The world’s most comprehensive historical financial database is right here in Los Angeles, thanks to Bryan Taylor, professor at Cal State Los Angeles and founder of Global Financial Data Inc. (globalfindata.com), a financial Web site and investor service.
For years, Taylor has collected historical data from more than 100 countries on interest rates, stock market indexes and currency exchange rates. Customers seeking a specific series say, exchange rates between the dollar and yen can cough up $25, chargeable online to a credit card. Bigger institutions can buy access to the whole base for $7,500 a year, and several mutual funds and banks do, said Taylor.
Some of Taylor’s online data is truly remarkable. For example, he lists price-earnings ratios for the Standard & Poor’s 500 index going back to the year 1871, in the Ulysses S. Grant administration. On U.S. interest rates, Taylor has amassed data going back to 1800.
With all that historical perspective, what does Taylor think about the current bear market?
“The price-earnings ratio is still historically high, despite having come down quite a bit,” Taylor said.
The S & P; 500 now is trading at about 25 times earnings, still above a historical range of 11 to 16 times earnings. The index reached as high as 35 times earnings in 2000, before the bull was made into mincemeat. But still, even the current 25 times earnings is roughly double the long-term norms. More ursine undulations ahead?
“Well, the market could more or less stay flat for a while, while earnings catch up,” said Taylor, who noted that the stock market went sideways for the entire 1970s, after a heroic rally in the 1960s. Another long pause could be in the cards in the years ahead, surmised Taylor.
Those who have their horns out could be disappointed, he added.
“In both the 1980s and the 1990s, earnings doubled, and the price-earnings ratio doubled. I don’t think that will happen again.”
Indeed, the P/E ratio on the S & P; 500 index was 7.5 in 1980, 15 by 1990, and then 30 or more by 2000. But investors should not expect the index to hit 60 times earnings by 2010, and indeed it is already retreating, noted Taylor.
Investors may want to rest for a while in short-term interest-bearing investments, suggested Taylor.
Mutual Trust
One reason the mutual fund industry has enjoyed spectacular growth in the past 20 years has been the trust of the investing public, said Michael Glazer, a partner with Los Angeles law firm Paul Hastings Janofsky & Walker, and for 15 years a legal adviser to the industry.
The good news: The fairly rigorous SEC regulation covering the industry which has worked, and kept the field relatively clean has been tightened up a few notches. Recently, the SEC promulgated rules requiring that funds have a majority of board directors who are “independent” that is, not managers of the fund, or the distributing entity, such as a brokerage. Further, the independent directors have to control the process of selecting new independent directors. Most boards have five to eight members, said Glazer.
It is the job of the independent directors to represent shareholders’ interests, akin to directors at publicly held companies, said Glazer. “But they (mutual fund directors) have never been like directors of publicly held companies, who were really selected by the chief executive,” said Glazer, describing the sometimes lax attitude towards corporate governance that defined much of the pre-1990s era.
The laws governing the mutual fund industry, written in 1940 and amended since then, have always put real power in the hands of directors.
Indeed, the independent directors have the power to literally select new management even abandon a Merrill Lynch or Fidelity Magellan, if they so choose.
“Of course, that is like dropping the atomic bomb,” said Glazer. “It rarely comes to that.”
Curiously, while many funds have adopted codes of ethics in recent years, there are still no hard SEC rules against directors owning warrants on stock that fund managers are buying. In the past, some fund managers and directors have been personally enticed by the blandishment of stock warrants from brokerages, in implicit exchange for the fund buying the stock, often in initial public offerings, or securities that the brokerage was somehow pumping.
However, Glazer noted that independent directors now face tougher disclosure rules on potential conflicts of interest that they may have. He added that the SEC examines mutual funds every four or five years. “And it is thorough. Several people from the SEC come in for several weeks and review the fund’s operation,” he said. “It’s like a bank examination.”
Banks Getting Stingier
Larry Hurwitz, chairman of the downtown Los Angeles-based Marshall & Stevens corporate evaluation firm, and president of loan-finder shop Lawrence Financial, said that business lenders have retreated from lending on cash flow, and are going back to the more-stodgy asset-based lending. In particular, banks are loath to lend to finance business buyouts.
Recently, a buyer of a profitable PPO (preferred provider organization, a type of health insurer and provider) had trouble securing financing, even after agreeing to put up 50 percent of the purchase price as a down payment.
“A PPO doesn’t have many assets,” explained Hurwitz. “We think we can get it funded … at 15 percent annual interest (from a non-bank lender).”
But even when a company has assets, banks are chary. The dicey state energy picture is contributing to lenders’ skittishness.
“Many manufacturers can’t compete if they have to pay the (energy) rates we have seen,” said Hurwitz. “We are seeing a big increase in requests for Chapter 11 (bankruptcy) financing.”
Industrial real estate values may begin to sag, suggested Hurwitz.
From his vantage point, Hurwitz said, the recession may be a bit deeper and longer than many had hoped.
“This may play out over two or three years. When you had a boom like we had, the bust usually isn’t over in a year,” said Hurwitz, noting that the Southern California downturn after the late-1980s’ boom lasted several years.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book, “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” Bloomberg Press, will be published in May. He can be reached at [email protected].
