Putting Things In Perspective

Merrill Lynch's Chief Economist, David Rosenberg (who is one of our favorite economists on the Street), put out a piece recently which echoed a lot of the points we've been echoing here and to our subscribers recently.  He outlines five reasons why investors shouldn't panic:

1. We've gone 820 sessions now without a 10% correction in the broad market, which is the third longest stretch ever. We have been overdue for a pullback for some time.

2. The forward P/E has compressed to a mere 14.1x – back to where it was in mid-October 2005 right around the last time the market was when it began to find its legs.

3. Massive buybacks – over $100 bln this year or +22% year-over-year.

4. Earnings backdrop remains strong (at least for the current quarter).  Negative pre-announcements remain lower than last year's levels.

5. Inflation expectations are starting to subside.  Gold, Copper, Silver, and other major metals are all well off their recent highs, the dollar is strong, and the yield curve is flattening again.

Comments

[x]

I could counter with a solid counter-argument on all of those statements but let me pick one I enjoy so very much. Helping our needy CEOs make the car payment.

Buybacks. Well, I have two comments about them. 1) They are self-serving as there are many scenarious under which a CEO could be the worst in the world, not grow earnings at all and yet walk away with massive compensation through buy back programs richly rewarding his options. Let's take an extreme example to make the point. Earnings could actually decline over a period of ten years. That might involve significant market share losses, massive layoffs and destruction of the brand. Yet, if the CEO repurchases shares at a rate of 10% a year, in ten years the stock price would move up 10% a year to maintain its valuation. So, in ten years the CEO retires living life on the hog and the company is a mess. Now, that is an exaggeration but the concept is practiced quite often. Buffett has rules for investors looking at company buybacks and few of these companies meet that litmus test so most are simply lining their pockets. 2) If the future is so rosy, how come the only thing a company can find to spend their cash on is stock prices sitting at four year highs? Again, a no-no. A possible sign of future trouble IMO. Where's the capex spending? New products? Innovation? New marketing programs? New talent needed to grow the business? So, if they can't find any way to grow their business, invest in new ventures or penetrate new markets and alternatively they are investing in stocks that have returned single digits, on average, why are they in business? They could dissolve the company and give shareholders their money back and tell them to invest in passbook savings.

[ss]

You're a bitter dude.

I imagine you missed out on the first S&P +2% up day in 986 calendar days (10/1/03).

[x]

So, I'm bitter. I guess that is all you can say? After you nearly have a cow and accuse me of personally attacking you, although I didn't. Thin skinned. You are so silly. You must be, what? 15?

Well, here's a little free advice. Over 1000 companies had to restate earnings this past year. And, we are finding company after company has back dated options. So, in this high pressure environment where the carrot for such behavior is money, do you honestly think CEOs are always acting in your best interest?

Everything I stated above, and most everything I have posted on this board, has been said at one time or another by the greatest investor of our time, Warren Buffett. Now, I don't get my investment advice from Warren because he doesn't give it, but, if Warren Buffett had issued the statement I made above, would you call him a bitter dude? lol. Dude. ok. Read his interviews and his reports to shareholders.

He is a CEO and his statements move markets so he isn't going to interject the color commentary I did but the statements were pretty much verbatim from his philosophy and statements. Bitter? Or just don't agree with you? Dude.