Dueling Fools
1999
December 30, 1998

1999 Bear's Den
by Rick Munarriz ([email protected])

Last I checked, all big, blue and beautiful, the sky is still there. It's not falling. I may be a little chicken about the stock market come 1999, but I am no Chicken Little. So, no matter how critical I am about to be over the prospects of equities in the year ahead, remember that in the long run you will be hard pressed to find a better place for your money than in the stock market. Over the years Wall Street has gone through both feast and famine, yet ultimately, a fitting spread is served up to the patient investor.

So even if 1999 comes with a forwarding address to a bear's den, I am sure there will be plenty of successful companies with rising share prices -- the major difference now being that instead of simply shooting fish in a barrel to find a winner in the market you will actually need to roll up your sleeves and go fishing for salmon.

With the Armageddon disclaimer out of the way, I just have one thing to say: Gravity is going to have hell to pay next year! Today's valuations are nonsensical. Before someone tips me off to the fact that the market isn't supposed to be rational, I will have to say that that very notion proves my case. This week the S&P 500 is trading at 32 times earnings, more than twice its historical average. That would be fine if projected earnings growth would keep up, but it hasn't. It won't.

So, how goes that salmon fishing? Let's look at Internet auctioneer eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %>. I love the company. I've been a regular buyer and seller there for more than a year. Decent financials for a small company, except, that this isn't a small company to Wall Street. I doubt I would find any person willing to buy eBay outright for $10 billion. However, as a collective group, we have tagged a $10 billion market cap on eBay. In concert, we have put up ludicrous bids on the company to the point that I wonder if the market has forgotten what it was bidding on in the first place.

I don't mean to single out one specific security. The jaw-dropping valuations run rampant. Pick a rock, any rock. Turn it over. The stones are a lot easier to heave at the Internet stocks but you still find plenty of offline blue chippers like Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> and Wrigley <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WWY)") else Response.Write("(NYSE: WWY)") end if %> trading at three times their respective growth rates.

Who let this happen? We did. As overseas markets crumbled, the United States became a safe haven with a strong currency for an added kicker. Interest rates fell as cheap imports kept commodity prices down. For the good times to continue you have to embrace the notion that interest rates will again be cut dramatically in 1999 (which seems unlikely) and that the international investors won't flock back to their markets once stability returns abroad. And, yes, the big, blue, beautiful sky circles the globe.

The 1998 rush of investors trying to force money into the one viable growth outlet -- U.S. stocks -- has ironically enough created the situation where throwing funds blindly at the market seems to be the least viable growth option for 1999.

You don't believe me, check with the experts. Timer's Digest, a newsletter that polls alleged newsletter writing market gurus shows a majority feel 1999 will be a good year. That's not a welcome endorsement by the way. In 1997, the consensus was bearish. They were wrong. The market rose. In 1998, they were bearish yet again. They were wrong yet again. The market rose yet again. And now this year they are bullish? The contrarian approach, backtested here, seems to indicate an off year in what has been a brilliant bull market.

We enter the new year with political uncertainty and the market yawns. We go in with valuations one slice shy of the stratosphere and the market sighs. If this is the map to paradise I think we took a wrong turn at contentment.

Are we there yet?

Are we there? Nyet?

Perpetual upside is not a right. Despite recent euphoria, risk and reward remained joined at the hip. Right now folks just don't see it that way. A recent AOL poll had a majority of users expecting at least a 5% rise in the stock market over the next three months. It seems as if we the people think that risk-free returns of at least 20% a year are the norm. It's that kind of consensus that frightens me. No, I'm not going to stash my money under my pillow. I am just going to be a bit more diligent in my due-ings.

Be careful out there. And don't buy maps to paradise from strangers.

Next: The Bull Responds