Saturday, February 14, 2009

Think Stocks are Cheap? Think Again

Good Afternoon Folks!

I am sure a week doesn't go by without someone telling you that "stocks are a Cheap". Every stock broker that I know uses this line over and over again. I hear it on Bubblevision at least 10 times a day. What you need to realize is the reason these people are telling you this is because they have a vested interest in getting you to buy equities.

Stock brokers don't make any money if you sit in treasuries! Brokers only make money when they are putting you into stocks or investment funds. The only exception would be an accountant/financial planner that makes a flat fee based on a percentage of your total investment portfolio.

The problem here is that the brokers that most Americans go to for investment advice are ironically the last people they should be talking to when it comes to their nest egg because they have a vested interest in where you put your money. Whats sad is most advisors are probably looking to see how much money they can make off of where they put your money versus actually looking to protect and grow your life savings..

I mean how many of you were told to "stay the course, the market will come back" by your broker when stocks started dropping?

Anyone that listened to this "professional" advice now finds themselves 50% poorer. Their 401k's are now 201k's! Going forward, I think everyone needs to take ownership of their retirement portfolio's. Do you own research, read some solid financial blogs, and push back when your financial adviser's tell you to do nothing with your portfolio as the market falls off a cliff.

If you portfolio is down 50% and your financial advisor has you 100% in stocks, I suggest that you move your money because anyone that has you 100% in equities in this type of bear market simply isn't a good money manager.

Now, lets get back to the question: Are stocks cheap? Ahhh NO! Take a look:

My Take:

As you can see at the end of 2008, stocks still had a P/E ratio of about 20-1. Historically when stocks get this expensive, we usually BEGIN to have a recession. Yikes! Here we are 40% from the highs, and history is telling us that we should just NOW be starting to head into a recession.

This shows you how insane the market got over the last 25 years! In the past 140 years, no debt bubble even comes close to the one that we are now watching burst right before our eyes. This makes the 1929 bubble look like a walk in the park!

Equiries historically aren't inexpensive until P/E ratio's get underneath 10-1 from an earnings perspective. The reason for this is because corporate earnings fall dramatically during a recession because people stop spending. Stocks then need to ne repriced drop in order to reflect this.

The bottom line here is stocks are not cheap folks. They are actually expensive from a historical perspective! The PE's need to drop another 50% from here before they are actually considered to be"cheap". As a result, the market still have a long ways to go on the downside folks!

Bottom Line:

Just roll your eyes the next time you hear a "professional" on CNBC telling you that "stocks are cheap". Next time you meet with your broker, pull this chart out when he tries to pull the same stunt and see how he reacts.

I bet you that he won't have much to say. In fact, you might start smelling something because there is a good chance he might have an "accident" in his pants.


johndaniels said...

great thinking Jeff. I agree 100% on your analysis about stocks and brokers. I heard on the Patriot news hour the real P/E is around 21 for stocks at TODAY's prices. And not a day goes by that theres a headline above the scrolling stock prices on bubblevision:

Time to get in stocks?
Stocks at Bottom?
Are We at bottom?
Great Values on stocks?
Stocks are cheap now

etc etc

Jeff said...



Yeah, these analysts are out of control. Not one of them thinks outside the box.

The one exception is Meredith Whitney. She is the best! Thank god there are a few good eggs that provide research that you can actually trust.