Tuesday, December 21, 2004

Is the market overvalued ?

December 20th 2004

Of all the market commentator and newsletter writers out there I have some that I like and some that I respect.
Richard Russell, Herb Greenberg and Stefen Roach are among the ones I respect and like - and this month all of them seem to be saying the same thing - Beware the market is overvalued.

Here is Herb's column on CBS Marketwatch that appeared last week. Sorry its probably in their archives by now!!

Stephen Roach is the renowned chief economist at Morgan Stanley, his prediction last week was not only that the markets are overvalued but that an "economic armageddon" is in the offing

Richard Russell has been quite bearish for a while now - encouraging readers to move into gold and gold stocks for over a year now, those who heeded his advice last year must be smiling all the way this year. Here is his website

Personally I do see a lot of headwinds as far as the market is concerned in 2005. We saw a nice rally in the last few months. Remember that market did almost nothing till October and rallied about 8% (the S&P 500) in the last two month.

I attribute this primarily as a relief rally to the fact that
1. the election uncertainty was resolved
2. the economy is on stable ground if not a robust growth
3. the dollar has dropped more than 20% against the euro and yen thus adding nicely to the profits of multinational who sell their wares in europe and asia.

However as pointed out in the columns above the same issues will come to bite us next year
1. Already the White house has said it expects a much smaller growth in the economy next year.
2. The american consumer is drowning in debt and has no more to spend.
3. Home prices are at a record high.
4. Internet and Technology stocks are at astronomical highs using any ratios.

The classic and most telling sign of a market high - as acute market observers know is a merger frenzy.
Companies start buying competitors using stock as currency, why? Because they know it is inflated
Last week saw a flurry of mergers Symantec - Veritas, Sprint-Nextel and Johnson & Johnson - Guidant and probably more to come.

Also insider sales have reached record highs this month, see this story in Investors Business Daily
The increased insider sales and the merger mania should be cautions to the investor - be afraid, be very afraid.
-Don’t play the momentum stocks

If you are holding good value, blue chip stocks and you don’t need the money for the next 3 years, don’t worry
But don’t put new money into the market at this time. Sit on the sidelines through year end and probably even through Januray 2005 and watch what the market does.

AK
soundmoneyfuture@gmail.com

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