To join in, here's my simplistic view of the market:

(1) Undeniably, stock prices must follow earnings over a long period of time.

(2) The market was certainly undervalued. The hint was obvious in retrospect. Corporate raiders were buying up companies and liquidating their assets in the early '80s. However, it now looks overvalued.

(3) If we leave y2k aside, the boomer liquidity argument may be correct, but it leads to a corrolary; when the boomers move their money out over the next 20 years, there will be a mirror-image bear market.

(4) Y2k aside, I wouldn't buy the arguments about the technological revolution quite so fast. The revolution we are in now pales in comparison to the one in the '20s (cars, planes, telephones, mass production techniques, electricity were all new and revolutionary).

(5) How do I think about p/e's? The p/e ratio tells you your immediate return on equity. (Let's not forget that stock is part ownership a company.) For example, if a company's p/e = 50, you are earning 2% based upon CURRENT earnings. However, projected earnings growth is critical. The back-of-the envelope calulation that says your p/e should match your earnings growth rate really is a simple quantitative statement of what a balanced risk/reward ratio should look like; if future earnings are believed to improve alot, you can tolerate a lower return in the current earnings. As the p/e ratio gets substantially above your earnings growth rate, the market is essentially stating a greater tolerance to risk. As an example, I sold a pile of Dell when the p/e ratio got to 110 with a earnings growth rate around 50%. (For thos who know this stock, I was a very lucky boy.) In a nutshell, simple arithmetic told me it would take TWO YEARS of sustained 50% growth WITH NO MOVE IN STOCK PRICE before the risk reward ratio was back in balance again. With a market p/e of 35 and a projected sustainable earnings growth rate of well under 20% (possibly under 10%), the risk/reward ratio looks out of balance. The music stops and everyone tries to find a chair in a big way when some event causes everybody to become unwilling to tolerate the risk. Right now, the market seems to be willing to tolerate enormous risk in some sectors. (A little EBAY anyone?)

(6) Now for y2k. Y2k poses two problems: (i) Tolerance to risk has to go down (or I am truly in a not-even-close-to-parallel universe). There are simply too many people with too many paper profits looking to avoid giving it all back. (Riding the bench for a few minutes in a basketball game doesn't cause your to lose the game and it may very well improve your overall performance.) (ii) Y2k is likely to cause fundamental changes in the economy. This is NOT market timing. The risk is huge, while the rewards are trivial (maybe, at best, 10% more from here to December 1999). I moved to fairly liquid assets in fall of 1998 to avoid the musical chairs sometime in 1999. (If you think you're smart enough to see it coming, you're dreaming.)

-- Dave "Cornell" (dbc100@cornell.edu), May 14, 1999

Answers

Thanks for the great analysis, Dave. A good article which parallels your concerns was on the editorial page of today's Wall Street Journal.

"The high existing debt, the poor state of the economy and the rapidly aging population (which will require fewer workers to support more retirees) combine to create a disastrous public finance situation."

"The Japanese situation may result in a truly nightmarish scenario. ... This would spell the end of an increasingly open world economy...Good luck to Messrs. Greenspan and Summers."

by Rudi Dornbusch, professor of economics and international business at MIT, on the Japanese financial situation.

Alexi

-- Alexi (Alexi@not-in-the-dark.com), May 14, 1999.

For a counter view, consider some of Drew Parkhill's thoughts in the "Objective" thread debacle. Drew, I believe, feels that the market is ALREADY pricing Y2K in and would otherwise hit 18,000 this year and then ride a speculative bubble up quite a bit further before crashing.

Not sure he's right, but it is interesting and would explain why the market hasn't seemed to "panic" over it (ie, it is doing the equivalent of a mild panic right now against its strong speculative urge).

-- BigDog (BigDog@duffer.com), May 14, 1999.

Has anybody speculated on the impact of a 1929 type crash on the society as it exists now? Just how would everybody cope with such a dilemma?

-- y2k dave (xsdaa111@hotmail.com), May 14, 1999.

The average household now has an amazing % of their net worth in the market. The equity market by any historical measure is probably overvalued by 2-3 times. Even without the y2k debacle that is looming on the horizon. Unlike 1929, when mostly the richer folks lost $, the coming debacle will bankrupt the middle class, as urban real estate values will plummet also. The only question is when the drop begins and what is the trigger. It could happen tomorrow. The novice mutual fund investor may not even be aware that their funds have crashed until they get the October 1 statements. I wonder how many novice fund owners actually regularly check the net asset values, not many I'll bet. I know of folks who still actually expect the Nasdaq to rise 25% a year from now until the end of time. Compare RCA in the late 20's to AOL in the late 90's. The charts are nearly identical, as well as the reasoning used to support the ridiculously high P/E.

-- Tennessean (holladayl@aol.com), May 14, 1999.

Big Dog,

Ohhhhhhhh no no no no!!!! I must not have made myself clear. When I say Dow 18,800, I meant as a minimum longer-term target, for the *end* of this bull market. Most definitely *not* this year. Eek! Also, I think that if and or when Y2K's economic impact becomes visible (to the market at least), the market will *then* truly price it in, in a variety of ways. Am I making sense this time?

-- Drew Parkhill/CBN News (y2k@cbn.org), May 14, 1999.

I am interested to see if anyone has seen, read, or heard about Dr. Ravi Batra's book about what he thinks the stock market is going to do. Dr. Batra is an economics professor at SMU.

-- cw (cwiowa@uiowa.edu), May 14, 1999.

Looked up this book at amazon.com --

Stock Market Crashes of 1998 and 1999 : The Asian Crisis and Your Future, by Raveendra N. Batra (Ravi Batra)

Some reviews of various flavors there are fairly interesting.

-- Tom Carey (tomcarey@mindspring.com), May 14, 1999.

Thanks for the name of the book. I had heard what it was about but could not remember the name

-- cw (cwiowa@uiowa.edu), May 15, 1999.

Drew --- Double eek! I'm the moron. Sorry to misrepresent you. You can see who never makes any money in the market .......

.... exiting with his tail tucked between his legs

-- BigDog (BigDog@duffer.com), May 15, 1999.