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Contrarian Chronicles Wall Street great says the market is broken advertisement Investing pioneer John Templeton believes there is still huge downside risk to the stock market - and hes almost as bearish on house prices. By Bill Fleckenstein Wall Street has its statesmen and its noisemakers. Into the former camp fall the likes of Warren Buffett, the late Leon Levy and John Templeton, the founder of the Templeton funds group. Their wisdom is there for the taking, but when its deemed to be pessimistic, folks turn away. Thats where the noisemakers come in, ready to rev up any story that gets people buying stocks. Some technology chieftains have demonstrated remarkable skill in that arena. After all, the performance of their stock options depends on folks willingness to believe. Imagine, then, the scene behind closed doors when Microsoft MSFT , news , msgs announced its decision to show options the door. Templetons take: The stock market is broken Last week, a friend was kind enough to e-mail a copy of an interview that Sir John Templeton gave recently to Robert J. I, in turn, would like to share its wisdom with readers of the Contrarian Chronicles. During previous interviews with the publication in 1999 and 2000, Sir John said investors should expect a 1929-style crash in stocks. Flaherty notes that those earlier interviews prompted two very different responses. Some folks expressed gratitude for the money theyd saved by reading Sir Johns comments both at the time and later, while others opined that Sir John was old and out of touch, and what did he know about todays market, anyway? In his current interview, Sir John, who is now 90, devotes most of his thoughts to the housing market. What he tells Flaherty comes as surprise to the downside, since the writer had been expecting to hear more encouraging words: Because I was hoping for good news, Flaherty writes, I was personally taken aback and depressed by Sir Johns short-term pessimism. In that vein, Sir John offers this observation about Wall Street at large: The stock market is broken, and it will take some time, maybe years, to repair it. Mass media, especially TV read: Bubblevision today is so short-term that few in its audience grasp the lasting damage and corrective impact which will continue to linger from the greatest financial crash in world history. He continues: It would be unlikely that the bear market is over when the American stock market is only down about 30, when in the biggest boom ever, it had been up 10 times over where it had been years earlier.
That is three times the GNP of the United States That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and its bigger than it was at the peak of the stock market boom. Almost everyone has a home mortgage, and some are 89 of the value of the home and yes, some are more. If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further. On that note, he has a word of advice: After home prices go down to one-tenth of the highest price homeowners paid, then buy. Im sure his latest comments will elicit the same kind of response as when he shared his bearish views during the bubble - that he just doesnt get it. Its certainly the earful that I and others heard on the back of our bearish sentiments. Folks who make that argument, protesting that this time its different, are generally in the unfortunate position of having confused a bull market/rising prices with brains. Of restricted stock and the Microsoft flock Last weeks big news was Microsofts announcement that it would replace stock options with restricted stock and treat remaining options as an expense. Microsofts move is an intellectually honest one, in my opinion, and a rather brilliant one at that. By awarding restricted shares to its employees, its basically issuing a form of golden handcuffs: the shares vest over time, and the employees must remain with the company in order to sell them. Since Microsofts stock amounts to a pretty stable form of currency which is not to say it cant go down, but that a total collapse is unlikely, I believe this will give the company an added edge in attracting top talent. Other companies interested in aping Microsoft may not have as stable a stock, and, of course, most stocks in technology remain wildly, wildly overinflated. Microsoft may be expensive, but I dont consider it to be as egregiously valued as several others. Microsofts move should put pressure on other companies to start expensing options and go the same route, though lots of companies will resist the change. The wampum kings, as represented by Cisco Systems CSCO , news , msgs CEO John Chambers, will certainly resist it, as will Craig Barrett at Intel INTC , news , msgs . But over time, I suspect that these other companies will also be forced to expense options, and probably will be forced to do something like Microsoft has done. In any case, I applaud the move, as it obviously aligns everyones interests more closely. Silver shows signs of a rebound Turning to an arena that I refer to in my daily column as away from stocks, my contacts close to the silver market note that its changing and they continue to be bullish. Finally, we are seeing the earliest signs of investment demand, something thats been missing from the silver market thus far. Folks have already decided they want to own gold as protection from the Feds printing presses, and it now appears that a little of the same kind of money is trickling into silver. As a much smaller market than gold, it stands to benefit disproportionately. That said, silver remains very volatile, and the uptick in investment demand is in its infancy. Fixed income, too, may be witnessing an interesting change, on the back of last Wednesdays news that Peter Fisher will step down as Treasury undersecretary. Fisher had been adamant that 30-year bonds wouldnt be issued on his watch. Now that hes going, and, in view of our governments exploding deficit, perhaps the Treasury may start issuing 30-year bonds again. So, for anyone who has an interest in the long bond, this may turn out to matter. Of please-wait mail and hate mail Finally, a closing word or two on my e-mail. I continue to try to answer your questions as best I can, but a backlog of nearly 600 has thrown a wrench into responding in a timely manner.
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