I agree that XOM and INTC are fine companies, and I do hold large quantities of such stocks. I just didn’t buy at the present prices, and don’t intend to.
As the Fed tapers, it seems pretty likely that mid and long term interest rates will start to rise. Since the bond market is in something of a leveraged bubble, this could happen quite abruptly. I could see the 10-year T-bond going from 2.5% to 4% in a month or two, accompanied by a furious stampede out of bond funds.
What will this do to the net present value of the future earnings of these fine companies? Unless the interest rise is due to an actual boom in business, the stocks are likely to fall substantially. Companies like INTC are good buys at 12 or 13 times trailing earnings in such an environment. For oil companies, I don’t usually pay more than 10 times trailing earnings.
To reach these prices, a 10-20% haircut would be required. It is certainly not out of the question.
It is ABSOLUTELY not out of the question. No argument. But stocks are vulnerable to 20% corrections at virtually any moment in time. That includes 1000, 2000, 3000 and 5000 DJ points ago. At *any* of those times, stocks could have corrected by that amount, and they have, and they will again. But I would make the following 3 comments:
1: You don’t have to buy all your stock(s) at one time. After all, if you are at a Schwab or equivalent, if you save a mere 10 cents on 100 shares, you’ve paid for your $10 commission.
2: I disagree that bonds would make a 2.5% > 4% move in mere months. Slightly north of those levels and the US would detonate in terms of being able to service its debt. If the market demanded such a level of interest on public debt, it would in effect bankrupt itself. From 2.5% to 4%, a 62% move, would arguably if not unquestionably affect stocks very negatively, but it would affect the corpus of bonds massively worse. There, you *would* see roughly that same 60% loss in face value instead of 20-30-40% I completely agree you *might* see in stocks. In other words, the total certainty of the destruction such a rate rise would produce in bonds is much less a certainty when it comes to stock prices. Sure, erosion would occur...but the face value of bonds is connected to interest rates with a much more robust iron bar than it is with stocks.
3: These scenarios discount the idea that on the other side of such an interest rate rise are literally the most powerful financial forces on earth. To think that they would not resist with all they had the implicit self-implosion is not that believable.
Believe me, I am far more bearish on stocks than my arguments sound. But I also believe that your and my money in stocks is not as risky as is often held, and, if indeed we have it invested in quality stocks, we are not spending it that day or that week on bread or rent. Plus there is this preference conundrum: The day you are selling your stock, you are saying either that you fear a decline in same, and at the same time saying there’s a better place to deploy your capital. While there certainly *may* be, we always take that “new home” risk when switching investments.
Just trying to present a more balanced view, not saying either one of us is right or wrong. Nobody can predict the future.