Stock Markets and Values

The normal 20% or so stock market corrections to be followed by rallies up again would have given investors and institutions opportunities to invest when stocks are “on sale” never occurred. So we now have a stock market that is by all fundamental value gauges at least 20% over where is should be. Too high a percentage of stocks have been purchased while they were overvalued and at the very high end of their price ranges and valuation levels. Note that we now have a market that at every time it has sold at these levels has been followed by a brutal bear market. Despite ongoing and regular manipulation and central bank intervention and supportive buying, bear markets will occur.

Investment in stocks when they are far above their proper value happens all the time as recommendations by the brokerage houses must continue despite overvalued price levels.           Think back to the internet stocks and techs that were crushed then think back to 2008. Today, there are many quality companies that are selling at far too high prices in view of expected earnings and sales. It is not the companies themselves but the prices that too many investors have paid for them.

We recognize that the majority of recommended stocks are profitable and may offer solid long term potential, the problem is not investing in these stocks but investing when their prices are too high.

Numerous excellent and undervalued stocks can be found today. Yet most brokers are not permitted to recommend them to investors. Brokers in most firms have to invest in stocks followed by the research departments of their own firms. Therefore many experienced, well-informed brokers are restricted to only recommending and soliciting investment in the stocks that are on their own firms’ recommended lists. It has led to overpriced market disasters and will do so again.

Why can’t the brokerages suggest to investors to wait for better buying opportunities at cheaper prices?                                                                                                                                            Because the industry must generate business and commission revenues-every day! That entails recommending and promoting stocks despite the fact that they are by all standards overvalued.

Why is there less comprehensive buy/sell research coverage today?                                                       One primary reason is that discount brokerage houses have badly reduced the full service brokerage houses’ profitability. Example: recently a friend inherited one thousand shares of a NYSE listed stock; he asked us how much it would cost to sell it. It was then selling at $21 a share.

We checked the commission rates at two big name full service brokerage houses and the commission would have been between $460 to $520 for the sale of the 1000 shares at $21. We sent him to a large discount broker. The total commission was $9 total. NINE DOLLARS! He could not believe it. That sale of his stock accurately and clearly demonstrates why the full service brokerage industry has lost a huge percentage of its profitability.

Conclusion?                                                                                                                                             For many but not all stocks, this may end very sadly. Invest? Yes, just always insist on “value.”