Overvaluation - Microsoft & IBM Telling Us Something?
What the *%#@ is wrong with Microsoft? Every stock with four letters in it seems to move up about a buck a day, but Softee is dying a quick death right now. Isn't Microsoft supposed to be the company with everything going for it? $40 billion in cash, high margin products and a celebrity Chairman should be enough to at least ensure a market perform for a stock. Instead, Soft is the last horse in the race, losing eight percent for the year versus an 18% gain for the NASDAQ market.
Microsoft isn't the only tech company with stock market problems today. The largest computer company in the world, IBM, has been slowly eroding shareholder value since the middle of May. IBM has lost 12% in the last few weeks and it looks like it has another 10-15% to go on the downside. At a time when the market has been rallying better than at any time in the last three years, it is odd to see these two tech giants hurting so badly. Is there something other than normal market volatility a foot here? Could these two bellwethers be trying to tell us something?
In the stock market, there is always something leading that looks obvious in hindsight. The topping of the advance decline line in the Spring of 1998 foreshadowed the greatest bull market top of all time. The stock market bottom of 1987 was turned around when most indexes hit long-term moving averages. Today, Microsoft and IBM are showing us what might be happening to a lot of stocks in another three or four months.
Technology is still the talk of almost every business conversation that discusses the future. And while it is true that we will continue to demand and devour the latest technology for years to come, the low share prices of IBM and Microsoft are telling us something about valuations. There is a limit to how much you can pay for anything. Microsoft's earnings have been more or less flat for the last four years, and IBM's have been very erratic. Investors bid these stocks up so high to the point where they were looking for no less than 20-25% annual earnings gains for many years out, and there is no company in the world that will ever deliver those types of results. During the last seven months, these two stocks have shown us what to expect from the broad market for the next few years. Things can rally a bit, and just as expectations get real bullish again, things will sell off. This condition might be with us for the next 10-20 years.
Overvaluation is one of the two main problems that will afflict our market for the next decade or so. The other main negative factor is debt. Across the board, deep and wide debt. From the lowest levels of consumerism to the highest levels of government and everything in between. The American system is saddled with too much debt. Stocks will only be able to rally so far because we are bound by the contracts we have signed to pay record interest amounts to bond and debt holders, and this condition will prevail for at least another 10 years.