Main street hates stocks.
That is according to today’s front page of USA Today: The print edition had a center column, above the fold, screaming green headline “Invest in stocks? FORGET ABOUT IT.” That Cap and Bold headline is as it was in original. (The online version was the tamer Invest in stocks? Small players still smarting).
It may surprise some people to learn this is both an expected and positive development. It implies eventual lower prices (over the intermediate term), but will also help to create that elusive lasting market bottom, as I will explain in a moment.
First, an excerpt:
“On Main Street these days, investing in the stock market is about as popular as watching a scary movie on a 12-inch black-and-white TV.
Wall Street’s long-running story about how stocks are the best way to build wealth seems tired, dated and less believable to many individual investors. Playing the market isn’t as sexy as it used to be. Since the 2008-09 financial crisis, the buy-now mentality has been replaced by a get-me-out, wait-and-see, bonds-are-safer line of thinking.
Stocks remain out of fashion even though the stock market has risen more than 100% since the bear market ended three years ago. It’s up 25% since October and 9% this year.”
This is no surprise — between the run of scandals in the 1990s and 2000s, the dot com implosion, analyst scandal, the 2007-09 crash, housing collapse, the flash crash, and HFT, mom and pop have taken their ball and gone home.
This is how bear markets eventually end.
Most people misunderstand what drives secular bull and bear markets, focusing on prices alone as the defining characteristics. I believe this is in error, or at very least paints an incomplete picture.
Whenever I give a market presentation at a conference, I always use the chart below. It explains in great deal how Main Street investor psychology impacts the long secular cycles of bull (green) and bear (red) markets. Note the metric at bottom, which is P/E ratio.
My definition of a Secular Bull Market: An extended period of time, typically lasting 10-20 years, driven by broad economic shifts that create an environment conducive to increasing corporate revenue and earnings. Its most dominant feature is the increasing willingness of investors to pay more and more for a dollar of earnings.
You can see this in the 1982-2000 secular bull market. Total returns were driven partly by earnings improvements, but far more by multiple expansion. This is essentially a psychological component.
A Secular Bear Market reflects the opposite: Following an extended secular bull, it is a period of time marked by increased volatility, frequent cyclical rallies and corrections, in an economically challenging environment. The dominant feature is that Investors are willing to pay less and less for that same dollar of earnings.
We see that today. Profits going up as volumes go down; investor interest ebbs and fades. Its how markets can go sideways or even rally and still see P/E ratios fall.
Ultimately, when the process generates enough investor disgust, we can form a lasting market low, typically, in the Single digit P/E ratios.
(The caveat is we don’t know how unprecedented Fed printing affects this psychological process).
Invest in stocks? Small players still smarting
USAToday, May 8, 2012
This post originally appeared at The Big Picture and is posted with permission.
4 Responses to “Invest in Stocks? FORGET ABOUT IT”
Maybe nothing is ever new in the world but all a matter of degree and degree counts. Consider how fast IBM rose to power, followed by Microsoft, followed by Goggle, followed by Facebook. Shorter and shorter times for companies to rise in worth. But what are these companies worth. They are really a combination of ideas and market domination.
They are about the control of information. The great recession was to a great extent about the control of information. The publics perception of the stock market is about the control of information. We assume that there is some real value as expressed by P/E ratios.
This is true if we can project from todays P/E to tomorrows P/E. Apple has great earnings now, and a very pretty machine. Now in theory that machine could be copied for a tiny amount of money. The underlying operating system will be some variant of Unix, the interface is some variant of a Windows/Mac/ X windows, and all the hardware tricks are known. So you get 10 talented people in a room and say go to it. And you can't get large design teams to work together so 10 people is about all you can use. Then you pay them each a million a year and go for three years. That is 30 million. And triple it for overhead which is 90 million. Multiply that by 10 for saftery and that is a billion. Then put in a budget of 5 billion for plant design. A billion there and a billion there I am generous. So I come up on the back of napkin with 6 billion. And now you got some thing completely new learning from all the lessons of everyone else. And what is Apple worth. 600 billion?
Consider though another path. The current operating system is keyboard and gesture based. What if we introduce voice recognition that is really powerful. Apple has been trying to do that for twenty years. Now a computer just looks like a thin screen that may roll up or fold up. All new. All computers start to look to the public as the same thing, so branding the computer is more difficult.
And Apple is the hardest of the big softareware tech companies to recreate. Google, Facebook, Ebay, Amazon, Oracle, all very easy technically to recreate.
And when one thinks about a company like Coke is just like these software companies. A relatively simple idea turned into a brand almost a cult. There are bottling plants but the value is in the brand and what is called the intellectual propery. All forms of information.
But information is evolving and spreading ever quicker. So are these mega companie going to be able to protect their "intellectual" property and their brand . That is a hundred trillion dollar question for Wallstreet.
In an information age are people going to decide on brand, and will the lawyers be able to prove that every new idea is really an infringement on the mega companies ideas?
It is working well today. Very well indeed. The public has been fooled about the value of houses. They were fooled by the dot com.
Wallstreet is very good at innovation in fooling people. People in WallStreet have all day to sit around thinking about how to use their information to fool the public who get this may go to work everyday (or not). In fact the Wallstreet people are able to fool themselves into thinking they are smart while in reality they just have information not availabe to the public.
So how long can this asymetric information game go on? It has been going on for thousands of years and right now it seems more powerful tha ever.
But if the idea of brand falls apart and real competiion starts then its not that wealth will disapper. No wealth will increase dramatically, but how wealth is concentrated will shift.
So we know the history of the last hundred years and how brand and financial information has been used to make some people very wealthy. Will it repeat in the same way.
Quite likely. On the other hand capital could flow to make "corporate makeovers" instead of corporate take orvers. Some strange backward country like Ireland could remake Google, Ebay, Oracle, Amazon, and Facebook with a tiny team. They are all similar and related. Call it Ireland GEOAF. Then they go from being a PIIG to KING.
It is not a matter of technology it is a matte of perception. Wallstreet is the KING of perception. Will they be able to do it for the next 10 years. I don't know. Do you.
Oh yeah, I could build GEOAF for thirty million with some great new innovations. Oh but this is not a request for money or anything else which would be positively bad.
The genius of Wallstreet today is to make companies with really mediocre products and strong monopolies. To get earnings and plow the earnings not back into innovation but in making a stronger monopoly. The companies never acquire much in the way of assets compared to their capitalization, nor do they ever pay dividends. They just promise in the future to keep up this amazing growth. In the meantime the founders and corporate officers sell off their stock which they got for pennies on the dollar and become rich. I don't think that 1 in 100 people consider that this is going with the major corporations, but it is worth thinking about before putting your money into companies with no assets but brand, tiny dividends, and rich CEOS.