If you have been following the market in the past recent weeks or months, you may have noticed some analysts are making remarks such as "the market will be higher in 5 years", "our market is under valued", and "Buffet is buying America, so should you". These are truly encouraging words, but I am not convinced.
First and foremost, let me begin by analyzing the analysts.
The thing is, analysts are always biased and always have a thesis for their recommendation. There is a popular thesis known as sector rotation that many of them use. A basic explanation, it encourages the purchase of secular stocks (Proctor & Gamble, Johnson & Johnson, or Pfizer) during tough times with a basic argument that people will always need such necessities. The opposite argument is for the purchase of cyclical stocks (Intel, Abercrombie & Fitch, or Darden Restaurants) during the boom time as people are more willing to spend.
This thesis may hold true during a "cyclical downturn" but what if we are in a "secular downturn"? Will you be using the best of the best toothpaste? Will you go see your doctor regularly or still consume your brand name medicine? The answer to that would likely be no. I've never lived through a depression or know of anyone who did, but I've read about it.
My point is after listening to these analysts, think about what they are saying with some skepticism because I am sure you can come up with your own investment thesis because it just isn't hard to do.
The hard part is how analysts interpret data they receive on a daily basis. Essentially, they must convert raw data into information. With that, here is the latest data (as recent as Nov 21, 2008) on the market.
First and foremost, let me begin by analyzing the analysts.
The thing is, analysts are always biased and always have a thesis for their recommendation. There is a popular thesis known as sector rotation that many of them use. A basic explanation, it encourages the purchase of secular stocks (Proctor & Gamble, Johnson & Johnson, or Pfizer) during tough times with a basic argument that people will always need such necessities. The opposite argument is for the purchase of cyclical stocks (Intel, Abercrombie & Fitch, or Darden Restaurants) during the boom time as people are more willing to spend.
This thesis may hold true during a "cyclical downturn" but what if we are in a "secular downturn"? Will you be using the best of the best toothpaste? Will you go see your doctor regularly or still consume your brand name medicine? The answer to that would likely be no. I've never lived through a depression or know of anyone who did, but I've read about it.
My point is after listening to these analysts, think about what they are saying with some skepticism because I am sure you can come up with your own investment thesis because it just isn't hard to do.
The hard part is how analysts interpret data they receive on a daily basis. Essentially, they must convert raw data into information. With that, here is the latest data (as recent as Nov 21, 2008) on the market.
Source: Bloomberg November 21, 2008 |
Analysts are saying the market is cheap based on the fact that stocks have declined 50%, but wait, I can't believe that justifies the fact that it is cheap. Nordstrom sells a T-shirt at $200 and if the cut the price by half ($100), it's still an expensive T-shirt. I know it isn't as simple as that, but my point is to study why certain assets rise before they fall.
Historically, the Dow Ind is considered undervalued if it is yielding 6%. We're a little above 4%. In addition, I believe the companies in the Dow will be cutting their dividend which will bring that yield down.
Before backing up the truck and buying stocks because someone says it is cheap, sit back and think about why the stocks went up in the first place.
Art
Stay tuned for updates on the market.
Historically, the Dow Ind is considered undervalued if it is yielding 6%. We're a little above 4%. In addition, I believe the companies in the Dow will be cutting their dividend which will bring that yield down.
Before backing up the truck and buying stocks because someone says it is cheap, sit back and think about why the stocks went up in the first place.
Art
Stay tuned for updates on the market.
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