Date: Sunday, 8/29/99, at 11:05 a.m.
The 90 day treasury bill now yields about 4.8% annualized.
The S&P 500 has an EARNINGS YIELD of about 3.8%.
The dividend yield is only 1.3%. If you manage to retire with a
MILLION dollars in your account, you will get $13,000 of income,
enough, when added to Social Security, to get you a nice trailer
along the Texas-Mexico border.
Microsoft pays no dividend at all.
Is there anyone out there who believes that by holding Microsoft
for the next 20 years you will recieve an INCOME STREAM from the stock
anywhere close to the equivalent of 4.8% on your PRESENT investment compounded over those next 20 years in inflation adjusted dollars?
Remember, 4.8 percent of Microsoft's half trillion market cap is $24 billion, about equal to Microsoft's present sales. You will never see it folks, NEVER!!
Indeed, the only way you will get any return at all out of Microsoft
is to sell the stock to someone else at a higher price. It's called the greater fool theory, and it is the reason Bubble Vision pumps so hard on this concept that the marked-to-market value of your portfolio means something. If you are a trader or market timer willing to sell all your stocks, it means a great deal. If you are a long term investor it means very little.
Marked-to-market portfolio values are a meaningful measure of what you can get for your stocks only if you sell them now at current prices. Thus, stocks are meaningful collateral only behind callable loans.
Marked-to-market values say nothing about what greater or lesser fools will be willing to pay you for a stream of dividends or eanings 10 or 20 years from now.
The problem is that stock prices are highly leveraged to very small changes in net inflows and outflows. On a fairly active day the New York Stock Exchange dollar volume is about $35 billion, the NASDAQ about $13 billion. Throw in the AMEX, the Philly and Pacific and you are somewhere modestly north of $50 billions per day.
The majority of that volume will be investors selling one issue, and then buying another with the proceeds. That is, most sales proceeds are quickly recycled into purchases and vice versa. If all sales are "recycled" into new purcases, then the market is in equlibrium and overall market averages would not move even as individual issues continue to fluctuate. (Actually, absent new money flows, the market averages would gradually sink due to management fees and brokerage expenses, but ignore that for the moment.)
Very small amounts of money, a billion dollars a day or so in new money buying will drive prices up until new sellers appear to match the new demand. The same is true of new net selling. A tiny fraction of $50 billion will be enough to drive down prices until new buyers appear to match the supply.
It doesn't take anywhere near $50 billion a day in new selling ressure to produce dramatic price moves. About a billion or less a day will do the job quite nicely.
Thus, although the NYSE and the NASDAQ might have a marked-to-market value of about 14 trillion right now, if the 401(k) crowd decided to begin selling to the tune of a mere 1 billion per day (250 billions per year) instead of buying the 850 million per trading day they
purchased in 1997 and about 600 millions per day in 1998, the rk-to-market values would fall quite dramatically. Further, such selling would have "dynamic effects" on prices as soon as market
professionals figured out that the trend was likely to persist and lowered their bids. The selling would accellerate.
The selling would end when common stock prices had fallen enough to become attractive as t-bill substitutes, with a dividend at 3 1/2 to 4% plus anticipated increases of 7% to 10% per year.
That is somewhere around Dow 3500.
The irony is that while Maria and the gang on Bubble Vision have been working overtime for the past several years making anyone selling or sitting on the sidelines feel like a fool for not being in
the market, they have neglected to tell you that "households" consisting primarly of wealthy retirees, corporate executives and corporate founders (Bill Gates and Michael Dell) have pulled a
Trillion dollars of CASH out of stocks in 1997 and 1998.
It is the greatest wealth transfer in the history of the world.
Getting one segment of the population (primarily Baby Boomer 401(k) mutual fund buyers,corporations buying back stock to prop up option values, state and local government pension plans and foreigners) to hand over a Trillion dollars to another segment of the population involves a process, and, with the exception of Corporations which are helpless in the face of the self-interest of their CEOs, the process involves an intense psychological conditioning to convince Joe Sixpack of the truth of one obviously silly idea - that you can buy and hold stocks for retirement and the marked-to-market values that arise because of YOUR actions will motivate a new generation of investors to duplicate your behaviour years from now when you retire.
The problem is the present generation of movers and shakers who have been selling into this rally has made off with a Trillion dollars of cold hard cash by providing stock to the market over the past two years.
Do you suppose that the corporate execs who sold option stock or founders stock in 1997 feel bad because marked-to market prices are higher now?
I doubt it.
First, these sellers over the past several years are the ones who write the checks to Bubble Vision for advertising that keeps the psychological conditioning going. They understand the psychological
conditioning process because they finance it.
Second, these people understand that making money on stocks is a process, and that this process involves FLOWS and not STATICS such as marked-to-market stock values.
So who do you think is the smart money?
Wealthy retirees who have owned stock since the 1950s and Corporate CEOs selling option stock? Or Joe Sixpack, State and Local overnments, and foreigners who have been buying over the past 3 years?
Warren Buffet once said that if you have been playing poker for 30 minutes and have not figured out who the patsey is, YOU are the patsey.
If you allow the psychological conditioning of Bubble Vision to make you feel bad about "missing the rally," then you are the patsey.
And the reason is that there are very powerful sellers who want you to feel that way so that you will part with your cash. They could care less about what happens to marked-to market portfolio values after they get that cash and tuck it safely into the two year note.
In response to their massive cash hauling activities over the past three years, liquidity has started to crack. First, the advance decline line topped in April of 1998 and has been sinking for 16
months. Second, the on-balance-volume indicator on the NYSE Composite Index has been sinking since January of 1999 (8 months) indicating massive distribution. Finally, volume peaked in April of 1999 on the NYSE and the NASDAQ and hit lower highs in the July Rally before
resuming its downtrend of 4 months, signalling falling demand.
The end of the cash hauling party is near.
And in this respect, you can look upon Greenspan's newfound concern about the "bubble" in two ways. One theory is carreerist "ass covering". Knowing that the flows are going to produce a bear
market in any event, he would like to be able to claim credit for having produced it and then manage it on the way down so as to do the least amount of damage to the economy.
The second and more realistic view is simple fear of political instability and revolution if the half of our population that is invested in stocks and is counting on those stocks for retirement suddenly discovers that their marked-to-market portfolio values have disappeared and that they can no longer retire, while while the massive debt they have incurred to buy those stocks still must be
repaid.
Complex societies must distribute perceptible, tangible benefits to its members or risk collapse. The loyalty of the middle and upper middle class is absolutely vital to the legitimacy of the American government.
The anger and disillusion that would be created by a serious bear market could easily destabilize and overwhelm our political system. The Federal Reserve has prudently decided that it wants to
be on record as opposing the bubble.
And it looks like the situation has become so freighted with danger that the Fed might be taking some small, timid steps toward actually doing something about it.
That should tell you all you need to know about the balance of risk and the durability of marked-to-market values.
-- wayne (wwitcher@mvtel.net), August 29, 1999