Bears Get Nervous as Their Arrows Dwindle – The New York Times Misses the Mark

Tuesday, March 30, 2010

The New York Times is notoriously late in recognizing a stock market trend change. On Monday, they published a bearish article that is a valuable read. It shows how empty the bears’ quiver has become.

The article, “Stocks Soar, but Many Analysts Ask Why” (The New York Times, by Javier C. Hernandez, March 29, page B-1), is a conglomeration of the negative subjects we’ve already read about and analyzed ad nauseum. And there is no profit from using yesterday’s news to invest.

Besides this useless information, here’s where the article misfires.

Bad statistics to “prove” overvaluation

One attempt at a bear case is by trying to show that stock prices are overvalued. No analytics are presented, but there is a graph showing the market is selling at a price/earnings (P/E) ratio of about 17. However, that’s using last year’s earnings. Market valuations are based on what will be (i.e., forecast or “forward” earnings), not what was.

Here is The New York Times’ take:

“The incongruity of it all can be seen clearly in an analysis of price-to-earnings ratios, a gauge of how expensive stocks are relative to their performance.”

I assume “performance” means earnings per share. Yes, the picture is clear, but the reporter needs to substitute “inexpensive” in that sentence. On January 14, I published a table of the Dow Jones Industrial Average’s basic fundamentals (see “The 2009 Earnings Are Coming! – OK, but What About 2010?”). Here is that same data, updated to March 29.

Note that while the market is up 2% over the 10-week period, the earnings, both actual and forecast (“forward”), improved even more. Therefore, prices are now more attractively valued, not less – and certainly not overvalued.

Cherry-picked performance to imply overly bullish investors

The article’s states:

“The S.& P. 500 is up nearly 75 percent from a year ago, and the Nasdaq is up nearly 90 percent.”

Well, not really. For this article, one year excludes the V-shaped drop and recovery through March 26. From March 26, 2009, to last Friday (March 26), the performance numbers are +41% for the S&P 500, +51% for Nasdaq and +38% for the DJIA. These returns were supported by the fundamental improvements over the twelve months.

Contradictory views of investor behavior

The article says that investors are sensibly pessimistic sellers:

“There is a sense in some corners that stock prices will decline: investors are betting more on stocks’ falling now than they have since July.”

And that they’re mindlessly optimistic buyers:

“… investors have begun snapping up stocks: over the last several weeks, new cash has poured into American equity funds at a brisk pace, and mutual funds have shown particular strength.”

Actually, as a group, investors are finally, but cautiously, adding net new funds into US stock funds after being large net sellers for much of the stock market’s rise. This activity is neither a sign of over-optimism nor an indication of stock over-ownership. We have a long way to go to get to that type of market again.

A Mysterious “X” Factor

In case the other stuff didn’t get you worried, how about a scary Jaws allusion?

“Even during some of the stock markets’ better weeks, jitters have seemed to lurk just beneath the surface.”

What’s lurking beneath this stock market’s surface is a massive amount of underinvestment in US stocks. Many individual and institutional investors, for reasons ranging from sophisticated to emotional, believe being out of the US stock market is wise and will produce better returns. However, as has happened before, the steady drip-drip of positive returns finally wears down that belief.

So… Even though you read it in The New York Times, the rationale for a bear market is thin or nonexistent. The facts support a bull market, an “X” factor notwithstanding.

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