The Seven Faucets of Money
Will Puch Stock Prices
Much Higher
by Donald Rowe
The Wall Street Digest
Mutual Fund Advisor
Every
day on CNBC, I hear market technicians forecasting a severe market sell-off
and occasionally a crash. Most of these bearish forecasts are based on valuation,
which is terribly myopic.
The
dividend yield (1.58 now, 1.9 a year ago) is now at the lowest level in
history. The market is selling at the highest book value ever (5.93 now,
4.95 a year ago) and mutual fund cash is below 6%. While all of these statements
are true, I disagree that a market crash or steep sell-off is imminent.
I
believe too many people are watching the level of the pool when they should
be watching the faucet.
Valuation
levels are climbing relative to earnings, but the faucet of money flowing
into the pool is wide open, and stock prices will rise until the Fed does
something significant to slow the faucets of money.
Let's
take a look at the seven faucets of money.
Reason
#1 to be bullish: The dividend
yield is low because many corporations have stopped paying or stopped increasing
the dividend payout.
If
corporations did not have the cash or the profits to pay dividends, then
I would be concerned about the shrinking dividend yield. However, I think
the dividend yield will fall even lower and disappear from many corporations.
The
fact is the S&P 400 Industrial Corporations are sitting on a record
hoard of cash. They have enough cash to double the dividend yield and still
have enough remaining for normal operations.
The
Sunday New York Times business section recently listed the 15 nonfinancial
companies with the most cash per share. My staff researched the dividend
yield for each of the companies listed and it should have been impressive.
After all, they have the most cash per share of stock.
However,
it wasn't impressive. Ten of these 15 cash rich companies paid no dividends.
Of the top six richest companies, only one paid a dividend (.7%). the richest
company, King World Production, pays no dividend.
Here
is the dividend yield for the remaining four companies, and all of these
dividend yields are lower than the market dividend yield of 1.64%.
Stride Rite 1.5%
Autodesk .5%
Boeing 1.1%
Biomet .3%
Reason
#2 to be bullish is what corporations
are doing with all of that cash.
Corporations
are using their cash for stock buyback programs which will lower the P/E
ratio and push stock prices still higher. Corporations are also using their
cash for mergers and acquisitions, which again shrinks the number of shares
available for purchase.
Even
with new shares available from Initial Public Offerings, there was a net
loss of shares available for purchase in both 1996 and 1997 because of stock
buy-back programs, and mergers and acquisitions which totaled almost $1
trillion in 1997.
A
market selling at almost six times book value today is not the frightening
problem it would have been twenty years ago. First, it is a composite number
and, therefore, meaningless.
The
U.S. was a manufacturing country in the 60's and 70's. Therefore, the amount
of money invested in plant and equipment to manufacture steel and automobiles
was a very large number.
Today,
however, the U.S. is a technology and information based service economy.
Over
60% of the Gross Domestic Product is generated by the service sector where
people are the product, or people sit at computers and create new products,
new software, new computer games, etc.
Microsoft's
market value is based on profits. But how do you assign a book value to
500 spooky bright computer engineers who sit in isolated rooms creating
new software?
What
is the book value of a computer consulting firm or a personnel placement
firm when the only capital asset may be a computer to schedule the consultants
or the people? I would not be concerned about the book value composite in
today's service oriented economy.
Reason
#3 to be bullish is liquidity.
While mutual fund cash is at a low level, other cash levels are at record
highs. Liquid assets in the U.S. just reached a record $4.1 trillion. This
is amazing, when you consider that we are in the eighth year of a bull market
without a 10% correction, and the eighth year of an economic recovery without
a recession. Amazing?
Yes,
it has never happened before. There is $3.1 trillion invested in mutual
funds, but there is over $4 trillion in cash sitting on the sidelines waiting
for a correction.
Reason
#4 to be bullish is interest rates.
The U.S. has the lowest interest rates in 20 years. That is bullish for
the economy. However, the U.S. has the highest interest rates (except for
Italy) among the G-7 countries, and that is bullish for the stock market.
Here's
why: In Japan, the 90-day T-bill is yielding .5%, compared to 5.01% in the
U.S. Smart Japanese investors are borrowing money in Tokyo at 1%. Then they
move the money to the U.S. to buy stocks and bonds.
The
same thing is happening in Germany and other G-7 countries. The net result?
$90 billion every quarter, or $360 billion annually is flowing into the
U.S. from foreign countries because of higher U.S. interest rates and a
stable dollar.
Most
of this foreign money flows into our stock and bond markets. That is a very
large faucet of money not controlled by the Fed. If the Fed raises interest
rates to slow economic growth, this faucet will open even wider, and the
dollar will rise against the yen and the German mark. I know the Fed doesn't
want that to happen.
Reason
#5 to be bullish is our Federal
Government. Over the last 7 years, the Federal Reserve has been printing
an average of $342 billion annually to finance deficit spending by Congress.
Deficit
spending provides liquidity to the economy and the stock market, which fosters
faster economic growth but with unnecessarily high interest. Balance the
budget honestly, and the long bond yield will fall to 3%.
What
would that do to stock prices? Marvelous things! And you'll love it, if
it ever happens. Congress still borrows from the Social Security funds to
"show a lower deficit."
Reason
#6 to be bullish is our banking
system. The banking system and Mr. Greenspan both want you to spend and
borrow.
Proof
of this is in your mail box. How many of you are receiving pre-approved
credit card applications in the mail? Two billion of those credit card applications
were mailed last year by the banking system. Another 2 billion will be mailed
this year. Thanks to these credit cards, the banking system is creating
$200 billion dollars in new loans annually.
Reason
#7 to be bullish are the nation's
growing pension fund assets. In 1980, pension fund assets were only $500
billion. After pension reform in the mid 1980's money invested in pension
plans began to soar.
$2.8
trillion is invested in pension plans today. At current rates of growth,
$12 to $13 trillion will be invested in pension plans over the next fourteen
years.
The
total value of all stocks at the end of 1997 was only $10.2 trillion. So,
$12 to $13 trillion in pension fund cash is an awesome amount of money chasing
a shrinking supply of stocks.
I
believe that alone will virtually guarantee higher stock prices. There is
an estimated $25 trillion dollars in cash worldwide searching for a low-risk
bull market to invest in at the touch of a computer key.
Never
in the history of the world has so much money been so freely and cheaply
available for investment, growth, and expansion.
The
bottom line of what I have just described is that we have learned how to
create awesome sums of money. The availability of money is the most important
force that drives stock prices higher.
The
world is floating in a sea of paper money without inflation, and interest
rates are still not rising.
Editor's Note: Donald Rowe is editor
of the Mutual Fund Advisor, One Sarasota Tower, Sarasota, FL 34236,
1 year, 12 issues, $150.
The Bull & Bear Financial Report
Copyright 1999 | All Rights Reserved
Reproduction in whole or part is strictly prohibited
without prior written permision
NOTE:
The Bull & Bear Financial Report does not itself endorse
or guarantee the accuracy or reliability of information,
statements or opinionsexpressed by any individuals or
organizations posted on this site
PLEASE READ DISCLAIMER |
Web Site Designed & Maintained by
Estrada Design & Communications
in association with
THE BULL & BEAR INTERNET DIVISION
1-800-336-BULL |