How bad can it get?
One week ago today I warned investors to get out of the
Then, the inflation numbers did get worse and stocks got
And it could have been worse. The Dow had been down
around 230 points on Friday before a late day,
end-of-the-month rally led by professional investors
trimmed the decline. These pros - banks, brokerages and
hedge funds - closed out their books last Friday for the
month of February and had a strong interest in seeing the
market end strong.
These pros won't be so interested in keeping stocks high
this week, although there were rumors around on Friday of
another interest-rate cut by the Federal Reserve that might
Now for this week's question: How much longer can this
First off, the stock market isn't likely to keep going straight
down. Markets never do. But the key indication of how
bad things are going to get will be how investors handle the
Over the last few years, Wall Street's charming and
well-paid mouthpieces (with an assist from the media) have
convinced ordinary investors to buy after these downturns -
bargain-hunting is the cute name for it. In the used-car
business, they call this an inventory clearance sale or
something like that.
And small investors have been very obliging, which put a
floor under most market slides. Strangely, small investors
might still be playing the role of savior.
Two tracking services said there was a record $140 billion
inflow of money into mutual funds in January.
But there is a message behind the inflow of money into
mutual funds, and it's worrisome.
If small investors were putting a record amount of new
money into mutual funds, who was cashing out?My guess:
Corporations and wealthy folks who invest privately are the
ones cashing out. In other words, the smart money wants
no part of this market.
So how bad can it get?
The easy way would be to look at some numbers. The 30
stocks that make up the Dow now have a combined
price-to-earnings ratio in the low 20s depending on how
the figure is calculated. The average P/E over the life of that
index is 14. That means blue-chip stocks could still fall by
one-third and only be back to their historical average level.
Other indices are even more overpriced.
The big worry right now should be that these indices will
fall below their historic averages. And that could happen
easily if small investors - the folks who put that $140 billion
into mutual funds in January - suddenly panic while the big
shots are also fleeing.
There is another problem - the PE ratio. You calculate that
number by taking the price per share of all stocks and
divide it by the earnings per share of those stocks. You're
probably ahead of me, but that E - the corporate earnings
- have been declining rapidly.
So there is no telling when the market will hit the historic
average if the denominator of our equation is steadily
I'm not looking to incite panic and I hope that my warnings
But the pros and monied folks already know this stuff, so I
figure that these dirty little secrets ought to be shared with
people who actually work for a living and are only dabbling
in the market.
There is, of course, the hope that the Federal Reserve will
rescue the stock market. And on Friday the U.S. Treasury
made a very significant hire when it brought Peter Fisher
onto its payroll.
Fisher is an executive at the New York Federal Reserve,
where he has been described as the financial market's
"troubleshooter." He's know as the fixer - the guy who
controls a covert organization that's been dubbed the
"plunge protection team."
But Fisher aside, the Fed and the Bush administration have
a big problem.
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