Krystal BAll - 29th January 2001
Dear Reader, Please read first the Disclaimer section at the end..
Whenever a bullish stock market takes a dip there is an immediate natural tendency for the ‘speculating investor’ to add to his portfolio. As the dip increases in depth and magnitude the obstinate denial mounts till all the money saved and borrowed is sucked in and there is no more to be put in. This point marks the end of the most substantial part of the market fall.
But it doesn’t stop there. The falling indices have to go down and down till exhaustion point. Many times this last part of the bearish market shows itself on a chart as a gentle eastward down-slope with protracted waves carrying the price-line gradually up and down. Investor behavior during this phase gradually shifts from optimism to pessimism while it should be just the opposite. As the mood to ‘salvage’ gains ground ‘sell’ orders increase. Till there are no more stocks to sell. Now that perhaps is close to the bottom.
After the blood bath is over, the financial statements of a small section of the investors show a ‘net surplus from market‘. Such may call themselves good gamblers. But actually an adjustment to this surplus is required as a good part of the gains during the bull phase has gone into trendy clothing, fancy gadgets, vacations, swimming pool & club payments and other wasteful expenditure. The net cash equivalents would be lesser.
The bigger section of the gambling community while making a gross loss from operations will need to add up the cost of this wasteful expenditure to arrive at the actual cash loss. As the bell rings to remind of re-payables on account of loans and interest dues these folks and their lenders embark on another type of economic activity. Distress selling of other assets. Homes, cars and appliances. So now these markets too have to go down with so much on offer. And the manufacturers will announce further earnings warnings.
The ones who can’t pay their dues will take the route to absconding or self-destruction. The worst of them all will resort to crime.
So at the end of it all who are the ones who can remain unaffected?
1.The ones who got out completely with all gains in tact. The fingers of one hand are enough to count these heroes.
2.The lucky gamblers. Astrology defines this section as a minority.
3.Those who had the resources backed by moral compulsions to pay up the loss. Quite a few will fall in here. Some of these may even intensify their Biblical studies.
4. And lastly the ones who never played the market game. This species may not exist in USA. If there is anyone of this kind who is he please? And where can we find him?
Where is the Nasdaq now? Are stocks at an attractive PE ratio?
As the Nasdaq market fall appears to have been arrested in recent days many investors are fancying stocks that have fallen substantially. They quote attractive price earnings ratios after factoring in revised earnings estimates.
Question: A stock that was quoting $150 (100 times early yr. 2k earnings estimate of $1.5) is now quoting $75 (only 75 times yr. 2001 estimates of $1). So is it not safe to buy for a projected price of $100 (100 times $1)?
Logic: According to market statistics as the bull market gains fervor not only do corporate earnings grow but also the PE multiple factor. In other words a stock that quotes 10 times the earnings at the middle of a bull phase will change track and grow at more than just the same multiple. At the height of the mania the PE factors could be 50, 60…100… any number. The reverse is true of a bear market. PE multiples can trail 100,90…5
Answer: So the stock quoting
$75 in a bear market runs the risk of falling to $5 or less (5 times $1).
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