I Fall to Pieces

July 15, 2002

If the stock market were a song, it would be "I fall to pieces" by Patsy Cline. June was terrible, with the Dow, S&P500, and NASDAQ down 7.1%, 7.7%, and 9.5% respectively. So far, early July looks worse. As I addressed in the last issue of MAXadvisor, the main culprit is a growing feeling among investors that they've been swindled by Wall Street and corporate America. And in many ways, they have.

One thing is for sure, if one of these high profile scam artists from corporate America doesn't go to jail soon for fraud, the investors won't get the catharsis they so desperately need. Doesn't matter where they hail from, Enron, Global Crossing, WorldCom, throw a dart, there are many to chose from.

Tabloid news headlines aside, the real trouble - as it's been for some years now - is valuations. Stocks were priced for perfection when anything but became the market environment. More troubling, stocks were richly valued assuming the numbers (earnings and revenues) were "on the level", which, sadly, they were not. A little over six months ago I said on FOX news that earnings were very likely overstated by 20-25% across the board in the S&P500. At the time this was a controversial statement. Sadly, now it seems like I may have been underestimating the problem.

Irrational apathy?

Are their any positive signs? Some. Certain very rational investors have started to enter markets they have long avoided. Warren Buffet recently made an investment in a beaten down telecom company, and Bill Gross, famed Bond fund manager of Pimco (and manager of the Harbor Bond fund that appears in our two most conservative model portfolios) has started buying telecom bonds.

The media is salavating over the the market turmoil. The last time they got so excited about something was when everyone was getting rich in the cash machine that was Wall Street circa 1999. Press hype usually kicks in close to the end whatever they are covering.

And keep in mind though that there are many trillions of dollars in cash just itching to get back in the market. Still, mutual fund investors have yet to throw in the towel on investing, which would lead to a crash of epic proportions.

At MAXfunds, we've been quite negative for going on three years now about insane valuations. Many have accused of us being gloom and doom bears. That's why it's noteworthy that we are starting to see a light at the end of the tunnel. For the first time in quite some time, we think the market will return semi respectable 5-8% returns per year over the next 10. At the older valuations of yesteryear, we were quite sure the S&P500 would return hardly anything over the next decade, but then, it's now down around 40% from those levels. 

Don't expect heady returns of the late 90's anytime soon, do expect some wild rides, especially in the short term, and most importantly, do expect a well diversified portfolio in good stock and bond funds to beat out money market yields over then next 5 - 10 years, which is why are not 100% in cash. This may not sound sensational, but is a fairly big departure from what we said in 2000 and 2001, which was that cash would be one of the best asset classes ("cash is king" from 'The Psychic', circa January 2000 and 2001).