Investment & Financial Articles
Title: Road Map To A Healthy Stock Market
Author: Charles Payne
Article:
At this point everyone has weighed in with theories on how to
turn the stock market around. Even president Bush has come
through with his three reasons the market is in reverse. As I've
said before his insistence that the market is down in part to
the treat of terrorism is a big mistake. It actually gives the
Osamas of the world more power and the ability to achieve their
goals without implementing actual transgressions.
I'm going to outline a series of events listed in order that
they have to occur that may have to happen before the market can
sustain a rally. They are trust, accountability, economy, new
thinking and earnings.
Trust: A Matter of Mea Culpa, Hara-kiri, and Open Kimonos
Mea Culpa
I think the biggest problem with the misdeeds of corporate
titans that have been caught in the cookie jar is that none have
come clean. It would be very refreshing if one would step
forward and say he/she just let it get out of hand. However, the
mea culpa isn't just the necessary from those facing criminal
conviction. To a certain degree we all played a role in the
market's demise. The individual investor will have to come to
grips with the fact they threw caution, common sense and
discipline to the wind. Most investors are blaming their
brokers, but at the end of the day free will plays a role.
Then I'd love the media to admit they played a role. CNBC in
particular has spent the last year and half acting like they
weren't part of the hype. They don't want to admit they were the
carnival barker, not just reporting on the events inside the
tent.
Next there are the brokerage firms themselves that already were
working in a Catch-22, as they had to answer to two masters; the
individual client and the corporate client. Now they had to fend
off the threat of the Internet, which became a Borg-like
creature that changed the rules of Wall Street. In effect, it
became the great California Gold Rush.
It isn't about getting preachy, but we all say we messed up, I
think we'll all be back on track mentally. The dream of quick
riches has been wiped out, but the dream of making money in the
stock market is still intact.
Hara-kiri
In addition to coming clean some folks are going to have to go
an extra step. I would say that not all of the CEOs that have
failed shareholders did so with selfish greed and malicious
intent.
The bottom line is that they probably have to be replaced. Not
because they can't learn from their mistakes, but because the
underlying share prices will never recover, as question marks
and doubt will always haunt them.
This brings up another dilemma, the thin talent pool. As the
public rightfully screams for the beheading of CEOs and
dismantling of too friendly boards few are considering their
replacements. If you think baseball has been yielding too many
homers in part to a thin talent pool, just imagine trying to
field a thousand of so publicly traded companies? Developing a
big-time CEO is harder than finding a person that can pitch a
100-miles an hour, plus steroids really don't do much for the
decision-making process of a corporate executive.
Open Kimonos
Obviously transparency is necessary going forward. Still this
can be yet another tricky situation. From a broad perspective
the greater the transparency of corporate America the better the
quality of all things associated with the economic system. Not
just the honesty of reporting but also of the end products.
Consumers have been demanding such quality for a long time and
they have been answered. Now shareholders will demand the same
transparency that a car buyer wants to avoid buying lemons.
Accountability
Someone has to pay. America has always had a strange
relationship with its would-be criminals. They love Bonnie and
Clyde, Machine Gun Kelly and more recently John Gotti. Yet seem
to loathe Ivan Bosky, Michael Milken and Gordon Gecko. This
really goes back to a Robin Hood mentality that it's okay for
the underdog to take from the rich but not okay for the rich to
take from the people. This is a lesson that Martha Stewart is
learning the hard way (not to say she's guilty of anything, but
if she is.) with her current stock sale imbroglio. At the end of
the day it really only becomes an inconvenience for those
staying at Club Fed. The key is that the average person on the
street needs to feel like there is some fairness in this world.
Before getting back into the stock market those whose lives are
marked with rules, regulations and spending time in traffic
court to fight a ticket must see an equal distribution of
justice.
Economy
The economy has to continue to grow. It is unreasonable to think
that a transition from a recession to a would-be expansion could
happen without a few bumps in the road. Of course with so many
things going against the economy that have nothing to do with
fundamentals it is hard to figure when the coast will be clear.
A company like WorldCom says it may have fibbed to the tune of
$4 billion dollars and the confidence in America suffers. That
puts additional pressure on the dollar, a greater focus on the
rating agencies to be even more aggressive in their downgrading
binge. It causes net outflows in funds. It lowers the wealth
effect and hampers the economy. Yet the American economy has an
iron will. It will be dinked a few more times, but that is what
will make the move into expansion that much impressive.
New Thinking
The mindset of the quick payoff has to be eliminated. I don't
think one can be a passive investor anymore. In fact, the same
decisiveness that investors are demanding from the system,
ratings agencies, brokerage firms, governing bodies and
corporations themselves they should apply to their approach at
the stock market. In a recent Business Week article it was noted
that the turnover in NYSE issue in 1960 was just 12%, last year
it was 94%. That means there isn't always a lot of time to
peruse or hesitate. In some ways it is unfortunate that
companies aren't allowed to evolve or reach their goals over a
longer period of time. Yet this is the world we now live in and
investors have to adjust.
Earnings
Much is made about the market still being over valued based on
historic price to earnings ratios. This is because companies
have no pricing power and are afraid to force the issue.
Moreover there is still the inventory overhang and the fact that
some industries are too crowed -back to the modern day baseball
theory. Creative destruction and an improving economy are the
only things that can make this situation improve. There are
other ways to measure the worth of a company beyond the P/E
ratio. However, in order to feed into the economy earnings have
to be a tributary allow for job creation, research and
development spending and an improvement in the wealth effect.
The most compelling aspect of better earnings is that investors
have to believe in the sincerity of the numbers.
About the author:
Since 1991, Charles Paynes' Wall Street Strategies has
successfully provided timely and effective equity advice to
institutional money managers, retail brokers and individual
investors of all types, and has thousands of subscribers from
hundreds of brokerage firms. http://www.wstreet.com Wall Street
Strategies provides research online, including enhanced services
and communication tailored to today's fast-moving markets.
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