"The drums, Bwana.
What do they mean?"
WHILE THE MEDIA unearths one major financial disaster after another, my jungle tom toms keep telling me that there is a lot of light beyond that thick underbrush. When the market can rise by 18 percent in five days, as it did before Thanksgiving, that's the only lifeline I need to sustain my inherent optimism well into the next year. We could buy into all those stories about the "next wave of resetting teaser loans" and be hopelessly pessimistic, but what's the point? The damage for the moment has been done. Let's focus on what's positive.
Got milk? If anyone wants to peer into the glass that's half-full, there's plenty to feel good about. For one thing, stocks are selling at price-earnings ratios of 12 to one. For those of us still building a retirement account, this is one of the best values I've ever seen. Investing more during this current downdraft is the opportunity of a lifetime to reduce the average cost of everything we have ever bought.
What does a 12 to one P/E ratio mean? For every $12 invested, companies in general are earning $1 of profit. Put another way, for every $100 of investors' money at current stock prices, companies are earning profits at a rate of about $8 per year. Out of these earnings, large companies pay dividends to stockholders, and those dividends today are amounting to a return of just under 4 percent for the 500 largest U.S. companies combined. Not bad. Stocks may work their way lower than today's prices, but investors are still receiving dividend checks that are four times the current rate of return on money market funds. According to Ken Fisher in Forbes, the last time dividends amounted to more than the yield on treasury bills was in 1958. Meanwhile, the other 4 percent of the 8 percent profit is being reinvested or used to pay down debt â€” spooling up in either case to trigger explosive increases in future stock values.
It's true that the economy is slowing down, but that's old news. This just in! Economists just announced that the recession started last December. Since recessions tend to last less than two years, this would place the recovery at some point in 2009. Meanwhile, what people don't seem to notice is that corporate America, or at least two thirds of all public companies, earned more money by the third quarter of this year than by the same quarter of last year. There are specific industries obviously hurting, but the majority of companies are doing fine. Believe it or not, cutting a work force to some extent can actually lead to higher profits. Managers at General Electric divisions are famously instructed to cut the lowest performing 10 percent of their work forces EACH YEAR.
So recessions are not all bad. A thorough housecleaning of the financial services industry has been a godsend. All those responsible people criticizing the fact that we allowed Lehman Brothers to fail are forgetting that if we had propped up a organization that was leveraged 27 to 1, we would have just been postponing the inevitable. Along with the market downdraft has been the scene of embezzlers crawling out from under the rocks. As John Kenneth Galbraith pointed out in his book "Crash," there is the "Bezzel" factor of any crash that is brought to light when ever-rising markets mask the fact that money has been stolen. These periods offer wake-up calls for people tempted to invest in something that seems to be too good to be true. It prompts us to be that much more circumspect when choosing financial advisors. Who is this investment proposal really serving?
It's depressing to recall how great our investment statements looked back in September of '07 â€” not to mention the warm glow from what we thought our house was worth at the height of the "bubble." For us optimists, however, life is full of second chances. Someday, our statements will return to what they reflected slightly over a year ago. Even house prices will be back to where they were â€” especially if inflation heats up. The trick to staying positive is to maintain the long view, resist the steady drumbeat of media hysteria, and never forget that there's more to life than just money. Happy Holidays.