AL CZERVIK’S POPCORN FARM

8/8/11

As loyal readers know, I wasn’t surprised by the Dow’s 600 + point drop today; well, maybe I was surprised by its magnitude, but not by the drop. See my 8/6/11 post MR. MARKET, THE RATING AGENCIES, AND MORE, in which, commenting on last week’s carnage, I said

Is it any wonder stocks took a tumble? Will they fall further? By the same measures, it seems logical to think they will, but predictions on directions of the market are foolish at best and dangerous at worst.

Naturally, after today, anyone who doesn’t let his emotions, or, in the case of yours truly, his permabear nature, get the better of him has to start asking whether the market is getting cheap, or at least reasonable, in the wake of the today’s conflagration. My mind started wandering to ways to play a rebound, perhaps through some stocks that, at least on the face of it, look attractive, like

--Apple (AAPL), the stock everyone seems to want to buy just a little bit lower, with a balance sheet bereft of debt and full of cash (about $30 per share in cash) and trading at 12-13 times earnings and just short of 10 times cash flow,

--GM, virtually debt free and way off its IPO price. I like GM more than F for two reasons: the strength of GM’s post-bankruptcy balance sheet and its superior position in China,

--some small caps that a very alert and diligent friend analyzes with rigor and sells effectively, or

--one of the leveraged ETFs that make acting on one’s notions dangerously easy or one of my usual flirtations with masochism in the options markets.

As I was musing away on these things, I thought to check something, a set of statistics that all of us sort of know but probably few of us reflect on their sheer magnitude: How much are the equity markets up since their 3/9/09 (closing) bottoms? The answers, even after today’s defenestration, are as follows:

Dow 65.1%
S&P 65.5%
NASDAQ 85.8%

Okay, I follow these things pretty closely, though not as closely as some of you. But I was surprised that the markets are still up so much from the bottoms. Maybe you, and everybody who follows the markets, know the size of the above numbers, but I’m not betting on at least the latter.

Are things really anywhere from 65% to 85% better than they were in March, 2009? Simply by looking at price/earnings ratios, one could conclude that the answer is “No,” since P/E’s have expanded, and not inconsiderably, since the bottom. But there is more to this than P/E ratios. Some might argue that things are a lot better since the bottom: Banks are better capitalized. The threat of massive industrial bankruptcies has been removed, or put behind us. Hmm…I’m starting to run out of elements of the bullish, or at least the not so bearish, arguments. But even if one can argue that, in general, the world’s economy and the financial system is in better shape than it was back in the Spring of 2009 (I, to a very limited extent, might even concede some elements of this argument.), is one prepared to argue that things are 65% to 85% better? I’m having a hard enough time admitting that things are better at all!

As I, and legions of others who has spent so many trying to figure out the markets, have said ad nauseam, predicting the direction of markets is precarious at best. I’m probably as likely to be wrong on these matters as I am to be right. But I, for one, am comfortable remaining true to my permabear nature for what looks like quite a while.