We continue to be bombarded by news about the new records reached by the
stock market. Reports inevitably swirl around the Dow Jones industrial average (DJIA).
As we have often pointed out, the Dow is composed of only 30 stocks. The
broader S&P 500 and other broader indexes like the Russell 5000 have still to
make even numerical records.
On Oct. 26, 2006, we alerted our readers to the fact that the-then record Dow
(12,118), whilst a record number, was not a record value; and it is increased
value that most wise investors look for as a reward for their stock investment
risk.
Based merely upon the published ("cooked") average rate of inflation of some
2.2 percent (since 2000), the Dow would have to be at some 13,049 (some 469
points above its present so-called record level of 12,580) to set a true record.
And that is if you believe the published inflation figures.
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Measured in "real" money terms (gold) the Dow would have to stand at a
whopping 23,000 to set a record!
Yesterday, Bloomberg published an interesting item by Daniel Hauck that said,
"U.S. investors last year put the least money into domestic stock funds in a
rising market since 1984, according to industry statistics." The article went on
to report, "The percentage of mutual-fund assets invested in domestic stocks
fell to 78 percent last year, the lowest since 1984."
We and our sister publication Financial Intelligence Report have long urged
our equity investors to invest in overseas equities and related mutual funds.
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A 2007 global
recession is in the cards. Here's how to position yourself now for monster
profits before the panic headlines begin.]
The article also pointed out that many U.S. investors had diverted money away
from domestic equities, into real estate and international stocks. The Morgan
Stanley EAFA index climbed 23 percent last year, beating the S&P (up 14 percent)
for the fifth straight year.
Despite this surge in overseas markets, Europe's Dow Jones Stock index still
sells for some 14.2 times 12-month estimated earnings. The emerging markets MSCI
Index sells for 14.9 times (even following a 29 percent surge in 2006). On the
other hand, the S&P 500 sells for 16.1 times. So overseas stocks still look
cheap relative to domestic American stocks.
And yet, according to the Bloomberg item, the S&P is still some 8.1 percent
below its record.
Our readers will remember that we have constantly warned of the market "hype"
put out by Wall Street and mainstream media. On Dec. 8, 2006, we published an
item pointing to the exponential use, by Wall Street and its related mainstream
media of "hype" words such as "goldilocks," "soft landing," and ‘liquidity."
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We quoted Stephen Roach of Morgan Stanley, who said, "There is one word that
permeates virtually every discussion I have with investors around the world —
liquidity. It's really the only thing they want to talk about." He then added,
"In the view of most fund managers, liquidity remains more than ample to support
ever-frothy markets, irrespective of the outcome for the global economy."
We note that even the Dow lacks that clear sense of conviction that one normally
associates with record setting runs. The Dow almost sputters to each new
numerical high that the media then hypes as a true record.
We therefore still believe that much of the bullish talk about the U.S. stock
market is overdone and urge our readers to remain cautious.
Editor's Notes:
