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Top 942. May 6, 2000 9:35 PM

» JenL_2 - Cisco in Barron's

Rande - I posted the 5/8 Barron's cover article on Cisco that you recommended to the "Cisco" thread:

Cisco's Bids

I know that you don't agree with some of the points made in the article. Barron's tries to point out that Cisco is a "house of cards", but it sounds like a winning business stategy to me. Why couldn't Cisco just continue along the same lines forever? Barron's is so negative sometimes.....or are they just telling us what we bulls don't want to hear?.....Jen

-- posted by JenL_2

Extremism Is No Vice When It Comes to Selling Books

Top 943. May 6, 2000 10:20 PM

» JenL_2 - Going to Extremes

Rande - The Gene Epstein article you recommended in 5/8 Barron's:

By Gene Epstein

Six months ago, it would have been hard to imagine that Robert J. Shiller's bearish tome, Irrational Exuberance, would get very much attention. That it is now on the New York Times best-seller list may be the clearest sign of a sea change in investor psychology.

Indeed, basking in the glow of his rave reviews ...., his celebratory blurb in the New Yorker, his recent tour of the TV circuit with the usual friendly questioner -- stopped off by the front-page article in the New York Times Sunday business section dubbing him the current thinker of record -- the affable Yale economics Prof. quipped in a telephone interview with me last week that just this once, his market timing proved to be right-on.

Now, if it were a forced choice, I'd rather see Irrational Exuberance become a best seller than, say, overheated tripe like Dow 36,000.....

.....the book does provide good stuff on investor psychology and a nice dissection of the pecadilloes of securities analysts' reports. And at least for now, better to read a work that cools our ardor than one that stirs it up.

In a very real sense, however, Exuberance and 36,000 are two peas in a pod, more similar than not: In each, the authors go to extremes, painting a picture that's either all bull or all bear, since even-handedness isn't what sells. Try putting out a tome called Semi-Rational Exuberance, or Why the Naive Investor Was Half-Right, and the Experts Half-Wrong. You would be telling the story much more accurately, but you might have trouble getting a publisher.

And the point is, a balanced portrayal of the past few years would show that the amateurs were half-right, while Professor Shiller was one of those experts who proved to be half-wrong.

As both the New Yorker and the New York Times report, on December 3, 1996, Shiller informed the Federal Reserve Board of Governors that the market was way overvalued, which may have inspired Chairman Alan Greenspan's "irrational exuberance" statement two days later. (His academic paper based on that testimony bore the title, "Valuation Ratios and the Long-Run Stock Market Outlook: Ratios are Extraordinarily Bearish.")

Now recall that back on Irrational Exuberance Day, the Dow closed at 6437. With the benefit of hindsight, not many analysts would say the market was then overvalued at all. Right now, four-quarter trailing earnings per share on the S&P 500 are estimated to be around 50. If we apply a modest multiple of 20 to that figure (the real multiple is now at 28), we get an S&P index of 1000, which would put the market 34% higher than it was then, and would be roughly equivalent to a Dow of 8648. Assuming that's fair value, it means that anyone who bought the market on that fateful day in December '96 would have seen prices rise at a compound rate of nearly 10% a year.

Wharton economist Jeremy Siegel believes that a reasonable price/earnings ratio on the S&P should range between 20 and 25, and on that basis, the market is surely overvalued at 28 times estimated 2000 earnings. But Shiller has his own take on this matter, which forms the centerpiece of his book, and which got featured in the Times article as the "Exuberance Index."

The E.I. is his version of a P/E ratio for the S&P......Mainly because the "E" that stands for earnings equals the earnings averaged over the previous 10 years......

.....The book defends this bizarre approach by explaining that the use of a 10-year trailing average is "along the lines proposed by Benjamin Graham and David Dodd in 1934."....

...Over and over again, the book argues with New Era strawmen of one sort or another, citing their extreme positions and then knocking them down. But nowhere does it grapple with the simple reasons for believing that in certain key respects, times have changed for the better, and those higher valuations aren't just a snare and a delusion.

Ironically, Siegel, cited by the author as a "lifelong friend" who "urged me to set down my ideas in this book," made this case very well when I spoke to him last week.....

....Siegel could hardly deny the bubble in the tech sector, since he recently published a bangup piece in The Wall Street Journal, which demonstrated that even the most optimistic earnings projections couldn't bring the P/Es for many of these companies back to some acceptable level. But the overall market is another matter, especially when it comes to some of the nontechs.

As Siegel put it, "What Bob Shiller overlooks is that we know how to avoid a depression like the 'Thirties, we know how to avoid an inflation like the 'Seventies, and except for the mild recession of 1990-91, we've been living through a peacetime expansion that's now in its 18th year, and is still going strong. So I think we could make the case that our macrostability has markedly improved, and that for this reason, equities aren't as risky as they used to be."

Moreover, adds Siegel, "We're in a productivity spurt that may be like the 'Sixties, which is friendly to earnings growth, and we're living through a period of globalization in which U.S. firms are leading the way and scooping up profits around the world."

Siegel points out that even at current prices, the market might be bought for the long term. If S&P earnings keep growing at the rate of 10% a year, then prices can rise at 8%-9% annually, and the market's P/E can eventually revert to a fair level.

For his part, Siegel has contributed to the literature with his book, Stocks for the Long Run. If he'd only come up with a snappy title like You, Too, Can Be a Millionaire, he might have had a chance of matching the sales of Irrational Exuberance.

Subscribe to WSJ & Barron's Online @ http://www.wsj.com

.....Jen

-- posted by JenL_2

Top 944. May 7, 2000 1:33 AM

» rich_hine - do you look at price-earnings ratios in a portfolio

Rande:

Thanks for your thoughts on index investing in tax-deferred accounts.

I recently loaded my portfolio into the Morningstar site, and I see that Morningstar shows my equities with a price-earnings ratio of 47.4, about 28 percent higher than the S&P 500.

Is this something you look at in doing your asset allocation? Do you try to get the P-E ratio for equities in line with or under the S&P 500 P-E ratio?

- Richard

-- posted by rich_hine

Top 945. May 7, 2000 6:42 AM

» Rande - Karin,

Karin,

Stockmarket speculation -- Much of the excess has been dealt with, though certainly the speculators will always be with us. Long-term investors shouldn't care.

overextended margin accounts -- Many were sold out in the early weeks of April. Hopefully, those that are left are building equity and coming up some cash. Not a way to live, in my opinion.

rise in wages & prices -- Inflation is a monetary phenomenon. The Y2K-related money supply excess is being dealt with. There is still a lack of pricing power at the retail level and I would be more concerned about profit margins than I would about inflation with rising wages. Fortunately, increased productivity appears to be dealing nicely with the effect of increased labor costs -- what a concept, corporations AND workers both benefit. Unheard of.

decline in stock prices -- stocks fluctuate.

foreign trade imbalance -- the U.S. is so far ahead of other countries and regions of the world right now, it's ridiculous. Where else is the investment money going to go? Could be a problem someday, but not right now.

-- posted by Rande

Top 946. May 7, 2000 6:45 AM

» Rande - Jen,

Jen,

The Barron's article made some valid points, no argument. Would I buy Cisco right now? No. Would I sell it if I owned it? No. Awesome company with incredible product, dominant market share, and world-class management. Doesn't get much better. Market valuations have of a way of working themselves out over time. Thinking as a business owner, is this a company worth owning over the long-term? Yes. Let the brokers and the speculators fret over the short term.

-- posted by Rande

Top 947. May 7, 2000 6:53 AM

» Rande - Rich,

Rich,

Haven’t you heard? P/E doesn’t matter. Seriously, the overall top-down focus should be on asset allocation first. The rest will take care of itself. If you want to keep a market weighting to the U.S. stock market, then one of the W5000 funds is a great way to go. An overall P/E of the level you indicate probably means you are overweighted to techs. Nothing wrong with that so long as you know what you own and why (i.e., it’s a conscious decision based on reason and not a portfolio by default). As we’ve talked about, one way to go is sort of a compromise between the stock-pickers and the indexers – develop a core index approach and sprinkle the fringes with active management and/or sector selection as you see fit. If you’re wrong, shouldn’t be too much damage done. If you’re right, you could add value. Even if you decide to overweight here or there, the exchange-traded index shares such as QQQ for tech or XLF for the financials, etc. might be a good way to go in terms of tax efficiency and low expenses.

-- posted by Rande

Top 948. May 7, 2000 9:19 AM

» Mark_J - The striking thing about the Cisco piece was the comment that if

The striking thing about the Cisco piece was the comment that if Cisco were trading at a PE of 100, it'd be at $36. I think that comment alone is a warning shot fired across the bow. We may not see Cisco plunge to that level, but could we see Cisco stagnate and drift as valuations catch-up? Definitely. Also,as the article points out, that stock is priced for perfection. Any bad news from one of their acquisitions, the Fed, the market, or whatever will have a huge impact on high-PE multiple stocks.

I don't own Cisco, except via mutual funds. I certainly wouldn't buy it at these valuations. If I had it, I might sell down to the 4% at level.

It's a great company, but that's not a secret. Folks have priced that in to the stock.

-- posted by Mark_J

Top 949. May 7, 2000 9:23 AM

» clueless - Rande

I heard some guy selling disney cruises on the radio yesterday. He was doing an excellent job selling the cruises. I was listening very intently. But then for some reason he started talking about the stock market. Very strange. Saying we are in a bear market. He sounded very convincing. Being very concerned I reviewed my portfolio and for the year I am down about 1.3%. Just goes to show when you down a few of those complementary maitais, mix in a little of that hot caribbean sun the whole world looks just a more like the way you want it to look. Myopia is a beautiful thing.

-- posted by clueless

Top 950. May 7, 2000 10:03 AM

» Kirk - Clue

Someone said we were in a bear market? Man they smoke good stuff where ever he was! That guy must own a bunch of B2B, Internet.com or Biotech funds or all the wrong stocks like Lu, Msft, T and UTEK that have been slaughtered this year. Perhaps he is just related to James Stack or Bil Fleckenstein?

From my end, my portfolios are up pretty well YTD. My newsletter stock portfolio is up 14.1% YTD - corrected off being up over 20%, but still decent performance. Must be stock/fund selection?

Even the Wilsire 5000 is ONLY down 2.6% YTD. Hardly a bear market! Maybe a ratings thing to compete with Regis who wants to make DIS a billionaire!

Even this chart shows the S&P500 and its MA are on an up trend for the last 6 months.

-- posted by Kirk