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Bonds Are a 'Safe' Investment: A Big Lie Gets Even Bigger
People are really losing their appetite for equities. In the wake of last year's 39% drop in the S&P 500 index, investors seem to be scrambling for some way to preserve the money they have -- and they lack an appetite for taking the risk of buying stocks. One way I measure this is that despite the 15% increase in my newsletter's stock picks in 2008, there's not much appetite for subscribing. I think most people have concluded that the plunge in stocks does not make them cheap because there is not likely to be earnings growth to prop them back up.
Among the biggest losers in the stock market is TARP. The Congressional Budget Office (CBO) estimated last week that the U.S. Treasury's $247 billion in TARP investments made in financial institutions -- including 262 banks -- through the end of December have lost 25% of their value. NYU economist Nouriel Roubini estimated that potential credit losses for U.S. banks could hit $3.6 trillion -- $2.2 trillion more than their $1.4 trillion in capital.
This suggests that investors are wise to stay away from bank equities. But there is vast uncertainty regarding how many other industries and companies will suffer the collateral damage of a bankrupt banking system. It seems likely that any industry -- such as automobiles, airplanes, big computers, MRI machines -- that depends on financing to close deals will be in deep trouble. And with 2.6 million lost jobs in 2008, so will any industry that depends on the recently or about-to-be fired workers in these companies. Are there any equities that could emerge unscathed?
One that comes to mind announced its earning yesterday -- International Business Machines (NYSE: IBM). IBM's fourth quarter net rose 12% thanks to its strategy of focusing on higher-profit software and services -- which accounts for 80% of its earnings -- and reducing its dependence on the computer hardware business, which suffers more in down economic cycles. With EPS of $3.28, IBM beat expectations by 23 cents a share.
But is IBM stock cheap? It depends on whether its earnings forecast is realistic. At a P/E of 10, IBM's price/earnings to growth ratio is a very high 5.0 (less than 1.0 is cheap) -- with earnings forecast to grow 2% in 2009 according to analysts' estimates. But IBM raised its 2009 forecast to $9.20 a share -- 45 cents per share better than the average estimate of analysts polled by Thomson Reuters. Having made $8.93 a share in 2008, that new forecast implies a growth rate of more than 3 percent. That growth rate still makes its stock expensive.
But if IBM can keep beating expectations -- posting the 18% growth it enjoyed between 2007 and 2008 -- maybe it is an exception to the idea that equities are dead -- since that 2009 growth rate would make its PEG a mere 0.56.
IBM shares were up 3.8% in pre-market.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
1-21-2009 @ 10:57AM
3018c133 said...
People have lost confidence in the honesty and ethical behavior of wall street and the inability or unwillingness of government to enforce regulations that protect investors.as a long time investor in the market ive had it with the greed and dishonesty of some on wall street and will never again ener the market.
1-21-2009 @ 11:55AM
BHarrison said...
The "marketing tactics" of the corporations and the markets / funds simply went from being "marketing" to blatant FRAUD. No prudent and reasonable person can belive in, or have faith and confidence in the financial reports or representations of any of the FIs, corporations or the markets / funds . . . it all has been 'smoke and mirrors" for far too long; and it became blatant FRAUD.
Congress has yet to enforce or deliver on the promises of FULL DISCLOSURES and TRANSPARENCY for the bail out funds, and there has been no legislation to instill INTEGRITY in the markets and the corporations to establish reasonable "faith and confidence" in any of our busnesses or markets.
The CORRUPT CEOs, CFOs, and others who orchestrated and oversaw the perpetuation of the pyramid and Ponzi schemes, and other FRAUDS are STILL collecting those exorbitant salaries, and other compensations.
They have been revealed for the crooks and/or incompetents that they are, and prudent and reasonable people are NOT going to invest in such corrupt, and manipulated markets and corporations.
Get rid of the old CEOs, CFOs, Boards, etc., and instill INTEGRITY into it all . . . and outlaw "creative accounting practices which should be "criminalized", and then perhaps the people might begin to slowly return to investing . . . BUT that isnot likely to appen anytime soon.
1-21-2009 @ 12:32PM
A. Marshall said...
Corporations exist for the benefit of their owners....the shareholders. But over the past few years, it has become obvious that CEO's and board members have their own interest way above that of the shareholders. CEO's and upper level executives have had windfall compensation while shareholders have lost it all. Not surprising to me that there are no investors for these equities in this current situation. Better odds in Vegas, and it is more honest, as well!