Market Musings Blog

A stock’s price/earnings ratio describes how much an investor pays for that company’s earnings. The math is simple: it’s the price of the stock divided by recent earnings per share. If the stock price is $20 and the earnings are $2, then the PE is 10. In this case, an investor is paying $10 for every one dollar the company has earned. Value investors prefer to pay less for earnings rather than more, so a PE of 10 is more attractive than a PE of 20. A dollar is a dollar, after all, and we don’t much care who’s earning it.

Over the last twelve years, PEs have compressed, big time. In the late 1990s, the average PE of the market was over 30. That is stupendously high, as the average PE over several decades has been just 16. Now, part of the reason the market PE was so high was because technology stock valuations were beyond unreasonable. But many mundane stocks have suffered, too.

This compression has happened two ways. First, stock prices are down or at best, flat. Second, earnings have increased. Here are a couple examples:

• Intel. Earnings were $1.53 in 2000. The stock’s high was $76; its low was $30. Fast forward to 2011: the company is now earning $2.31 – about 50% more; but its stock price ranged between $19 and $26 in 2011. Why are investors willing to pay so much less for Intel’s stock, even though its earnings power is so much greater now than ten years ago?
• Ok, ok, so that’s a tech stock. Special case. How about something falling into the “mundane” category? Emerson Electric earned $1.65 in 2000 and its stock price averaged $30 during the year. Now, it earns $3.24 – 96% more than back then – but the stock sells at $51.50. Why isn’t it closer to $60?
• Kroger. Earned $1.34 back in 2000. Average stock price was $21. Now, Kroger earns $2.00 – that increase is about the same as Intel’s 50%. But Kroger is barely hanging onto a $24 stock price. Why isn’t it $30?

In the last two days, two headline investors have opined on the stock market, and their bias is positive. Larry Fink, who runs BlackRock, one of the largest investment companies in the world, is on Bloomberg news indicating that investors should be 100% invested in stocks. Particularly interesting is that Mr. Fink is a bond guy. Read the article here.

On the heels of that pronouncement, Warren Buffet, in a mild twist, says “bonds should come with a warning label.” In this article, Buffett – who is frequently bullish on stocks – indicates that both gold and bonds will not likely produce much return going forward.

Nouriel Roubini, Mr. Super Bear, is also mildly bullish, saying the current rally might have some staying power, but his bullishness extends only through the first half of 2012. Then all bets are off.

While stocks are, overall, pretty cheap, they’ve also run up some 15% in four months. That rally, coupled with the continuing disarray in Europe, warrants a note of caution. We’ve sold more than we’ve bought lately, and are finding it tough to pass stocks through our relatively strict valuation screens onto our “buy” list.

As I was reading The Girl with the Dragon Tattoo, a Kuwaiti billionaire was turning livid. Bassam Alghanim discovered that brother Kutayba had paid to have his computer hacked and all the details of his private life – emails, financial details, legal affairs – were now published on the web. Those of you who have any familiarity with Lisbeth Salander, the heroine of Dragon Tattoo, will understand why I decided to do a little research to find out exactly how hard it is to get into someone’s computer. We have a lot of information to protect, and I want to be sure that we stay state-of-the-art in the way of keeping prying eyes OUT.

Turns out, it’s very easy to snoop someone’s computer. You can hire a hack job on the web for a few hundred dollars. You can buy software to install on your own computer to record keystrokes on a remote computer that’s working on the web. You can download YouTube videos that will show you how to hack any gmail or yahoo email account, or how to trick other entities into sending you strangers’ passwords. In this way, you could reap credit card or Social Security numbers, passwords to bank or brokerage accounts, etc. Here’s a great article on the subject:

http://onemansblog.com/2007/03/26/how-id-hack-your-weak-passwords/

Test your passwords here:

https://www.microsoft.com/security/pc-security/password-checker.aspx

Improve your passwords here:

http://www.microsoft.com/security/online-privacy/passwords-create.aspx

Alternatively, if you have too dang many passwords to remember (no, DON’T write them down!), you can use a password vault like Roboform:

http://www.roboform.com/

If just a few of the folks who read this blog will take some action to improve their computer security, the whole web will be a little safer. Do your part.

“… So goes the year” is one of those old “Wall Street wisdom” sound bites. The theory is that when January culminates in good stock market performance, so will the entire year. In fact, about 86% of the time since 1945, a good January has led to a good year: the average return for the S&P in such years is 14%.

This January, the S&P closed with a return of about 4.48%. That’s better than all of last year. Does this mean stocks will do well this year? We take the old saying with a grain of salt – actually a whole shaker. We’re dubious for several reasons:

• First of all, it doesn’t always work. About 14% of the time, stocks do poorly despite a positive January. And there’s no way to tell which year you’re in: one of the 86 out of 100, or one of the 14.
• Second, other seasonal and cyclical phenomenon affect stock returns. For instance, the market usually performs well in an election year. So if this year is decent, will that be because of the election cycle, or the January effect?
• Third, there have been only 66 January’s since 1945 (not including 2012 which isn’t in the statistics yet). This is a pretty small sample size. Statisticians would say this isn’t enough observations to result in a statistically significant result.

As is typical of our calendar-driven society, the new year lends an aura of hope for what is to come. The stock market rarely escapes the effects of this optimism, and this year was no different as the Dow surged 180 points today to close at 12,397. Stocks haven’t been this high since July of last year. It’s easy enough to worry that this one good day means the year might be spectacular and you’d better be on board lest you miss out. In fact, stocks are cheap, having discounted all sorts of desolate news over the last several years.

We expect investors to wrestle with two big questions in 2012: how steep will Europe’s recession be, and how will it affect the rest of the world? The consensus in the US seems to be that our economy will be dragged through the mud along with Europe, but as we’ve written before, that is not necessarily a foregone conclusion. Housing, for instance, is a distinctly native industry that depends little on what happens in Europe. We don’t export homes to Europe. If – and I admit it’s a big IF – housing were to at least stop getting worse next year and maybe improve a little, that would provide a much needed ballast for our economy.

If enough things go right or even just stay neutral in 2012, the consensus that currently links our economy to Europe’s may shift. If more investors begin to believe that the US will escape a Euro-induced recession, we could have a very good stock market in 2012, extending today’s Dow move.