Friday, June 24, 2005
I managed to squeak out ahead this week. My portfolio gained $3,277 (0.8 percent) to $430,778, outperforming the NASDAQ (down 1.8 percent), the S&P 500 (down 2.1 percent), and the Russell 2000 (down 2.2 percent). I think the downdraft we saw this week is temporary, and that the market will rebound next week. Nevertheless, I remain pessimistic about the long-term prospects for the stock market. I base this statement on valuation. Although the S&P 500 is trading at a reasonable 20 times earnings, this is not as bullish as it seems. First of all, the 20 times earnings multiple is based on S&P operating earnings. The earnings multiple based on net income that the media never seems to discuss (which includes such things as one-off charges) is closer to 25. Second, earnings growth has outpaced revenue growth for several years now. As a result, corporate margins are at all time record highs. This is not sustainable. Eventually margins will decline. If you don't believe this, then you don't believe in capitalism. For my money, the most telling statistic is that currently the average price to sales ratio for U.S. stocks is 1.4. The historic average is 0.8.