Road Map to A Healthy Stock Market
by Charles Payne
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 Iíve 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
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
Trust: A Matter of Mea Culpa, Hara-kiri,
and Open Kimonos
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 isnít just
the necessary from those facing criminal conviction.
To a certain degree we all played a role in the marketís
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 Iíd love the media to admit they
played a role. CNBC in particular has spent the last
year and half acting like they werenít part of the
hype. They donít want to admit they were the carnival
barker, not just reporting on the events inside the
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 isnít about getting preachy, but
we all say we messed up, I think weíll 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.
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 canít 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 donít do much for the decision-making process
of a corporate executive.
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.
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 itís 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 sheís
guilty of anything, but if she isÖ) 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.
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.
The mindset of the quick payoff has to be eliminated.
I donít 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 isnít always a lot
of time to peruse or hesitate. In some ways it is
unfortunate that companies arenít 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.
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 Ėback 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 Paynesí 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
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