Last week's bloodbath on the Nasdaq and Dow exchanges wasn't the official start of a bear market.
Last weeks bloodbath on the Nasdaq and Dow exchanges wasnt the official start of a bear market. It was part of a series of bear maulings that will continue until we return to a more natural financial picture.
What were witnessing correlates quite well with the behavior of real bearsthe kind with fur, teeth and big claws that theyre not afraid to use.
Bears in the wild are used to living in harmony with nature, eating when theres food and hibernating when there isnt any. When theyre fed by humans they get fat and lazy, returning to wherever they got their last meal, no matter what time of year. And if theyre hungry and no one is giving away food the next time around, they start slashing whoevers in their way.
Bear maulings happen roughly the same way in the investor community. Investors have been fed ridiculous returns on stocks running at more than 20, 30, 40 or even 50 times earnings for the better part of a decade. As a result, theyve gotten pretty comfortable with those fat returns for very little work. Now those returns are slowing down, and theyre starting to slash at the companies for not giving them the same kinds of returns theyve come to expect.
Personally, Ive always thought bears are among the dumbest creatures that have ever roamed the earth. They cant see well, although they do have a keen sense of smell, and they dont have any real enemiesor at least they dont think they do. Investors who expect the same kinds of inflated returns to continue rolling in dont see very well either, although they do have a good sense of smell for money and carnage.
The bad news out of all this is that the maulings wont stop any time soon. Companies like Cisco are still trading at more than 45 times earnings. Qwest is at 56 times earnings, while EMC is at 38.
What happened is that investors sought refuge from the dot-com collapse in infrastructure companies, and Cisco, Qwest and EMC are all well-positioned for growth and taking advantage of where the market is heading. But theyre still overvalued in relative terms. Oracle, by contrast, is trading at about 13 times earnings. IBM is trading at about 20 times earnings, and General Electric is running about 30 times earnings.
As investors start to realize there are no safe havens any more, theyll start picking stocks for what they really are worth, which is a combination of market conditions, upside potential and profitability.
The market used to consider the high teens on a price/earnings ratio to be risky. But that was before we started feeding the bears.