Why Financial Markets Will Not Repeat 2008

By Conor Sen I've never been a huge drinker, especially as an undergrad, but a couple weeks before graduation I threw up from alcohol for the first and only time as a college student. A friend of mine who had never even sipped alcohol was turning 21, and to celebrate his dad had sent his friends money to throw a party. It being college, we elected for quantity over quality, and among our purchases was a thick, red, gooey drink that smelled and tasted like atomic fireballs, which we called 'red hot'. It might have been 3 for $5, or maybe it was 5 for $3. On the night of the party, we were drinking all sorts of awful mixed drinks, and eventually drinking red hot became a macho challenge. Drinking red hot was a LIFO experience -- last in, first out -- and to this day the smell of it is nauseating. The Fall of 2008 was the equivalent of investors funneling red hot. It left us all feeling sick and hungover, and to this day the smell of credit markets in the news or weakening economic data has us clutching our stomachs.

(To read Todd Harrison's piece on whether there was capitulation in the market, click here.)

Hindenburg Omens. Flash Crashes. Japan. Middle East revolutions. The BP (BP) oil spill. The debt ceiling. The end of QE2. And of course the PIIGS. Ever since 2009 we've always been a step away from the crash that finally takes the S&P 500 to its supposed fair value of 400. We get a whiff of red hot and we puke. On Thursday the VIX had the 10th-largest single-day increase in the past 20 years. The ISM Manufacturing and Non-Manufacturing indices still indicate expansion, as does the Philly Fed, non-farm payrolls are still weakly positive, and markets are trading like a major terrorist attack or the collapse of a major investment bank has already happened. But is it really the case that since 2009 markets have merely floated higher on a wave of stimulus and quantitative easing, held aloft by Wall Street trading desks and the Fed? Here's a chart of price/book ratios for four value stocks I track from ycharts -- Cisco (CSCO), Intel (INTC), Microsoft (MSFT), and Walmart (WMT).

(To view Michael Comeau's article on how HP's TouchPad hits the bargain bin, click here.)

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(To see Satyajit Das' piece on European banks and their real stress test, click here.)

In the summer of 2008, which I guess is where doomsdayers would have us believe we sit now, the price/book ratios for these four were 3.78 for CSCO, 7.06 for MSFT, 3.36 for WMT, and 3.05 for Intel INTC. As of Thursday's close, the price/book ratios are 1.74 for CSCO (-2.04), 3.83 for MSFT (-3.23), 2.57 for WMT (-0.79), and 2.27 for INTC (-0.78). These are all at or near all-time lows. Dividend yields for all have risen as well. In fact, MSFT, INTC, and WMT all now have higher dividend yields than the 10-year treasury yield. Imagine telling someone in 1999 that in 2011 MSFT and INTC would have higher dividend yields than risk-free government bonds and yet everyone would be clamoring for treasuries yielding sub-3%. 22 Dow stocks have higher dividend yields than the 10-year treasury yield, which is surely something unseen since at least the Eisenhower Administration.

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