HOME OF "PICTURES OF A STOCK MARKET MANIA"
May 26, 2005
Samex Capital's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
This excerpt from the May 23rd issue has been posted
to coincide with receipt by snail-mail subscribers.
Our colleague Jim Bianco (www.biancoresearch.com), has repeatedlymade the point that if there is a bubble in housing, it is not likely to bust while everyday all you see are repeated mentions of a housing bubble. As with the mania instocks, it is only when everyone says (and believes) "this time it's different,"that the whole shebang just goes kerplop. Interestingly and ironically,Marketwatch's Mark Hulbert just wrote about the real housing bubble, exposed in a study byYale's Robert Shiller. The economics professor found that until 2002, the phrase"housing bubble" was hardly ever mentioned in the pages of major U.S.newspapers. At that point, the number began to surge upwards like any of theinternet or techie darlings during the heyday of the mania. According to Hulbert'sstory, "....a graph plotting the number of mentions of 'housing bubble' over the last30 years shows all the telltale signs of a bubble -- a long relatively horizontal linefollowed by a huge spike upwards." This is in stark contrast to the stock maniathat commenced in the late 1990s, where there were almost no mentions of a stock bubbleand instead, usually only oft repeated beliefs that prices could surge almost endlesslyhigher. Importantly, Shiller claimed that "relative value" was a veryimportant consideration, rather than a black and white categorization of a housing bubble,saying "I think most of us can agree that real estate in certain parts of the countryis more overvalued (or less undervalued) than in others." Amen! Giventhat the ten most undervalued of the 99 locales examined in our February 28th issue wereundervalued by 16.3% and that the average overvaluation of all 99 locales was a paltry2.8%, we believe the premise of a bubble is somewhat mistaken and if anything, hastilyjudged. According to data provided by the Office of Federal Housing EnterpriseOversight, average price gains in the last five years amount to 102.4% for California, 75%for Florida, and 68.9% for New York; and all three states have been labeled asbubbles. By comparison, in the last five years of the stock market mania, Nasdaqsurged more than six-fold! Ironically, David Wessel's WSJ article last week claimedthe Fed was now on the worry track. The story featured a chart showingyear-over-year price changes for housing from 1985. Prices increased to near 9% in1987 then slackened to just below zero by 1991. The pace of increases then picked upfrom 1993, rising steadily to roughly 10% last year. Huh. Yawn. Meanwhile, forget Nasdaq. The Fed stood by and did nothing as the Dow averaged (yes,we said averaged) 11.7% gains for all of the years between 1985 and 2004.
CNBC's Ron Insana recently interviewed Sam Zell, the country'slargest landlord, with 128 million square feet of office space and 225,000apartments. Responding to a question regarding the existence of a bubble, Zell said,"The constant conversation about the single-family home market is misleading. I can'thelp but compare it to the single-family home market everywhere else in the world. Andwhen you look at it in that context, this market is still very cheap relative to the restof the world. I don't really think that there's a bubble in the single-familymarket."
And at the famed Milken Institute Global Conference recently heldin Los Angeles, some of the best real estate minds in the country including Zell,concluded that although prices had soared in certain high profile markets, such asCalifornia, real estate is a local business and many markets have been experiencing onlyvery modest growth. Zell also commented that the only bubble was the one thatexisted in the media.
Still, there is no question that the most overvalued markets (i.e., such as Chico, CA -overvalued by 43%) are at best, approaching bubble territory. However, theinevitable price corrections, will very likely be limited to those areas that are grosslyoverpriced and will not necessarily affect your own locale. By comparison, thebursting of the stock market bubble affected practically all investors. Housingprice corrections, like stock market corrections, are not rare events. That suchcorrections may be on the horizon for overvalued locales does not a maniamake.
----------------------------- We last covered insideractivity in the top ten Nasdaq issues back on September 7, 2004. At that time, weconcluded that insiders were revulsed by their own stock, since there were 18 sellers forevery buyer. We also concluded these companies were collectively and massivelyovervalued. What has changed in the last eight months? Insiders have becomefar more active as sellers, indicating revulsion on one of the largest scales we have evertracked. The seller-buyer ratio has ballooned to 31.6 to 1 and the absolute numberof 284 sellers is the most we have ever recorded. Just for kicks, we'll tell youthat the ratio of shares sold to shares purchased was better than usual at 375 to 1 butlet us not leave out that 90% of shares purchased were at one company; Microsoft. Sans "Softee" in the calculation, the ratio soars to 1816 to 1. Theaverage P/E multiple for the group has fallen nicely to 29.3, under the 30 mark for thefirst time in recent memory, but still extremely high for a group whose best earnings andrevenue growth rates are probably in the past. Total market capitalization nowstands at $921 billion, up 7% from last September and is equal to exactly one-sixteenth ofthe entire U.S. stock market. The average price-to-sales ratio of 5.6 is enormous,compared to the other 15/16ths of the U.S. market. Despite the obviousovervaluation, the group is still quite popular due to their inclusion in the QQQQ Trust,probably the most heavily traded equity entity of all time. The group comprises39.2% of the trust, which trades an average of nearly 100 million shares per day, roughly$3.5 billion worth. While it may be that sellers are simply taking their proceedsand buying shares in the other nine constituents, we doubt it. The evidence is quitecompelling. Insider activity says these shares are grossly overvalued.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the firstissue was published in May of 1990. Mr. Newman is also a member of the Market Technician'sAssociation and has been widely quoted for years by the financialpress, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 20 times per year and focuses oneconomic and stock market commentary, often covering controversial subjects. Severalproprietary technical indicators are usually featured in every issue accompanied bycurrent interpretation. Broad samples of our work can be viewed at
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