Are You Seriously Looking At Risk/Return?"

An astute money manager who invests other people's capital in something called a generational" mutual fund has made the statement: This is a generation that only looks at Risk/Return from the context of Return." We couldn't say it any better.

How else can the older and supposedly wiser generation rationalize current events at NASDAQ?

When applied to NASDAQ stocks, Valuation Risk as a concept does not seem to be appropriate to the average investor today " and that seems to include professional investors.

This was a three-and-a-half day week where NASDAQ stocks continued their rampage, without much of a fundamental basis and against the trend of interest rates and the trade-weighted U.S. dollar. Yields on the important 30-year U.S. Treasury Bond are up to 6.27 percent, and appear headed higher. Oil prices are rising. Labor shortages are beginning to occur. The biggest Bulls on Wall Street are now starting to admit that the Federal Reserve Bank will have to continue raising rates next year. S&P500 and Dow stocks, except for a dwindling few, are looking awfully top heavy.

While the economic backdrop is entirely different, the market anxieties are more and more feeling like the summers of 1981 and 1987.

What we decided to do for this article was list Revenue and Earnings Growth Rates, and Historical P/E and Current P/E for each of the Dow 30 Industrial stocks. Then, given that the Dow average may be headed sideways until the NASDAQ picture changes, we will list the 15 Dow stocks we feel are subject to greatest downward price correction in the next two months, strictly from a technical perspective. Before we do, we'll take you back to October 1987 for two NASDAQ leaders now included in the DJIA: Microsoft (MSFT) and Intel (INTC).

Every investor is aware of the great market crash of 1987; however, it pays to frequently revisit these important points in our history because, in the market, past is prologue.

On October 5, 1987, the NASDAQ index closed at 453.63. Seventeen trading sessions later, it closed at 291.88, down 35 percent. The supposedly strongest stocks in the NASDAQ index, MSFT and INTC, were down even more.

From October 5 to 26, 1987, (15 trading days), MSFT closed down from 79 to 39.25 (50 percent) and INTC fell from 62.75 to 27 (57 percent). These moves, like those for other NASDAQ stocks at the time, were not in reaction to skyrocketing prices because, in the months leading up to this crash, the index levels and volatility of NASDAQ was relatively benign, similar to the situation in the Dow 30 stocks then.

Underlying this market correction in 1987 was the same problem we have today, however. Too many investors had thrown caution to the wind, deciding instead to speculate on penny stocks, with an excess level of cash available in the market at the time.

Today's penny" stocks are now one-to-two hundred dollars in price instead of the five-to-ten dollars for their counterparts of 1987. But the substance is pretty much the same: paper companies with big aspirations, marginal revenues and nil earnings.

Rather than the stock promoters of yesteryear from Canada, Colorado, Arizona, Nevada and Florida, supported by stockbrokers from smaller independent broker-dealers, today it is web gossip and low e-broker commissions that drive speculative stocks. The effect is the same: investing has been transformed for the time being to a game of speculating. In accounting terms, it's the principle of First-In First-Out. In the meantime, those who are the first-in" seem to have the momentum.

On Friday, Maria the Bull from Fort Lee exclaimed on Financial Entertainment TV: Momentum is running over the Bears!" As a greater value-add to the audience, that observer or commentator, or whatever, could have said: Speculation is rampant on NASDAQ."

After the price correction that will occur in these speculative stocks (and, like 1987, in the DJIA stocks), the majority of market participants will no longer for a while have much of a stomach for speculation and will return to time-proven principles of investment analysis. Until this break in emotional commitment to speculation occurs, there is little, we feel, that can be done to focus people on the need to prudently assess the attributes of Risk/Return. But, we'll try.

Over the years, as a broker, we had the personal good fortune to hold accounts of many public company stock promoters. We can tell you with all sincerity that in our experience almost all promoters lose their common sense perspective at the tops of market cycles, and they end up holding leveraged long positions all through the ensuing market crash.

Because they tend to believe their own hype, many of the biggest promoters lose everything in the end. That's why TV anchors should not be cheerleaders.

From the following list of fundamentals of Dow 30 stocks from marketguide.com (Nov 19) we see 2 striking features:
1. Dow stocks are growing at revenue and earnings growth rates of about 10-and-a-half and 13-and-a-half, on average, which is not a superlative performance record; however, the current P/E of about 30-and-a-half is more than double the average low P/E for the past 5 years.
2. Some high Dow P/E's, such as, American Express, Coke, Exxon, Johnson&Johnson, McDonald's, 3M, Procter & Gamble, and to an extent GE aren't growing near as fast as indicated by their lofty P/E ratios.

Using a simple Over-Bought screen based on charts from easystock.com, one of our favorite charting services, here is, in alphabetical order, a very subjective list of Dow 30 stocks we feel most vulnerable to a falling market over the next 60 days, should that occur: Alcoa, American Express, AT&T, Citigroup, Coca-Cola, General Electric, Home Depot, J.P.Morgan, Johnson&Johnson, McDonald's, Merck, Microsoft, 3M, Procter & Gamble, and Wal-Mart.

In reviewing our table above, we find that perhaps by coincidence most of these stocks are also trading currently at very high P/E's relative to their corporate fundamental growth rates or their 5-year low P/E multiples.