLine Index was 20.9x (see chart 1). Currently its P/E ratio is 18.3x, and while not as expensive as it was at its zenith, it is certainly not “cheap” by historic standards. Second, as for earnings momentum, if you deduct share repurchases, and seasonally adjust earnings, one finds that earnings momentum has been slowing since 4Q05 and is currently tracking toward mid-single digits. Third, recent reports leave little doubt that the economy is slowing. Indeed, GDP, capex shipments, ISM, private payrolls, Industrial Production, Existing Home sales, retail sales, et all, have been contracting. The lone stand-out arguing for economic strength remains governmental tax receipts, which continue to record low double-digit growth readings. Plainly that just does not “foot” with the recent 1.6% GDP report.
Other “non-footers” include: 1) a personal U.S. savings rate that appears to have bottomed, implying that Americans are saving more. This is not an unimportant observation, for it can be argued that for every 1% increase in the nation’s savings rate the business sector loses roughly $100 billion in profits; 2) reinforcing point one is a rare event that saw consumer credit actually get paid down in September with a concurrent reduction in bank lending to households during the month of October; 3) that begs the question, “following the Goldman Sachs-induced crash in gasoline prices, which have subsequently rebounded now that the gasoline weighting has been cut from 7.3% to 2.5% in Goldman’s much indexed commodity index, why have the retail stocks held up so well?!;” 4) evidently Amazon (AMZN/$42.55) and Wal-Mart (WMT/$47.50) don’t believe the retail rebound is sustainable since they are cutting their respective capex spending budgets; 5) and why, pray tell, does the U.S. Dollar Index remain amazingly resilient in light of low interest rates and given the fact that China, Russia, the United Arab Emirates, Saudi Arabia, Switzerland, New Zealand, etc. all telegraphed that they are reducing their weightings of U.S. Dollar reserves?; 6) why did the SEC, in mid-October, reduce margin requirements for select investments by hedge funds?; 7) how in the world can “guest workers” sue U.S. companies for under-paying them ( USA Today 11/15/06)?; 8) we could go on, but you get the idea . . .there are a lot of disconnects currently.
Here are some other points to consider. Everyone keeps screaming "buy large cap stocks". In a slowing economy, "they will help you buffer a decline in the markets". Oh, really?
- Wal-Mart pays a 1.4% dividend, and has not stayed above $50 since March 2005.
- 2 out of 3 Dow stocks are still below their 2000 all-time highs.
- An average recession in the U.S. causes a decline of 43% in the major market indexes.
- From January 2000-January 2006, $100,000 invested in the S&P 500 was worth $84,901.
- From January 2000-January 2006, $100,000 invested in the NASDAQ was worth $44.370.
At this stage of the market cycle and the economy, we continue to be no more than 50% invested in the markets. We will not get sucked into the current market rally no matter how sharp or high it goes.
We have no interest in climbing Mt. Everest, or experiencing brain swelling, insomnia, digestion problems, and death in our investment portfolios.
