[A-List] US: On the future of stocks

[Sabri Oncu <soncu@xxxxxxxxxxx>]

Two years ago, Mike Alexander wrote a book entitled "Stock
Cycles: Why stocks won't beat money markets over the next 20
years". For the last two years money markets beat stocks. By the
looks of it, money markets will beat stocks again this year. Mike
needs to wait seventeen more years to see if he is right but at
least so far, he is doing well. His website is below:

http://www.net-link.net/~malexan/STOCK_CYCLES.htm

There are some articles that contain good data there that you may
find interesting. By the way, although I see merit, I am not into
cycles myself for technical reasons.

The article below is not just on stock valuations. There is
information there which points to that this current US recession
is not over, as Paul Krugman, Stephen Roach and other
"double-dippers" have been claiming. The (near) future of the US
economy doesn't look good unfortunatelly. Some time ago Anne
Williamson sent an article in which an investment person was
saying that they were betting on gold. Apparently, it was a good
bet.

Best,
Sabri

+++++++++++++++++++


May 30:  Equity Risk $2 Trillion Idle Cash Can Be Used To Prop Up
Stock Market
Location: New York
Author: RiskCenter Staff
Date: Thursday, May 30, 2002


By some estimates, more than $2 trillion in idle cash, sitting on
the sidelines, can be better used to power the next bull run on
the US stock markets.

But the betting is the cash may not be put to work any time soon
because corporate earnings are still not exciting after crashing
by 31 percent last year. The economic recovery is not assured
because business investment, which slumped and pulled the economy
into recession last year, is still flat.

Investment in computers and other high-tech stuff drove the 1990s
boom. And in order for the economy to get back on its feet,
businesses need to start spending again.  While interest rates
have fallen precipitously to 40-year lows, people holding cash
are sleeping as soundly as babies at night. They may get a
single-digit return, but it's better than being left holding a
bag of money-losing stocks.

Yet Wall Street analysts continue to comment on financial talk
shows that this huge pile of sidelined money will soon return to
the stock market because the returns on such things as riskless
U.S. Treasury bills are so unappealing.

Alan Newman, editor of Crosscurrents, a financial letter, says
the Street is clamoring as never before for more money to jump
back into the market even though stocks have clearly been the
second-best investment after Treasuries.

"In the last 50 months since the Standard & Poor's 500 first
traded at today's levels, approximately $706 billion in new cash
has entered equity mutual funds," he says. "Strangely, with all
of this fresh cash, prices are no higher now than they were
then."

What's happening, he says, is the supply of stocks has finally
overtaken demand. The reality is that in order for the market to
mount a sustained rally, investors' demand for stocks will need
to at least equal the outstanding supply of stocks. It's simply
the law of supply and demand.

There's more. For stocks to rise, the market must be priced to
deliver an attractive rate of return.

But the problem is the price-to-earnings ratio of the S&P 500 for
the next 12 months is out of this world, hovering at a record 40,
which leaves little room on the upside for further market
appreciation. Stocks have traditionally recovered from recessions
only after P/E ratios have sunk to extremely depressed levels.
Rallies come more easily from lows. It just makes sense.

According to a Merrill Lynch survey in early April, global fund
managers thought stock markets were fully priced. A month
earlier, they estimated the markets were just 2 percent above
fair value. But what was significant about the new sampling: 62
percent of big money people now think U.S. stocks are the most
overvalued.

"Market psychology has come full circle regarding the economic
recovery and these lowered expectations are hitting stocks and
aiding bonds," says Kent Engelke, capital market strategist for
Anderson & Strudwick Inc.

Engelke says bonds may outperform stocks for the third straight
year, which is something that hasn't happened since 1938-41.

The second-quarter earnings of the 500 companies in the Standard
& Poor's 500 index are now expected to increase by only 1 percent
after declining for the last five quarters. Early in the year,
second-quarter earnings had been forecast to increase by nearly
10 percent, which shows the extent of the Street's optimism just
a few months ago.

By some estimates, $5 trillion has gone up in flames since March
2000, a ton of money equal to half of the total U.S. gross
domestic product of $10 trillion. So it's easy to understand why
investors have developed a "once burned, twice shy" mentality.

Investors are also dealing with messy issues. A record number of
corporate bankruptcies surfaced in the first quarter of 2002,
including the headline-grabbing implosions of Enron Corp. and
Global Crossing Ltd.

The risk is more companies may bite the dust as the cost of doing
business -- i.e., borrowing -- rises for the walking wounded.
Banks are already toughening up their standards amid
deteriorating credit quality.

The mounting credit problems could be a drag on the economy and
give the stock market a hangover this year.

Full at:
http://www.riskcenter.com/cgi-bin/article.pl?id=4938