Home
>
Stocks & Mutual Fund
>
Struggling Stocks, Booming Commodities

Struggling Stocks, Booming Commodities

04/28/2005

NASDAQ dropped -12.5% year to date in 2005. S&P500 index suffered -5.7% this year. US stock market has been terrible over past few months.

Not only general market is down, oil stocks recently had a significant correction as well. It is easy to be nervous because of the short term setback. However, to succeed with long term oriented value investing, we can not be distracted by the volatile short term market movement. It is time to step back and look at the big picture of the current stock market and review investment strategy to profit in this kind of tough environment.

Stocks in General and Oil Stocks

Below chart is past 1 year performance chart between Energy Index ETF (ticker: XLE) and S&P500 index (ticker: SPY). By looking at the chart, even a fool will know that oil market is booming while US stock market in general is struggling.

Simply put, the current US stock market is not in bull market. The heydays of 1980's and 1990's when anyone can simply put some money in S&P500 index fund or a decent US mutual fund to earn 10% to 20% plus annual performance is long gone. I expect for the next 8 to 10 years, the US stock market in general will be stagnant.

If you have believed that 20 years of stock market performance between 1980 and 2000 is stock market average performance, then you will be shocked to know that just before that period in 1960's and in 1970's, US stock market went nowhere. Dow hit 995.15 in 1966 and Dow was back to 800 in 1982. If you were the long term investor who invested in Dow index fund between 1966 and 1982, you got a negative -20% return overall for your 16 years of loyalty, how would you feel about that ?

Still remember the NASDAQ peak of 5000? In my opinion, NASDAQ is screwed up index with full of expensive stocks even today. I predict that we may have to wait another decade to revisit NASDAQ 5000.

Current Stock Market Average Valuation is Not Cheap

Currently SP&500 index trades at about 17x average PE today. Although this valuation is not terribly expensive, it is not that cheap either.

Over past 100 years of US stock market history, market usually bottomed at average PE of 10. That happened in 1974 or 1929 or 1980. We are not there yet, not even close over past 5 years even though the technology stock bubble bursted in 2000. In a major stock market bottom, we should see plenty of big cap stable companies trading at PE of low teens. Now look at this: Coca-Cola (KO) PE 20, Walt Disney (DIS) PE 24. Even worse, a no-growth stock like Sun Microsystems (SUNW) is still trading at premium PE of 19.

What is the Overall Earning Outlook of US Stock Market?

Even though the current stock market valuation is not that cheap, if earning is good, market should do fine.

Are we going to get excellent overall earning outlook in the next few years for the US stock market in general? Unfortunately, my answer is no. My take is that US stock market earning overall is decent, but not good enough to trigger a bull market. This market is still digesting the past bubble over-valuation coupled with poor earning outlook.

Here is one reason of my not-so-enthusiastic earning outlook: the rising oil and commodity prices.

The Booming Commodity price

Commodity and oil market has been booming since 1999 and the high commodity price is taking toll on overall stock market earnings. Companies need to pay more for the things needed in business: steel, copper, oil, natural gas etc. Historically, when commodity market was shining, stock market did not do very well, and vice versa. In 1960's and 1970's, oil and commodity had bull market run for nearly 20 years while Dow Jone index had horrible performance for nearly 20 years. From 1980 to 2000, the stock market soared while oil hit as low as $15.

The Bull Oil and Commodity Cycle Could be Very Long

Jimmy Rogers is famous investor who co-founded Quantum Fund together with George Soros. In his recent book titled "Hot Commodities", he is predicting that the current commodity bull market can last until 2013 strictly due to supply and demand.

In one chapter of the book titled "Goodbye, Cheap Oil", he clearly lays out the reasons why oil and natural gas bull market can last until next decade. This is as simple as supply and demand: rising demand coupled with declining supply.

The supply of oil and natural gas was diminished partly due to extremely low oil and gas price in 1990's. Over past 35 years, there was no major oil discovery in the world while the old oil fields deplete. Oil and natural gas production level of a well does not stay flat over the life of a well reserve. The production level of a well actually declines gradually due to geophysics of oil well until the reserve is fully depleted. Even there is new oil field discovered, it will take a decade after the discovery to actually produce oil! Increasing supply to meet demand is a very difficult and slow process.

Coupled with declining supply, the demand of energy from China doubled since 1990 consuming 8 percent of world's oil in 2004. US economy is growing with increasing oil demand year over year while US oil production has seen sharp decline over past 50 years.

Still the oil price is not that high on historical basis. Even with today's oil price of $50 a barrel, the oil price is still significantly lower than the inflation adjusted peak price of $90 a barrel in 1970's.

Value Investors Do Not Need a Bull Market to Make Money

As scary as the potential trouble in stock market, this kind of tough environment is great money-making time for value investors to pick up cheap shares.

Warren Buffet is the greatest value investor in the world. He averaged 20% annual investment performance over past 50 years. However, Mr. Buffet's performance in bear market of 1960's and 1970's was actually 30% per year return, much higher than his average performance.

Focus on Dirt Cheap Stocks and Booming Commodities Market

Stocks do not go straight up or go straight down. There will be huge run up or sharp sell off in short term. While market is not in good shape, this is and will be wonderful time for long term oriented value investors.

Commodity price is volatile. Just like stock market, commodity price does not go straight up or straight down. Although oil price weakened recently, I firmly believe that oil price is not going back to cheap oil price below $40 a barrel. As long as oil and natural gas prices stay high, oil stocks will do fine in its business. As painful as the recent sharp sell off in energy stocks, energy stocks in general are still very cheap and my investment strategy is to continue to stay long term oriented in them.

In the short term, it is very hard to know when a stock will go up or go down. But I do know that valuation and earning matters and investing in cheap stocks trading significantly below market average will be rewarding in the long run.

Article by Henry Lu of BlastInvest LLC, a premium investment newsletter publisher in Connecticut. Visit http://www.blastinvest.com for FREE "how-to" investing assistance, web services and more.

shuttle to Midway Beardstown .. Lockport Chicago limo O’Hare

In The News:

Google’s scam detection features, powered by artificial intelligence, are a significant step forward in safeguarding Android users from fraud.

The FBI has issued a warning that scammers are impersonating doctors, police and banks using spoofed numbers as "smishing" texts surge nationwide.

Communities with unreliable internet service stand to gain after Amazon's Project Kuiper launched its first full batch of satellites into orbit April 28.

Tech expert Kurt “CyberGuy" Knutsson says unsubscribing from spam might actually backfire. Learn when to avoid it and stop junk effectively.

Tech expert Kurt “CyberGuy" Knutsson talks about how the first nonstop beating heart transplant, called zero ischemic time, at Taiwan hospital changes surgery.

Kurt “CyberGuy" Knutsson: FBI warns of "time-traveling" hackers.

Kurt “CyberGuy" Knutsson talks about a soft, vine-like robot called SPROUT that aids safe survivor rescues in collapsed buildings.

Health insurance giant Blue Shield of California confirmed it had been sharing private health data of 4.7 million users with Google for three years without even realizing it.

Delta and JetZero’s blended wing body aircraft marks a meaningful step toward a cleaner, quieter and more efficient future for air travel.

Recent reports show many common passwords can be cracked in literally seconds. Kurt the CyberGuy explains how to strengthen your passwords.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Iron, a robot that stands 5 feet, 8 inches tall and weighs 154 pounds, combines advanced artificial intelligence with human-like movement and exceptional vision.

Hertz, the rental car giant, recently confirmed that customer information was exposed through a cyberattack on one of its software vendors.

There are a number of features with AirPods you may or may not know about to take your listening experience to the next level. Kurt the CyberGuy explains.

These 35 Chrome extensions have privacy and security concerns. Tech expert Kurt “CyberGuy" Knutsson says to delete them now.

Tech expert Kurt “CyberGuy" Knutsson says 329,000 mph fusion rocket promises to be fast, disruptive and enable deep-space missions.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Tech expert Kurt “CyberGuy" Knutsson says a new autonomous AI is a game changer that also raises privacy risks. Is your data safe?

Tech expert Kurt “CyberGuy" Knutsson says robots and drones are revolutionizing fruit farming with faster picking and smarter handling.

Landmark Admin revises May 2024 cyberattack scope to show twice as many people were affected. Kurt “CyberGuy" Knutsson gives tips to help stay safe from an insurance data breach.

Tech expert Kurt “CyberGuy" Knutsson talks about how Yamaha’s hydrogen outboard motor could revolutionize boating with zero emissions.

Tech expert Kurt “CyberGuy" Knutsson reveals how to memorialize or remove a deceased loved one’s Facebook account and protect their digital legacy from misuse or scams.

Tech expert Kurt “CyberGuy" Knutsson says an Apple Watch saved psychiatrist Amanda Faulkner by detecting deadly leukemia early.

Scammers and fraudsters are increasingly targeting the most vulnerable, especially nursing homes and the personal data of their residents. Kurt the CyberGuy has safety tips.

Infected USB flash drives can spread malware among multiple organizations in ways that can easily bypass traditional security systems.

Struggling Stocks, Booming Commodities

Stocks & Mutual Fund