Board-Ansicht
Mix-Ansicht- Is the Bear Market finally over? Marc Faber 7.11.02 (engl.) - patrick, 18.11.2002, 15:01
Is the Bear Market finally over? Marc Faber 7.11.02 (engl.)
-->07-Nov-02
Is the Bear Market finally over?
Marc Faber
Since early October most stock markets around the world have rallied sharply and many stocks are up by more than 50% from their lows. There are, however, a number of factors, which suggest that the present rally is unlikely to be the beginning of a new bull market, but rather a treacherous bear market rally, which will be followed by renewed weakness in 2003. From the October 10th low, the market has generated three opening gaps. Similarly a large number of stocks including IBM and GE gapped several times during this rally. Now, from technical analysis we know that most gaps are eventually closed unless they are breakaway gaps after a long base building period - ideally a base, which took several years to build. The problem with the recent gaps is that they came merely from an oversold position, but that most stocks had not been establishing any base formations at all before they gapped on the upside. In addition, the rally was accompanied by declining volume and relatively poor advancing volume compared to declining volume. Another concern I have is that investors, technicians and strategists were very quick to turn bullish. In fact at around the time the rally began, a Merrill Lynch survey found that 75% of fund managers thought world equities to be oversold. Moreover, whereas only 17% of fund managers perceived equities to be overvalued, 29% thought them to be “fairly valued” and a full 51% to be “undervalued”. Asked whether in 12 months time the markets would be higher or lower than at present, 28% of fund managers answered that the market would be “much higher”, 48% “slightly higher” (single digit returns), while only 9% responded that the market would be “slightly lower” and just 6% that it would be “much lower”. These sentiment surveys and the still low cash positions among mutual funds certainly do not reveal any capitulation at all on the side of investors - an event, which usually coincide with “major” bear market lows, such as we had in 1974, 1982 and 1990. I may add that I attend every year numerous investment conferences as a speaker and my sense is that the majority of investors is far more concerned about missing the next bull market than about losing another 40% or so of their capital as a result of a continuation of the bear market.
But technical and sentiment factors aside, there are also some fundamental reasons for remaining cautious. Since the US bear-market began in March 2000, the only excess, which has been purged, is the high tech and telecommunication stock market bubble. However, other excesses and imbalances, which the late 1990s brought along such as an excessive credit expansion, a declining savings rate, large trade and current account deficits, and over-leverage in the corporate and consumer sector have so far not been corrected, as was always the case in previous recessions. In fact, over the last two years these imbalances have actually become even worse courtesy of Alan Greenspan’s artificially low interest rate policies, which supported the refinancing boom in the housing industry and allowed the consumer to go deeper and deeper into debt in order to sustain his consumption. The problem with this situation is that the consumer is now highly indebted and that there is no pent up demand at all, which would support a strong economic recovery. Don’t forget that in previous recessions, consumers cut back on their consumption, purchased fewer homes, increased their savings rate and, therefore, rebuilt their balance sheets. And by cutting back on their consumption consumers built a pent up demand, which usually acted at some point as the catalyst for an economic recovery. But today, we have not yet seen any meaningful retrenchment in consumer spending and in fact the auto market looks increasingly like a “car bomb” ready to explode at any time once the zero interest rate loans are no longer extended. The car market bust could come as a result of the auto companies’ higher financing costs due to the recent widening of yield spreads on the bonds of their financial subsidiaries - this particularly in the case of Ford - or simply as a result of an over-saturated market, which led to a collapse of second hand car prices.
I may add that the consumer is financially very stretched. Otherwise how could current credit card charge off rates at 9% be twice as high as in 2000 and be higher than ever been before - not exactly a sign that the consumers’ balance sheets are as strong as so many US economists want us to believe.
Then there are question concerning corporate earnings and valuations. According to numbers published by Thompson First Call, the S&P 500 had in the 12 months ended in June 2002 operating earnings of $ 44.93. But according to Standard & Poor’s the S&P 500 had “core earnings”, which take into consideration all costs including pension costs and costs of options granted, of only $ 18.48. The difference arises from questions how to calculate pension fund liabilities, employee stock option costs and one-time expenses such as employee severance. Moreover, net income based on generally accepted accounting rules that companies report in government filings amounted to $ 26.74. Now, let us assume that the $ 18.48 figure does somewhat understate earnings while the $ 44.93 figure overstates earnings. Let us, therefore, take an average of both figures, which would give us earnings of about $ 32. By this measure the S&P 500 would still be trading at 28 times earnings - not exactly a bargain by any yardstick. And even if the S&P 500 earnings were $ 40, then we would still have a valuation of the S&P 500 of close to 23 times earnings, compared to a historical average of about 17 times earnings.
Earnings aside there is also a big question about future corporate liabilities as a result of under-funded pension funds. Of the S&P 500 companies 360 have defined benefit plans. Of these 360 companies with defined benefit plans 240 are under-funded, the highest level in ten years. AMR is under-funded by 601%, Delta 353%, Goodyear 142%, General Motors 137%, and Ford 87%! AMR is under-funded by $ 3.4 billion, but only has a market capitalization of $ 500 million while GM is under-funded by $ 29 billion with a market cap of just $ 22 billion. Therefore, unless the stock market recovers sharply, companies might be forced in the years to come to contribute massively to their under-funded pension funds in order to meet the defined benefits its employees are entitled to. Not exactly a very appealing scenario given the still relatively high stock market valuation and the low returns available on fixed interest securities, which are now a drag on the returns of pension fund assets.
Still, I concede that equities can rise even if earnings remain unchanged. This was the case between 1978 and 1986, a period during which stocks soared after the summer of 1982. However, what should not be forgotten is that in 1982, the Dow Jones was selling for less than 7 times earnings and that between 1981 and 1986, interest rates collapsed. The problem today, is that it is unlikely that bonds can rally that much more. In fact, I think that the US government bond market has either already made a secular high following its long-term bull market, which began in September 1981 and brought the 30-years yield down from over 15% to less than 5% recently - or that we are very close to a major top. Therefore, the stock market is unlikely to receive in future much support from declining bond yields.
In short, a rally irrespective whether it is a bear market rally or the beginning of a new bull market is a rally, which can - as was several times the case for the Nikkei since 1990 - lift the indices by 30% or more within a brief period of time. However, investors should be mindful that the imbalances of the US economy will eventually have to be corrected during a more serious recession than what experienced since the spring of 2000 and that, at such time, the stock market is likely to disappoint once again very badly.
Thread gesperrtgesamter Thread:
