Financial topics

[Higgenbotham]

In today's Elliot Wave Theorist, Robert Prechter is calling for an extremely likely top in the US equities market by the end of this week. He called both the massive leg down starting at the end of '08 as well as the turn in March with uncanny accuracy. He's been expecting a turn down for some time and may have starting calling for it a little early a couple of months back, but I think he may really be right this time.

Andrew

Prechter has been looking for a top since late August actually, but the market really hasn't advanced much since then.

Perhaps with the great earnings news from Intel the stage is finally set, as the maximum number of people possible may believe that the stock market and economy have turned around.

A lot of technical market indicators have been signalling a high for some time and others have recently signalled a high. One is the equity put call ratio which is linked at freddy's site. This indicator has been at a bullish extreme since August, and has been at a greater extreme in the past 5 months than it was during the year of the all time high in 2007. There are other indicators that have recently signalled at least a short term high is at hand.

Regarding your question about foreign currency, that was discussed some a few months ago in this topic. A search for Singapore will bring up some discussion.

Wrong Way Higgy

[abs]

Thanks Higgy - I'll search on Singapore - I try to keep up with this thread but may have missed that discussion.

[gerald]

deflation coming?

The Fed's own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc.

Professor Tim Congdon from International Monetary Research said the Fed is baking deflation into the pie later this year, and perhaps a double-dip recession. Europe is even worse.

from

http://www.telegraph.co.uk/finance/comm ... evels.html

An additional indication of deflation, if you believe their numbers.

http://www.dshort.com/inflation/inflati ... 72-present

Also, what is with this drop in price earnings ratio since 1983? a generational shift or something else?

http://www.dshort.com/charts/SP-Composi ... -large.gif

[freddyv]

...

Also, what is with this drop in price earnings ratio since 1983? a generational shift or something else?

http://www.dshort.com/charts/SP-Composi ... -large.gif

You mean the rise in P/E ratios. I recall the early 80's well. I remember looking at the business section and just salivating over the low p/e ratios and high dividends. It was not unusual to see p/e ratios of 5 or less and most were under 10 with dividends of 5% and higher in many cases. This wasn't just for a short period, as I recall, this was a pressure that built up over years. Richard Russell likes to say that we will know the start of the next great bull market by the extreme value that the market will offer. I agree and it will be a lot like the early 80's except that our economy was growing (inflating) its way to those great values while we are now shrinking our way there.

I always like to play with the idea of low valuations and high valuations so here is my thought process:

Imagine that we manage to inflate our way to great values, as we are trying to do. In this case I could see earnings for the S&P 500 getting back up to $80 or even $100 in the next couple of years. But to have great value would require an S&P with a P/E ratio of lower than 10 - let's say 8. That gives us a price on the S&P 500 of 800, given a best-case scenario, with reported earnings at $100 and a rather high trough P/E of 8.

Now let's consider a worst case scenario: In this case we would see a severe double-dip that once again hurts earnings but with no more budget cuts available for corporations as they have already laid off everyone they can afford to and the bailouts are no longer possible given the mood of the country. So in this case we see earnings at $20 for the worst 12 months (I can actually imagine much worse but let's go with this) and a trough P/E of 6 as investors lose all faith in a stock market that has lost them money for over 10 years and an economy that only seems to be able to grow debt and unemployment. This gives us an S&P 500 at a low of 120, about 10% of where we stand now.

So unless you believe that this time around we will not see great values prior to the next secular bull market you can see that we have nowhere to go but down from here, even in the best-case-scenario. Of course this does not mean the stock market can't go higher before reaching those great values and in fact I have expected the DJIA to reach back to the 11,000 level as it closes-the-gap it left open in July 2008 as it cascaded to the lows of March 2009.

I would appreciate any arguments to this valuation theory of mine as I always try to base my beliefs on facts, history and hard data.

Fred
http://www.acclaiminvesting.com/

[John]

Dear Freddy,

> Now let's consider a worst case scenario: In this case we would
> see a severe double-dip that once again hurts earnings but with no
> more budget cuts available for corporations as they have already
> laid off everyone they can afford to and the bailouts are no
> longer possible given the mood of the country. So in this case we
> see earnings at $20 for the worst 12 months (I can actually
> imagine much worse but let's go with this) and a trough P/E of 6
> as investors lose all faith in a stock market that has lost them
> money for over 10 years and an economy that only seems to be able
> to grow debt and unemployment. This gives us an S&P 500 at a low
> of 120, about 10% of where we stand now.

This analysis is absolutely correct, and in fact it's a mathematical
certainty. S&P 500 = 120 is correct.

John

[bcenkus]

Is this forum still active? I have a question about this topic, although it doesn't look like there have been any responses for a while...

[gerald]

...

Also, what is with this drop in price earnings ratio since 1983? a generational shift or something else?

http://www.dshort.com/charts/SP-Composi ... -large.gif

You mean the rise in P/E ratios. I recall the early 80's well. I remember looking at the business section and just salivating over the low p/e ratios and high dividends. It was not unusual to see p/e ratios of 5 or less and most were under 10 with dividends of 5% and higher in many cases. This wasn't just for a short period, as I recall, this was a pressure that built up over years. Richard Russell likes to say that we will know the start of the next great bull market by the extreme value that the market will offer. I agree and it will be a lot like the early 80's except that our economy was growing (inflating) its way to those great values while we are now shrinking our way there.

I always like to play with the idea of low valuations and high valuations so here is my thought process:

Imagine that we manage to inflate our way to great values, as we are trying to do. In this case I could see earnings for the S&P 500 getting back up to $80 or even $100 in the next couple of years. But to have great value would require an S&P with a P/E ratio of lower than 10 - let's say 8. That gives us a price on the S&P 500 of 800, given a best-case scenario, with reported earnings at $100 and a rather high trough P/E of 8.

Now let's consider a worst case scenario: In this case we would see a severe double-dip that once again hurts earnings but with no more budget cuts available for corporations as they have already laid off everyone they can afford to and the bailouts are no longer possible given the mood of the country. So in this case we see earnings at $20 for the worst 12 months (I can actually imagine much worse but let's go with this) and a trough P/E of 6 as investors lose all faith in a stock market that has lost them money for over 10 years and an economy that only seems to be able to grow debt and unemployment. This gives us an S&P 500 at a low of 120, about 10% of where we stand now.

So unless you believe that this time around we will not see great values prior to the next secular bull market you can see that we have nowhere to go but down from here, even in the best-case-scenario. Of course this does not mean the stock market can't go higher before reaching those great values and in fact I have expected the DJIA to reach back to the 11,000 level as it closes-the-gap it left open in July 2008 as it cascaded to the lows of March 2009.

I would appreciate any arguments to this valuation theory of mine as I always try to base my beliefs on facts, history and hard data.

Fred
http://www.acclaiminvesting.com/

Fred, you are right, I stand corrected

[Higgenbotham]

[I would appreciate any arguments to this valuation theory of mine as I always try to base my beliefs on facts, history and hard data.

Fred
http://www.acclaiminvesting.com/

Perfect.

Wrong Way Higgy

[freddyv]

Dear Freddy,

> Now let's consider a worst case scenario: In this case we would
> see a severe double-dip that once again hurts earnings but with no
> more budget cuts available for corporations as they have already
> laid off everyone they can afford to and the bailouts are no
> longer possible given the mood of the country. So in this case we
> see earnings at $20 for the worst 12 months (I can actually
> imagine much worse but let's go with this) and a trough P/E of 6
> as investors lose all faith in a stock market that has lost them
> money for over 10 years and an economy that only seems to be able
> to grow debt and unemployment. This gives us an S&P 500 at a low
> of 120, about 10% of where we stand now.

This analysis is absolutely correct, and in fact it's a mathematical
certainty. S&P 500 = 120 is correct.

John

And I now believe it is even more certain than I believed a year or two ago because nobody believes it can happen, they think we have seen the worst. Yet as I look at all of the trends in the world it seems certain that it must happen. Trillions of dollars of stimulus; bailouts galore and yet the best we can do is a 2.3% gain in GDP. What happens when we have shot all of our loads and the people are tired of bailouts, fake money and debt? Reality, that's what.

I remember posting here a year or more ago about how things kept happening that people thought couldn't happen. At that time I mentioned how sovereign defaults were starting to be mentioned and that soon they would be reality. Slowly, ever so slowly data has come to light that shows that one country after another is heading in that direction. Japan is done for, that is obvious, that they are a creditor nation is in their favor but what happens when they simply implode financially? I'm not smart enough to figure that one out. But when the great power of the world is also up to its neck in debt who will bail us out? Nobody, of course. Reality is coming our way and it is in no hurry but neither will it be put off by Bernanke, Geithner or even the great Obama. Why, not even the bluster of Barney Frank will be able to hold back the reality that is headed our way.

But what is reality? That's easy, just look at our past. We have lived on hope and fantasy, letting the rest of the world do the work for us. We kept bidding up the stock market and created fantasy earnings by buying useless things with fake money from equity that didn't exist. Like Wile E. Coyote we have gone over the cliff and have looked down but we don't seem to be falling yet so we have convinced ourselves that we can walk on air. We are magical and we have magical leaders who we know have lied to us but if we continue to believe their new lies the good times will never end.

But back to reality....

In the past couple of weeks I have begun to build a position in SDS once again and have specific plans for a rising market or a falling market. I do so as a hedge against what I fear is coming. I also am 15% in gold and have some cash under the mattress. I am working and saving and am proud to say I am closer to being completely debt free than I was yesterday but I am also making sure that I have cash in savings and on hand and some gold on hand. I am working to make my business more stable and profitable with plans for better times as well as hard times.

I don't know what will happen, I just know that we have likely not hit bottom yet and plan on being as prepared as possible.

Fred
http://www.acclaiminvesting.com/

[gerald]

Yup reality is coming, what ever that is. If I understand correctly pension plans in the US and possibly elsewhere are required to invest a large percentage of their assets in government bonds and quality corporate bonds and securities, for cash flow to pay pensioners. But when/if many of these securities go bust ( due either to decreasing tax revenue or decreasing corporate cash flows ) what do the pensioners do - get a job? that looks ugly. In the same vain, regarding commercial real estate, there is now talk of Zombie buildings -- nice. http://lawprofessors.typepad.com/land_u ... ahead.html and http://www.huffingtonpost.com/2009/11/2 ... 65400.html