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Mark Hulbert is at it again. This time the newsletter rating and return measuring maven is calling for a market rally.
According to Hulbert, days like last Thursday's market rally (up 190 points on the Dow) are "likely" to happen "in the weeks and months ahead." Hulbert is basing his bullishness on a report from Ford Equity Research of San Diego, the publisher of newsletter he follows, the Ford Equity Research Review, which has beaten the Wilshire 5000's returns for the decade by about four times (7.8% for the newsletter, 1.7% for the Wilshire).
Ford calculates what it calls a Price to Value ratio (PVA) for "thousands" of stocks, and rates them as above 1.0 for overvalued, less than 1.0 as "trading below the level justified by its earnings, quality rating, dividends, projected growth rate, and prevailing interest rates," and less than 0.7 as being undervalued or in their own words "underpriced."
So now we're finally getting to the meat of this thing. Over the weekend, Hulbert reported "As of the end of April, the firm calculates that 1,783 publicly-traded U.S. stocks are underpriced according to this definition. That works out to 40% of the universe of stocks on which Ford concentrates." For sent this report out to their subscribers on Thursday of last week.
Hulbert wondered how this number stacked up to prior numbers, so he called Ford, and found out that their historical average for the number of "underpriced" stocks is about 19%, which means that right now, according to Ford's methods, there are about twice as many cheap stocks as there normally are.
Now it gets interesting. According to Hulbert: "It turns out that there have been only two other occasions since 1980 in which the percentage of underpriced stocks was higher than where it is today. The higher of those two points occurred at the end of the 2000-2002 bear market, when the percentage rose to 48%. The second came at the end of September 1998, in the wake of the demise of Long Term Capital Management."
More important is the fact that both those periods preceded nice long term rallies in the stock market.
Dark Clouds For The Economy
Never to be outdone, though, The Wall Street Journal's Greg Ip, a guy with a good connection to haughty sources at the Fed, notes that history is not on the side of the bulls, and calls the current rally in the stock market as a period in which the celebration "celebration may be premature."
According to Ip, previous similar crises, such as the stock market crash of 1987 and the collapse of Long Term Capital Management in 1998 "threatened the heart of the financial system. But the underlying imbalances were largely limited to the financial markets themselves: stocks overvalued relative to earnings in 1987, and excessive hedge-fund borrowing in 1998. Thus, once the Federal Reserve's rescue operations had mitigated the threat to the financial system, the economic fallout was limited."
This time is different, according to Ip (oh boy!). It's different because it spread beyond Wall Street. Ip notes the following:
- "For several years, U.S. home prices and home construction kept climbing past levels considered sustainable. Homes became collateral for trillions of dollars in borrowing. That depressed savings, inflated consumption, fueled rapid lending and loosened loan standards."
- "When home prices stopped rising, the diciest mortgages began to default, triggering the crisis. But even now, prices are above most estimates of sustainable levels, and household saving has barely picked up. Even if the Fed's bailout of Bear Stearns Cos. in mid-March proves the apex of the crisis, as some think, the economy could still contract as consumers adjust to lost wealth and reduced access to credit."
Ip compares the current situation in the U.S. to that of South Korea in 1997 as that country's economic boom cratered and took until 1999 to start recovering. Along the way unemployment rose to nearly 8%. Also important is the fact that North Korea's problems spread from one sector of the economy to others, which Ip suggests would be the next possible development in the U.S.
Conclusion
Wall Street is bullish, but the outlook for the economy is potentially dark. Yet, it ain't so until it's so, to paraphrase Yogi.
In other words, it's possible that the fallout from housing may be contained. That would make Ip's notions moot. Meanwhile, if things aren't so bad, and stocks are cheap, you've got the ingredients for a nice bull run. The employment report, released last Friday was surprisingly mild, as only 20,000 jobs were lost, compared to estimates that expected above 80,000.
More data will be out in the next two weeks, with next week featuring a heavier calendar than this week.
Meanwhile, the S & P 500 needs to hold above 1400 and the Nasdaq above 2500 even as the market consolidates.
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Yahoo (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) scrapped their deal, but Google (Nasdaq: GOOG) might bank on this failure for years.
Chart Courtesy of StockCharts.com
When deals fo sour, the repercussions are predictably unpredictable. And this failed deal is no different.
For one thing, Yahoo and Microsoft might have given Google some decent competition. Now, they won't, which means that Google will be unimpeded in its quest to own the biggest chunk of the heart of the Net, search and related advertising and other products.
And more interesting are the reports that Microsoft CEO Steve Ballmer may lose his job over the failed coup, not to mention what might happen to Yahoo's Yang in a few weeks when the dust from all this settles.
For the stocks of each company, it looks as if Google may be the winner. If GOOG can close well above 600, it might be off to the races. |
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