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Struggling Stocks, Booming Commodities

04/28/2005

The NASDAQ has fallen -12.5% ​​since the start of 2005. S&P500 Index

suffered -5.7% this year. The US stock market has been terrible

over the past few months.

Not only is the general market down, but oil stocks have recently

important fix as well. It’s easy to be nervous

because of the short-term setback. However, to succeed

with long-term value investing, we can’t be distracted

by the volatile movement of the short-term market. It’s time to

take a step back and look at the big picture of current stock

market and review the investment strategy to take advantage of this type

difficult environment.

Inventories in general and oil stocks

The chart below is the 1 year performance chart between Energy

ETF index (ticker: XLE) and S&P500 index (ticker: SPY). By

looking at the chart, even a fool will know that the oil market

is booming while the US stock market in general is struggling.

Put simply, the current US stock market is not up

market. The heyday of the 1980s and 1990s where anyone can

just put money in an S&P500 index fund or a decent US fund

mutual fund to earn 10% to 20% more annual performance is

long gone. I expect for the next 8-10 years the US stock

market in general will stagnate.

If you believed that 20 years of scholarship

the performance between 1980 and 2000 is the stock market average

performance, then you will be shocked to know that just

before this period in the 1960s and 1970s, the US stock market

went nowhere. The Dow reached 995.15 in 1966 and the Dow returned to 800

in 1982. If you were the long-term investor who invested in

Dow index fund between 1966 and 1982, you have a negative -20%

overall return for your 16 years of loyalty, how would you

feel that?

Do you still remember the NASDAQ peak of 5000? In my opinion,

The NASDAQ is a screwed up index with lots of expensive stocks

even today. I predict we may have to wait for another

decade to revisit the NASDAQ 5000.

The current average stock market valuation is not cheap

Currently, the SP&500 index is trading at around 17 times the average PE today.

Although this assessment is not very expensive, it is not

that cheap either.

Over the past 100 years of US stock market history, the market

usually reaches an average PE of 10. This happened in 1974

or 1929 or 1980. We’re not there yet, not even close

Last 5 years even though the tech stock bubble burst

in 2000. In a major stock market trough, we should see

many large-cap stablecoins are trading at a low PE

teens. Now watch this: Coca-Cola (KO) PE 20, Walt Disney

(DIS) PE 24. Even worse, a stock without growth like Sun

Microsystems (SUNW) is still trading at a premium PE of 19.

What is the overall outlook for US stock market gains?

Even if the current market valuation is not so

cheap, if revenues are good, the market should do well.

Are we going to get great overall revenue prospects in the

coming years for the US stock market in general?

Unfortunately, my answer is no. My view is that US stocks

overall, market earnings are okay, but not good enough to

trigger a bull market. This market is still digesting

past bubble overvaluation coupled with low incomes

prospects.

Here’s one of the reasons for my not-so-enthusiastic winning

outlook: rising oil and commodity prices.

The booming price of raw materials

The commodity and oil market has been booming since 1999 and

high commodity prices weigh on the entire stock market

earnings. Companies have to pay more for necessary things

in business: steel, copper, oil, natural gas, etc.

Historically, when the commodity market shone, the stock market

didn’t do very well, and vice versa. In the 1960s and 1970s,

oil and commodities have been in a bull market for almost 20 years

while the Dow Jones index has performed horribly for almost 20 years. Of

From 1980 to 2000, the stock market soared as oil bottomed out

like $15.

The bull cycle for oil and commodities could be very long

Jimmy Rogers is a famous investor who co-founded Quantum Fund

with George Soros. In his recent book entitled “Hot

raw materials”, he predicts that the current raw material

bull market may last until 2013 strictly due to supply and

request.

In a chapter of the book entitled “Goodbye, Cheap Oil”, he

clearly spells out the reasons why oil and natural gas are bullish

market may last for the next decade. It’s as easy as

supply and demand: increase in demand coupled with a decrease

supply.

The supply of oil and natural gas has declined in part due

Extremely low oil and gas prices in the 1990s. Over the past 35

years, there has been no major discovery of oil in the world while

old oil fields are running out. Oil and natural gas production

the level of a well does not remain flat for the life of a well

Reserve. The production level of a well actually decreases

gradually due to the geophysics of the oil well until the reserve is

completely exhausted. Even if there is a new oil deposit discovered, it

will take a decade after discovery to actually produce

oil! Increasing supply to meet demand is a very difficult task

and slow process.

Combined with the drop in supply, the demand for energy from

China has doubled since 1990 by consuming 8% of the world’s oil

in 2004. The US economy is growing with increasing demand for oil

from one year to the next while American oil production experienced a strong

decline over the past 50 years.

Yet the price of oil is not that high on a historical basis.

Even with the current oil price of $50 a barrel, the price of oil

is still well below inflation-adjusted

record price of $90 a barrel in the 1970s.

Value investors don’t need a bull market to make money

As frightening as potential stock market problems, this kind

of a difficult environment is an excellent time to earn money

investors to buy cheap stocks.

Warren Buffet is the world’s greatest value investor.

It has averaged 20% annual investment returns over the past 50

years. However, Mr. Buffet’s performance in the bear market of

1960s and 1970s was actually 30% return per year, a lot

above its average performance.

Focus on very cheap stocks and the booming commodity market

Stocks do not go up or down directly. There will be

be a huge surge or a short-term hard sell. While the market

is out of shape, it is and will be a wonderful time for

long-term value investors.

Commodity prices are volatile. Just like the stock market,

the price of raw materials does not go up or down directly.

Although the price of oil has weakened recently, I firmly believe that

the price of oil does not return to a cheap oil price below $40 per

barrel. As long as oil and natural gas prices remain high, oil

stocks will do well. As painful as

recent strong sell-off in energy stocks, energy stocks in

general are still very cheap and my investment strategy is

continue to remain long-term oriented in them.

In the short term, it is very difficult to know when an action

up or down. But I know the evaluation and the gains

matters and invest in cheap stocks that trade significantly

below the market average will be rewarding in the long run.

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