By Clyde Noel
Stock Report
Last week’s stock market massacre left investors wondering just how bad things can get, because the future isn’t very encouraging.
We have signs of a weakening economy, reduced corporate profits and rising unemployment. The nation’s jobless rate in August posted its biggest monthly rise in six years when it shot up to 4.9 percent (113,000 corporate workers lost jobs in July).
At the end of last week, the Dow Jones industrials lost another 343 points and settled at 9,605. The Nasdaq composite lost another 118 and settled at 1,687. The Town Crier index took a real bath when it lost 9.06 percent for the week, and for the year, 26.51 percent.
On the initial $50,000 investment in the 50 stocks, the Town Crier index shows a loss of $13,255 since Jan. 1.
What is causing this sell-off? Investors worry the weak economy will soon start putting a crimp on consumer spending and that has kept the country going and out of a recession. With added unemployment, there will be less consumer spending.
Last week, personal computer and printer maker Hewlett-Packard Co. agreed to buy Compac Computer Corp. in a stock swap valued at $25 billion (about $19 billion now since both stocks have lost value). Investors greeted the merger coolly.
The merger may look good to management, but when Carly Fiorina said the proposed merger with Compac means eliminating 15,000 jobs, it further increases unemployment and decreases consumer spending.
So where do we go from here since investing in the market is still pretty dangerous? There is risk because the price-to-earnings (P/E) still remains high, especially on technical issues.
P/E is the stock’s current price divided by the company’s earnings over the previous 12 months. If prices fall and earnings remain the same the P/E falls to a safe level, but that isn’t happening because earnings have fallen or even disappeared.
Now is a good time to reexamine your portfolio. Overlook the positive favorite investments for the time being and look at those fallen favorites lying at the bottom of the financial toy box.
Ask yourself, if you had extra cash would you buy the investment again today? What do you think the stock will do? Stocks that don’t look promising should be dumped and the proceeds put to work in other investments.
If you want some guidance, go to www.quicken.com which will show how various model allocations have done in the past. While you’re at quicken.com, create a portfolio then click the Portfolio Analysis button.
Trying to call a bottom to the market is useless right now. You have as much chance of being right as of winning the California lottery. In my mind, there will be more waves of disappointment as new groups of prices are adjusted downward. We are testing the April lows right now and if the market goes lower, we can expect the bear market to go well into next year.
Noel, a seasoned investor, covers the stock market for the Town Crier.
