Investors, beware the ides of March - Commentary: A crucial month, for several reasons
By Dr. Irwin Kellner, CBS MarketWatch.com Last Update: 10:05 AM ET March 4, 2003
NEW YORK (CBS.MW) -- This could well prove a pivotal month for investors as they try to figure out what's hot and what's not.
From business, there'll be hints about how first-quarter earnings are doing, what with March as the last month of the quarter. Most firms will soon have a pretty good idea whether they are going to make their numbers or not.
It's one thing to know this internally, of course, and it's another to communicate it to investors. In this Sarbanes-Oxley era, many firms are reluctant to provide the precise financial updates they used to.
Where companies do speak out, they will be more likely to forecast earnings per share in fairly broad ranges, rather than just the penny or two that they used to.
Still, considering how earnings have been under pressure for the better part of the past three years, investors will be happy to see any sign -- no matter how small -- that the worst is over.
Even then, it's going to be a tough sell to get people back into stocks. Besides the fact that the market is mired in what would be its fourth down year in a row, most stocks remain overvalued.
The Standard & Poor's 500 Index today trades at close to 30 times its earnings for the trailing 12 months -- about twice its long-run average.
Only when you compare the S&P 500's dividend yield with the yield on the 10-year Treasury ($TNX: news, chart, profile) does the market even begin to look reasonably valued. But it's certainly not a screaming buy even on this basis; that's why first-quarter earnings will be so important.
Away from the market, another development likely to come to a head this month -- with important implications for investors -- is the situation in Iraq. One way or another, we should know within the next few weeks whether or not the United States will go to war, and if so, with a broad-based international coalition or not. See our Countdown to War.
With each passing day, we're rapidly passing through the best conditions for mounting an attack. The new moon has already occurred and pretty soon the average desert temperature will rise rapidly, making it difficult for our troops to do battle while wearing protective gear.
Bubbles, bubbles everywhere
Then there are the bubbles. If you thought the drop in stock prices and the breaking of the investment bubble (see my column of Feb. 25) meant that all bubbles were popped, you are wrong.
For one thing, there's the double bubble of debt (see my column of Feb. 18). Both consumer and corporate debts are at record levels, susceptible to any rise in interest rates.
Speaking of which, there also appears to be a bond bubble. Because interest rates are so low, bond prices are very high.
This could reverse rapidly, with prices poised to fall at the first sign of inflation and/or under pressure of increased supply from both the private as well as the public sector. See the latest Bond Report.
Any rise in rates would, in turn, threaten to pop another bubble -- the one in home prices.
Notwithstanding assertions by several Federal Reserve officials, the fact remains that housing prices have gone up much faster than family incomes for a number of years. See the full story on Federal Reserve chief Alan Greenspan's comments on housing.
Finally, there's the oil bubble. Oil prices have shot up because of concerns over Iraq, Venezuela, and the unusually cold winter. Read the latest on Futures Movers.
All three price bubbles -- bonds, homes and oil -- could be history by the end of this month.
Dr. Irwin Kellner, chief economist for CBS.MarketWatch.com, is the Weller professor of economics at Hofstra University and chief economist for North Fork Bank.