Stocks Seem Cheap to Me-How’s That for Contrarian?

In the United States, prophecy, with its emphasis on rational expectations concerning that which may come to pass, generally goes unattended by interest, let alone honor. Prophecy is by its nature a form of advocacy, and what is advocated is much more often dire than delightful, which gives displeasure to those people turning a nice buck from things as they are.

And, face it: We live, work and acculturate in real time. In an existential framework, that is to say, in which only the present matters because, notwithstanding what Einstein may have postulated and Warren Buffett’s long-termish investment philosophy seems to have demonstrated, in the American cosmology, what really matters about time is that it is money. In a worldview in which every second has its price, time is always a-wastin’, and the moment must be seized and squeezed for the last groat.

We are plungers, momentum investors, ceaselessly in pursuit of the new new thing, to use Michael Lewis’ happy phrase. It may be off-putting, but it is also our greatness as a culture. When the party or royal audience is over, and the time has come to leave, we turn around and go, often at flank speed; we do not exit backward, bowing, nor do we, like the French, say, pause to admire the patination at such length that we fail to notice that the lights have been turned off.

All of which is scant comfort to those of us old enough to have been lumbered with a historical education in which too much time has been spent in dead and dusty centuries past, in time frames of no conceivable utility when it comes to day trading. Twelve years of having one’s mind marinated in the notion that this very instant may be causally conjoined to some perhaps consequential future moment-which is what history is about-leaves one with a tendency to investigate the present for what it may tell us about the future, by which is meant a point in time more distant than the next 10 basis points on the upside.

It’s also fun just to know stuff, but that’s an argument I’ve now lost so often in this space that my reiteration of the pleasures of knowledge must by now sound as mustily unconvincing as Al Gore’s iteration of his alpha malehood. Speaking of which, if Mr. Blackwell is preparing his list of 1999 fashion victims, I would hope that Mr. Gore’s new earth-tone suits will receive the attention they merit (and let me also put in a strong word for the wholly unbecoming long, electric-blue evening dress sported-both at poolside and in the pool-by Martha Stewart in a Kmart commercial.)

Anyway, the bottom line is, people like me just can’t help looking at the present for indicators, portents, signs of what is to come. Usually, we’re wrong-and even if we’re right, it doesn’t matter. Still, about five years ago, I concluded, on the basis of what I saw about me, both in terms of the artistic and ethical norms of our society, that Norman Rockwell’s day was coming. Since prophecy is also a form of advocacy, I backed this up by using every means at my disposal, short of compromising glossy photographs, to persuade my colleagues on a foundation board on which I have the honor of serving to make a meaningful subvention to the Norman Rockwell Museum in Stockbridge, Mass.

It wasn’t easy. Rockwell was a hard sell, difficult to be persuasive about in the art-historical and art-critical conventions of modernism and after. But my unashamedly expert and experienced eye had long convinced me that Rockwell was the real thing, not an empty suit like Andrew Wyeth. As Peter Schjeldahl put it in the Nov. 22 issue of The New Yorker : “Rockwell is some kind of great artist … This is no mere adjustment of a reputation, but a deep shift in how we identify and value visual art. Rockwell’s greatness is of a kind that hides in plain sight.” Incidentally, I recommend Mr. Schjeldahl’s piece as a model of art-writing: full of big insights into the work specifically under scrutiny as well as replete with more modestly voiced, useful truths about art in general.

Anyway, we made the subvention, grudgingly, and Rockwell’s time seems to have come around. This time, the contrarian view, expressed as prophecy, worked out.

Oddly, at a recent meeting of the same foundation, I felt similar contrarian pangs, this time in connection with matters perhaps less elevated but certainly more significant in the great scheme of things. We were considering our investments. Our advisers enumerated a series of dots which they connected up to what they felt was a fairly convincing outline of an animal resembling a bear. Certainly the “dots” were of the sort that causes anxious chin-stroking and grunts of apprehension among fiduciaries. Glum indeed were the faces around the table, except for one: yours truly, Alfred E. Neuman.

Here are the “dots.” See what you make of them:

· Just four issues accounted for more than half the performance of the Standard & Poor’s 500 through the first three quarters, while 11 stocks account for 100 percent of the market’s rise;

· Those 11 stocks are Microsoft, Cisco Systems, General Electric, I.B.M., Sun, Intel, Citigroup, Nortel, Wal-Mart, TI and EMC. All stocks that owe their luster in some way to technology-either because they manufacture it, deliver it or (as with Wal-Mart) use it to manage with exceptional astuteness.

· Without technology stocks, the S&P 500 would have declined 1 percent year-to-date and been nearly flat for the last two years.

· The price-to-earnings ratio of the S&P 500 is currently 22.2 times forward earnings projections, while the technology sector trades at a forward price-to-earnings ratio of 37.0.

· Over all, the market hasn’t been this narrow since 1990, and this pricy in investor memory (at least since before 1900).

“Aha!” we exclaim. Concentration, high multiples: a sure recipe for big trouble. But what I see when I connect these dots looks more like a herbivore with horns- not a great, rampaging, deep-chested beast capable of carrying an entire economy up the slopes of Everest, but an animal more like Munro Leaf’s flower-smelling Ferdinand, or the gentle garlanded animal that carries off Titian’s Europa.

My reasoning is thus: I think we’re looking at a “Microsoft 2000 market.” Just as Windows is merely a shell wrapped around and pasted over the hoary MS-DOS operating system, so is the 11,000 Dow and its S.&P. equivalent a gaudy shell for a broad market in the equities of make-and-do-and-sell companies that has basically gone nowhere. One that is selling at around 17 times earnings, which is well within Graham & Dodd parameters. There is a point at which a bearish tendency becomes so extremely concentrated that it can be read as bullish.

The bear market, I fear, is the one we had from 1974 to 1981, one in which people bail out of stocks, period and across the board, either because earnings aren’t there or there are no solid values to be had for ready money or simply because the cow or lemming just ahead seems to be running for its life. I don’t see that here.

I have no doubt that gales of Schumpeterian “creative destruction” are out there, and will blow out the windows of the dot-com house of dreams (or cards, whichever you prefer), and Amazon.com Inc. will ultimately be wrecked by its lethal fundamental arithmetic-which is that of $10-an-hour people taking books out of one box and putting them in another. But the broad industrial heartland of equities looks O.K. to me, and ready to receive the funds that will rush out of the high-fliers when the lead herd animal is spooked and the stampede is on.

I’m seldom a contrarian bull-on anything. Maybe it’s a consequence of taking up residence in a new life. But right now I find comfort in the narrowness of the market. And unless memory serves me wrong, I’m under the impression that although there may have been better opportunities to buy stocks since the last time the market was this narrow, namely 1990, I can’t recall when they were.