This is not the time to be too negative

Sydney M. Williams




Thought of the Day

“This is not the time to be too negative”

February 11, 2010

I am neither a trader nor a technician, but it strikes me that stocks are pretty reasonably priced. I have no idea as to whether we are at resistance or support, or somewhere in between, but I do know that the S&P 500 is 30% above where it was a year ago (before its dramatic plunge in early March) and, according to Bloomberg this morning, cash on the balance sheets of the S&P 500 stood at $1.2 trillion at year end, up $500 million from a year earlier (70% higher) – not bad performance during a pretty nasty recession. Imagine how much cash they might generate should GDP advance throughout this year! Of course, hiring and investment will consume cash as confidence grows, but theoretically those investments are made with returns in mind.

Perversely (and inexplicably) it brings to my mind our government. David Lipton, of our sales desk, mentioned this morning that he had heard that it costs the government $100 million a day when their offices are closed. What was not said was that when government is open for business it costs us taxpayers just over $10 billion a day. As Steve Kroll, also on our sales desk, remarked, just think, if government closed for two years we could wipe out the deficit!

We all realize that we need government, but unlike a business, when government is open they do not generate revenues – they incur costs. When a business gets shut down for a day or a week, for whatever reason, there is a real cost in lost revenues.

But, back to the market; yesterday Bill Miller wrote a piece on the market in which he compared favorably the outlook for equities versus bonds. Mr. Miller has received negative publicity for his failure ten years ago to foresee the past decade; of course, very few people did anticipate ten years of negative returns. In a sense we are at the opposite end of the spectrum from where we were ten years ago and all of us are victims of using extrapolation to determine forecasts. Twenty years ago the S&P 500 was selling at 333.62; ten years ago it closed at 1387.12; yesterday the close was 1068.13. A compounded return of 15.3% during the decade of the 90s created a herd of bulls; a compounded negative return of 2.6%, during the aughts, has created a sloth of bears.

None of us can know the future. Nevertheless, it seems to me that the pessimism of today is as misguided as the optimism of ten years ago.