Tuesday, November 10, 2009

Wall Street Bulls in Hyperdrive

Bloomberg.com headlines another self-serving prediction by someone who profits in several ways from rising stock prices, the money manager Ken Fisher in Billionaire Fisher Sees S&P 500 Above 1,300 as Economy Recovers. (Billionaire?)

The Standard & Poor’s 500 Index will probably exceed 1,300 as early as February because the economy continues to rebound from the worst recession since the 1930s, billionaire Kenneth Fisher said.

The benchmark index for U.S. stocks has surged 62 percent to 1,093.08 after sinking to a 12-year low in March. It will add up to 25 percent from last week’s close in the next three months, said Fisher, 58, who oversees $35 billion as chairman of Woodside, California-based Fisher Investments Inc.

“It’s just a reversal of excessive pessimism,” Fisher, ranked by Forbes magazine as the 289th-richest person in the U.S., said in an interview yesterday. “We still have a lot more bull market to go because we had such a huge bear market.”

So what he's saying is that after a rebound from two 20% down months in Jan. and Feb. this year to be up about 19% on the year, with a huge rebound that took 8+ months to accomplish, now the S&P 500 is going to rise at, what with compounding considered, would be approximately a doubling of the index annualized.

Here is Mr. Fisher from spring of 2007 in a Forbes column:

Four and a half years and still going strong. The bull market that began in late 2002 is far from over. Pessimists will tell you that the good times have to stop, that after four years the market just has to be due for a correction. But that's because the pessimists don't look at what is driving this market.

The driver is the relationship between earnings yield (the inverse of a price/earnings ratio) and bond yields. When earnings yields are bigger than bond yields, institutional investors can make a profit by using borrowed money to acquire shares of stock. The process can continue for years, until equity prices are bid higher or the cost of money gets higher.

We're in the middle of such a process. The phenomenon can go on for quite a while. It did in the early 1960s, when a combination of cheap money and low stock prices gave rise to the conglomerate boom, personified by Harold Geneen of ITT.

Was this man prescient or what?

Better to go with Andrew Smithers, who wrote a book at the most difficult time for a realist, 1999-2000, that stocks were more overvalued than they had been all century. He currently says that stocks are about 40% overvalued.

Here's the risk-reward for some people. If you buy the SPY (ETF for the S&P 500) and hold for 5 years, you will have received about $10 for every $100 you invest, via dividends. You will have $90 at risk. If you buy a 5-year Treasury, you will have $111 dollars or so in your pocket.

Now, if you listen to and believe that the 2009 Ken Fisher prediction is going to be at least as correct as his spring 2007 prediction was incorrect, the difference between $90 and $111 is a matter of only a few months. Just think how much your SPY security will rise in 60 months!

The most astute financial minds in the known universe are bidding for money and deciding whether to lend it.
That 5-year money with a high degree of security yields about 2 1/4 percent per annum does NOT occur because these prospective borrowers and lenders, and investors, have taken leave of their senses and are passing up an almost sure thing.

When a man who became one of the richest men in America by investing other people's money suggests a likelihood of a hundred percent annualized return, you should wish America luck but wonder whether the people who are selling during the next rally are dumber or less well informed than the new buyers.

If we see corporate insider buying skyrocket as it did this past winter at much lower price levels, that would be impressive. Let's watch data such as that.

Copyright (C) Long Lake LLC 2009


  1. First Mishkin, now this.
    Has the world gone crazy?

    S&P says "as reported" earnings in 2011 will be $61/share. Apply a generous 18 P/E and get a price of 1,300. In 2011. At current earnings levels, 850-900 would be appropriate. Discounted dividends says the same thing.

    This will not end well Doctor. Hopefully it is the I-Banks and their wealthy patrons that get scorched for a change and not the retail investor.

  2. Thanks, Oregon Guy. I agree w your numbers, as does Jeremy Grantham, and I agree it won't end well, except that oddly the financial markets never end. And since the inmates are running the asylum, and one thinks of 1999, well . . . anything goes. Anything can happen. I used to take the markets with some seriousness. Now I consider them to be gambling--but with a yield if you want it. And where it goes, nobody knows.