Opinions: Vitaliy Katsenelson and Gary Shilling

By on November 12, 2008

As reported by the Denver Post, some well-known market observers continue to express bearish views:

“Stocks overall, even after the decline, are not cheap. They are trading at 18 or 19 times forward earnings,” said Vitaliy Katsenelson, author of Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) and a Denver money manager. What many investors fail to realize is how fat corporate profit margins became in recent years and how hard-pressed corporations will be to achieve even average profit margins in a contracting economy, he said. Corporate profits, which averaged 8.6 percent of revenues between 1980 and 2007, reached 12 percent last year, an unusually high level. Lower profit margins will strain the earnings so important in calculating price-to-earnings ratios, a key measure of what stocks are worth. As investors become more risk-averse in a severe bear market, the average price of stocks falls to seven to 10 times earnings versus 16 to 18 times in more normal times.

The housing slump and credit crunch have moved into a full-blown consumer pullback and a global recession, notes economist A. Gary Shilling. Consumers, who represent about 70 percent of economic activity, are increasingly finding money harder to come by and cutting back on spending. Mortgages are more difficult to obtain, home-equity lines and loans are being cut off, and credit-card companies in October failed to sell any bonds to support the borrowing by their customers. That hasn’t happened since April 1993, according to data from Wachovia Corp.
When housing prices finally bottom, more than half of households will find themselves with negative equity, another incentive to save and not spend, Shilling predicts. The most dangerous hit will come as families lose their sources of income. The U.S. unemployment rate hit 6.5 percent in October, its highest level since 1994.



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