Weekly Risk Report 01/26/2009
During the last few weeks I've heard from a number of people whose confidence in the concept of investing money in stock markets has been deeply shaken. It seems every night there's news of another shady character with a fancy title bilking money from shareholders, investors or the public coffers. It seems the Panic of 2008 has unnerved many.
The stories continue. People have told me they don't want to open their year-end statements because they don't want to see how bad the year ended. At dinner the other evening a gal asked me if I thought there was 'anything' worth an investment. For those of us in the business of investing it can be both easy and very difficult understanding such thoughts. It is easy because we've seen up close just how nasty a bear market can be. At the same time we can have difficulty understanding such wide spread pessimism. I don't think we're wild eyed optimists, but we do see that pessimism can be overdone.
When a market becomes what is termed "oversold" there are a variety of statistical measures that can be observed to see if the condition is mild or severe. The same is true of "overbought" markets. For instance, right now it takes a stock price gain of 31% in the last 13 weeks to show up on Value Line's 41 "Best Performers" list (the best 2.5% of all stocks in Value Line). That tells us that 97.5% of all 1700 companies Value Line follows did worse than this, but doesn't necessarily tell us much else. However, when we note that it takes a stock price loss of over 67% over the same period to make VL's 41 "Worst Performers" list, we see quite a bit more.
When we compare the information shown above to, say, the "tech bubble" era of early 2000 we fill in more gaps in understanding. In January of 2000 Value Line showed it necessary to have more than a 110% gain in just 13 weeks to make it onto the "Best" list. Also, on the "Worst" list we saw it took only a 31% loss go make that list. So, right now the two lists are quite a bit different from back in 2000.
Other market data also gives an indication the overall stock market is still doing what it loves to do. To an impartial observer it would appear the stock market's motto is, "Anything worth doing is worth over-doing!" People think of the stock market as "doing" something. In fact it's individual and collective investors who are the ones "doing." We would be hard pressed to blame the fans at a football game for the team's failure on the field. In a sense we also have a hard time thinking of market misbehavior being the result of massive numbers of people making bad choices.
Our i-Wave market risk indicator again is showing us several things. Its showing us there's better value available today than at any time since possibly the early 1970s. It's showing a very low level of speculative activity. It's showing a strong consensus opinion at all levels of participation of extreme pessimism (the consensus is usually wrong in such cases). Finally, it is showing us that nobody wants to go through the expense and effort to bring new businesses "public" through initial offerings. In other words, all four of our main indicators are extremely bullish right now.
The last item (IPO) is of interest. If one had an "average" company back in 2007 and wanted to have an "initial public offering" of stock, that company could have looked forward to having the stock priced at about 19 times its earnings. (If earnings were $1 per share, the stock would have sold for about $19) Today, if that same company decided to take the company to the public market, it would only get maybe 11 times earnings as a stock price. ($1.00 of earnings would give a stock price of only about $11 per share). So, it's pretty easy to understand why there's very little IPO activity right now. It’s also indicative of the relative value that is now available to investors.
I personally don't know what it will take to "restore confidence" to the stock markets. I am reasonably sure that it will return, however. The sentiment pendulum has been swinging way to the pessimistic side. SignalPoint has chosen a path of averaging down during this steep decline. We look forward to a "reversion to the mean" of market sentiment.
