**[investwise]** Herb Morgan: Pessimism Of 2010 Will Not Last For Long

 

In the DC comics' Bizarro World of the early 1960s Htrae (Earth spelled backward) is a fictional cube shaped planet ruled by the Bizarro Code "Us do opposite of all Earthly things! Us hate beauty! Us love ugliness! Is big crime to make anything perfect on Bizarro World!" The Bizarro broker sold bonds that were "guaranteed to lose money." Is life imitating fiction in 2010? Is 2010 the Bizarro 1999?   Let's compare attitudes of 1999 to today:   The Business Cycle: In 1999 the popular thinking was that the business cycle was dead. Technology had given businesses the ability to effectively manage inventories such that any recession would be short lived. Moore's law had so fundamentally changed the world that investors aggressively purchased shares in unknown companies with no history of profitability.   Valuations: Equities were extremely overvalued, but of course it was different this time, or so we were told. Technology stocks and mutual funds were all the rage. Up or out was the leading investment discipline of the time. Misplaced faith in growth was everywhere. In 1999 Cisco Systems reported revenue of $12.15 billion and net income of $2.10 billion.   That generated a market value in excess of $300 billion. Imagine, 150 times its net income! Why? Because things could only get better, or so we thought.   Today, Cisco has net income of closer to $10 billion or five times greater than what it had in 1999. In fact each of the last three quarters operating income numbers have been greater than the total of reported in 1999. Yet Cisco's market capitalization at $121 billion today is a mere shadow (40%) of its 1999 valuation. What can be said of Cisco can also be said of the S&P 500 and equity markets as a whole.   Look at this chart from Hays Advisory:         The I/B/E/S (Institutional Brokers' Estimate System) began in 1976. IBES gathers multiple analysts' earnings estimates for publicly traded companies in the U.S. By comparing the forward 12-month earnings yield estimates to the yield of the 10-year Treasury note (considered to be risk free) investors can take an unemotional look at stock market valuations.   The difference in 2010 is simply a manifestation of a collective change in attitude, an inverse of 1999. A lack of confidence by the investing public permeates the national conscience.   So 2010 is no longer 2010, it is Bizarro 1999 where everything is opposite of then. But just like 1999, prices generated in the market are merely a reflection of all known information and the collective confidence we place on our future. To be sure, our level of confidence is the inverse of 1999. In retrospect our exuberance of the day was irrational and I suspect the same may be said of today's pessimism.   Yes we have an out of control government at every level. Yes, the European currency is faltering along with its banks. Yes, our country is failing with its fiscal stimulus. Yes, unemployment is high. Yes, risk capital is in hibernation. Yes, central banks are "printing money." Yes, yes, yes, yes and yes. Yes, the U.S. effectively nationalized General Motors, Citigroup, AIG, Fannie Mae and Freddie Mac.   Yes, but the onward march of human freedom and capitalism is now so much bigger than just the U.S. Our ideas won! The world is just now digesting hundreds of millions of new workers and consumers.   Today's pessimism has created what I suspect will be a great buying opportunity. For I simply do not believe there exists the remotest chance that any part of today's condition is permanent. Seriously, do you really think gold and its ETF kin like the GLD and IAU can only go up?   Sometime in the near future things will change, and that will generate higher multiples and higher prices for the great companies of America. Yes, General Motors, Citigroup and AIG will again be private companies. Yes, Europe will return to growth. Yes, the U.S. economy will expand and create jobs. Yes, the American people will reject the false "hope" and "change."   I don't believe that St. Augustine played the market but I'd like to borrow his quote on faith: "Faith is to believe what you do not see; the reward of this faith is to see what you believe." Renew your faith in capitalism and renew your faith in the ability of our republic to fix what ails us. Renew your faith in ownership of great American companies. Stay long my friends.     Herb Morgan is president and chief investment officer of Efficient Market Advisors, LLC, an ETF separate account manger serving financial advisors and their clients Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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