Markets and Monsters in the Closet A good friend use to tell me not to confuse him with the facts. We all have our perceptions about what is real and what is not and most of us prefer to keep it just that way. Assuming you like reading this column, you fall on the other side of the fence where facts matter more than fiction. First, I will tell you for certain that neither I nor any other market pundit can assure you of what the market will do short term. There can be a monster of any magnitude come out on any given day. Taking it one step further, that move can come from a big unexpected event or it can flat out come for no reason the media can pinpoint (of course, a culprit of some degree would be attached in this case.) That said; we cannot hide all our money in the mattress as we know inflation will eventually rob us blind. Prudent allocation is the plan. Fear of a monster coming to get you is based far more on emotion than fact. Remember that the monster of 1987 produced new market highs within 19 months. That was a painful day but no real long term damage for those that didn’t sell out of fear. Compare that to the very mild beast of 2000 – 2002 where the trend sent us in a downward spiral for two years but not one day was anywhere near as painful as the fateful day in October of 1987. The point is that the monster can come – good or bad – but it is the trend of the market that we must watch the most. Remove emotion and turn to facts for guidance. Let’s not get carried away with useless information but here are some points I find very interesting as well as comforting. Did you know that if the price to earnings ratio was as high today as it was in March of 2000 that the S&P500 would be a full 66% higher than it is right now? Did you know that the value by market capitalization of the company’s listed in the S&P500 totaled $14 trillion and that they currently have $2.8 trillion in cash on their balance sheets according to the Financial Times? That is 20% of their entire market cap in cash! Did you know the S&P500 is up 89% from September 30, 2002 through March 31, 2007 but that the earnings of the companies in the S&P500 are up 93%? Yes, the market has been on a real run for a while now and history tells us that it needs to take a break – and it very well may do that. If you need the money tomorrow or this year you should probably sell and run for the bank. If you plan to stick around on this Earth for a few years; hopefully, the above facts will give you some comfort in fending off the fear of the monster. All of the conservativeness of the companies – the hoarding of cash – does provide comfort in a way but it is also frustrating at other points. Why aren’t they using the capital to reinvest in the business or in simple dividends? Honestly, I think the answer is fear of ever going through the 2000-2002 period again. The business world has many battle scars. The wounds have healed but the scars and the memories still remain. The companies in the S&P500 right now are only paying out 30% of their earnings as dividends according to Barrons. Compare that to 55% that was being paid out in the 1980’s and you may raise an eye brow or two trying to figure out what it means. In 1980, 94% of the companies in the S&P500 paid a dividend while today only 77% do. Things change! Finance theory tells us that at some point their collective retaining of earnings could lead to higher growth rates of earnings per share in the future if they find good use for the stockpiled cash. Right now the leaders of corporate America have decided collectively to do other things with their cash. As we have already uncovered, part of the money is in the bank ready for battling economic down turns – another monster in the closet that seems to be missing – and they are buying back as much of their own stock as they can afford. Last year was the record with $494 billion of stock buy backs with a mere $233 billion in dividends according to Bob LeClairs math. If you are scared of the monster in the closet, you are not alone. CNBC reported massive short interest on the NYSE, companies have way too much cash to even remotely seem content or complacent, and history tells us the market is long in the tooth. So where is the market monster….maybe he is in hibernation, maybe he is not. Maybe he will come out this week. In the mean time, pay attention to the trend, my friends. Not to confuse you with the facts but the big bad monster seems to be staying in the closet. ________________________________________________________________________ Joseph “Big Joe” Clark is a Certified Financial Planner and the Managing Partner of the Financial Enhancement Group, LLC. He is a Registered Principal offering Securities through World Equity Group, Inc, member NASD/SIPC. Registered Investment Advisor Services offered through World Equity Group, Inc. Big Joe can be reached at email@example.com, or (765)-640-1524.