There are good investing articles and there are poor investing articles. It may be impolite to pin point the weaker ones, but it has to be done to strengthen the quality of arguments and our understanding of financial markets. To many of us, there is a delusional effect, in that when we hear something from the business channel or read something from business sites or magazines, their credibility is assured. Well, on balance, more than half of anything that's been said or written (I'm being nice) are crap. Hence, we need to drill down their arguments and premise. I am surprised to find such a weak investing article in Seeking Alpha, of all places. The writer is David Zanoni, on why he thinks the markets have bottomed. My comments in purple.
David Zanoni - Seven Reasons Why The Markets Have Bottomed
There are many analysts who believe that the rally we have been experiencing for the past four weeks is merely a bear market rally. However, to accurately assess where the market is heading, we need to look at how current macro conditions will shape the future economy. Therefore, I have compiled a list of seven reasons why I believe that the market bottomed in early March.
1. Attractive House Prices
House prices have fallen 29% on average since their peak in July 2006. Buyers have the upper hand when dealing with sellers. There are plenty of discounts and inclusions sweetening the deal. Also, first-time home buyers get an $8000 tax credit towards the purchase of a home.
(This point is so weak. The 29% is an arbitrary figure, why not 25%, why not 20%, why not 35%?? How much property prices have fallen will only make sense when it is put next to affordability ratios. Whether it is cheap or not is dependent on supply and demand factors as well, including interest rates. The tax credit is OK but is not a substantial enough figure to prompt buyers to jump in. Foreclosure rates are not flattening out enough. What if prices fall 50% before rebounding? Another major factor is employment, nobody is willing to buy property or buy another property if their job security is uncertain. The percentage of people who think their jobs is not as secure as the previous 6 months must have risen considerably, and until that feeling subsides, you cannot possibly just quote an absolute price drop as saying things are good. The number of people joining unemployment lines are still rising, which means more people will have problem keeping their homes - we also need to see unemployment rate topping out before we can say house prices are low enough to attract substantive buyers.)
2. Historically Low Mortgage Interest Rates
The national average mortgage rate for a 30 year fixed loan is about 5%. If you pay approximately one point and have excellent credit you can lock-in a 4.5% rate on a 30 year fixed. These rates will get many potential home buyers off the fence and into home ownership. Also, many current homeowners are refinancing at these excellent rates, freeing up extra money to be pumped into the economy.
(Back to the above argument. Mortgage rates is but one factor in the housing cycle. Locking in 4.5% may be decent but again affordability and job security issues are more paramount to just the rates. If the economy dives again, we could see the US plunging into deflation just like Japan for the past 15 years. In Japan BLR is as low as 1.5%. Looking at historically low rates is persuasive but the point lacks substance because this global crisis is easily the worst we have seen since the Great Depression, which means it can blow historic figures out of the water.)
3. Reasonable Energy Costs
With gasoline prices averaging slightly over $2 a gallon nationally, consumers and businesses are not pinched like they were in the summer of 2008. Also, lower natural gas and oil prices have made utility bills much more manageable.
(If the reasonable energy costs were to be a prolonged phenomenon, then yes, it will spur things. Looking at things at a specific point in time is so flawed. It is likely that energy prices will surge very soon, which more than negates the low energy prices currently, thus putting low energy prices being a short lived memory. You do not use what is likely to be temporary and extrapolate it into the future. Its like making $20,000 a month from the market during a bull run and thinking you have $20,000 extra a month to spend for the rest of your life, we all know how that story turns out.)
4. Tax Breaks/Stimulus
Although many of us are not getting a raise from our employers this year, we are getting more money in our paychecks as a result of the stimulus tax breaks. I have to give kudos to the current administration for making the tax breaks in the form of a payroll modification rather than a check. Millions of taxpayers dollars were wasted in past years when the government mailed notices and checks to our homes. Studies have also shown that tax breaks are more likely to be spent when in they're in the form of payroll modifications.
(This one is passable, not entirely convincing but passable.)
5. Low P/E Ratios
The normal or average price to earnings ratio for the S&P 500 is about 15.5. At the beginning of March '09 the ratio was 11.9, thus prompting President Obama to state that buying stocks with a long-term perspective is a good idea right now. There are many greatly valued stocks to choose from right now with relatively stable revenue and earnings.
(Again, unprecedented crisis will indicate that historic figures may not be good guides. One thing for sure, markets are cheap or very cheap, it is unlikely that one would rate markets as expensive now. If you have a time horizon of 5-10 years then you should be OK buying now. But to look purely at PE ratios is very one dimensional. The writer committed a major decision making flaw, which many of us do, that is anchor and adjust. You anchor at the average and see how far the current level has moved away from the mean. The further it is, the stronger the pull back to the mean. That kind of simplistic anchor and adjust argument will not win me over, its shallow and a first year college student thesis. If I am to read this kind of crap on Seeking Alpha, I am wasting my time.)
6. Increased Merger & Acquisition Activity
Companies with strong balance sheets and plenty of cash are looking for attractively valued businesses that can be added to their own, making the aquiring company even stronger. Here is some recent activity: IBM buying Sun Microsystems; Gilead Sciences buying CV Therapeutics; Merck merging with Schering-Plough; Roche buying Genentech. I expect that more deals will be done this year as companies realize that this is the opportune time to snatch up valued businesses.
(This one is a good argument and a very good indicator to a market bottoming.)
7. Currently Employed with Stable Jobs will continue to spend
Yes, unfortunately the unemployment rate recently rose to 8.5%. However, let's not forget the 91.5% that are working. Many of these working people are in stable jobs and industries and will continue to pay their mortgage or rent, utility bills, buy clothes and food, dine out occasionally, trade-in or buy a new/used car, upgrade their homes, etc. Although many have cut back on spending, I feel that their spending will begin increasing with stimulus/refinance money in their hands. Furthermore, those who are saving are pumping more money into banks which we all know need all the help they can get right now.
(This is a weak argument. Its a second hand car salesman kind of pitch, or in Asia it would be a snake oil salesman pitch. Desperate and unconvincing.)
I realize there is a plethora of negative news out there in the media, but we have to look ahead and see how the tide will change. The reasons provided above, I believe, are signs that the market has hit its low in early March. The market will not go straight up from here either. I think that we are currently due for a short-term pullback after a more than 20% gain, but I don't think the Dow will go below 6500 or even below 7000. I think that a pullback to 7200 - 7500 is more reasonable in the current environment. Many companies are running with as few employees as possible right now and I think that the stimulus will increase demand and prompt many of them to hire again. I see the light at the end of the tunnel and it is the sunshine, not the front of an oncoming train.p/s photo: Elanne Kong Yuk Lam