Stocks ARE Cheap – A Response To Tim Knight

This morning, leading blogger, technical analyst and master trader Tim Knight went off on me for yesterday’s post in which I argued that stocks are cheap.  Knight starts off his post, “The Bullish Mindset”, this way:

Each morning, SeekingAlpha sends me a summary list of all their articles.  I usually have time to glance at the headlines listed, and on occasion an article will intrigue me enough that I’ll click on it.

This morning one such article was called Stocks Are Cheap, so naturally I just had to click on that one.  The article begins, “These days, one of the arguments that really annoys me is when somebody claims that even after the 50% decline in the major indexes stocks aren’t cheap.”

Well, that was all it took to send me right up the tree.  I like intelligent, rational, logical arguments…..

But saying, in essence, “stocks are cheap because they are down a lot in price” is simply false.

Grrrrr!!!!! 

I really like and respect Tim Knight.  His blog, Slope of Hope, is great, filled with excellent technical analysis and first rate charts and graphics.  I also believe he is a top level, highly profitable trader. 

But this is a total mischaracterization of my argument! 

I led off pointing out that stocks were down 50%.  But that isn’t what makes them cheap.  As I get to in the body of the post, what makes them cheap is that they are …. errr… well….. cheap!!!  To make that point I listed three blue chip stocks (Hewlett Packard (HPQ), Adobe Systems (ADBE) and Pfizer (PFE)) that are trading below 8 times reasonable estimates of this year’s earnings. 

In order to refute my case, you’d have to tell me why these stocks aren’t cheap contrary to my analysis or possibly show that they are not representative of the market as a whole.  Knight doesn’t even address my core argument.   Instead he constructs a straw man and knocks that down.

*****

He then goes on to slander my track record:

One nice thing about SeekingAlpha is that you can look at the prior works of the same author to get a sense of some things he or she has written in the past.  Here are a few others which caught my attention:

1/23/2008 – I’m a Buyer of Apple on This Selloff
Closing price of AAPL on day of article:139.07; Closing price yesterday: 86.95; net change  -37.5%

7/18/2008 – At These Prices, eBay Is a Steal
Closing price of EBAY on day of article:23.98; Closing price yesterday: 11.53; net change  -52%

8/18/2008 – Why I Got Long Oil Today
Closing price of OIH on day of article:175.37; Closing price yesterday: 69; net change  -61%

I think you get the idea.

Now, in fairness to the author, there seemed to be some articles that were pretty well-timed, and the writer’s self-reported trading performance seems extremely good.  But it at least helps to read similar articles from the past and how the writer thinks to measure how seriously one should take current writing.

Again, this is unfair and a mischaracterization of my positions.  If I were a buy and hold investor, this criticism would be fair.  But I’m not.  Frequently I’m using valuation in conjunction with oversold conditions to put on a trade. 

For example, I bought Apple (AAPL) in my personal account – which is usually the same as client accounts – on 1/23/08 for $130.85 and sold it on 1/28/08 for $131.60.  It wasn’t a great trade (+0.43% after commissions) – but I didn’t come even close to losing 37.5% as Knight implies.

The same thing applies to my post on oil.  I wasn’t recommending oil as a long term hold.  I was recommending it as a trade: “It’s been a relentless selloff in oil the last 6 or 7 weeks and I think it’s due for a bounce sometime soon”.  And this in fact turned out to be a very good trade.  I bought DIG in my personal account at $76.96 on 8/18/08 and sold it three days later on 8/21/08 for $89.30 – a gain of 16% while Knight implies that I lost 61% on this trade.

eBay (EBAY) is another story!!!  I added to my position the day of that post (7/17/08) at $23.80,  added more at $17.25 on 10/6/08 and then cut my position size in half at $15.20 on 1/6/09.   We still own a chunk of eBay shares.

Knight concludes by ripping my “7 Reasons Why I’m Playing For A Bounce” (9/18/08).  The bounce I called for did in fact materialize shortly and I made money on this trade: bought SPY at $116.40 on 9/17/08 and sold it the next day for $121.35 for a +4.25% gain and added to my Goldman Sachs (GS) position at $100 also on 9/17/08 selling out my entire position on 9/22/08 and 9/24/08 for $132 and $134.

Also, to title a post about my views “The Bullish Mindset” is a little ridiculous given that I’ve been a voracious bear since I started the blog and my company in 2006.  I wrote a report still advertised on my website titled “How To Invest in the Coming Bear Market” (January 9, 2008) and gave a number of talks at Border’s in March, April and May of 2008 on the same topic – also advertised on my site.

For the record here are Top Gun’s returns compared to the major indexes since inception (1/1/07 -2/20/09):

S&P: -45.71%

Wilshire: -45.12%

Top Gun: +39.04%

*****

I have no hard feelings towards Tim Knight and in fact recommend his blog as one of the very, very best technically oriented trading blogs in existence.  I read it all the time. 

I just wanted to set the record straight about Top Gun.

Also I challenge you Tim to take on my argument that, on the fundamentals, stocks are cheap.  You write: “My point is that logical, sober thinking tends to beat feelings, notions, and ruminations.”  Well I didn’t see any logical, sober thinking in your post to the point that stocks aren’t cheap.  I’d be interested in hearing your case for that…..

UPDATE (Thu 2/26/09, 5:00pm PST): I e-mailed Tim Knight about his post “The Bullish Mindset” defending myself and we had a cordial exchange.  He had some nice things to say about Top Gun on his blog today.