Question From a Viewer Who Disputes Our Near-Term Outlook 10/09
Charlie and Marty,
First off, I am a long time reader of your website and I do appreciate your commentary. However, at this time, I think you are missing the boat [in the short term only!!].
Could it be possible that things are not as bad going forward as they appear? The treasury yield curve is steep; the leading indicators have been on the rise for the past several months and are near all-time highs (ECRI weekly leading index), and although the employment situation is very bad, don't the recent numbers suggest that it is turning around?
While I agree that the stock market is decidedly overvalued, I would like to point out that PE's have been rising on average for many years, so using a historical average that does not adjust for this long term trend may not be appropriate. Although price to sales, dividend yields, and many other ratios are also decidedly unfavorable, that might simply reflect that the current environment is dominated by speculators, rather than investors. Many market participants are simply looking to make a trading buck, rather than investing. I think the statistics support this (margin debt, dollar trading volume, etc). It is indeed a signal of a financial bubble, and will ultimately have devastating consequences. But in the short term, given the technical market strength, I cannot imagine how being short ANY stocks would have made you any money.
If the dollar collapses, the war escalates, rates suddenly rise (and the real estate bubble pops), or all the speculators suddenly quit (for whatever reason) then sure, the investors are going to take a huge beating. And ultimately, we will either sit for a very long time at the current levels or crash. But attempting to make the case that the economy isn't improving seems contrary to the evidence, and indeed, the stock market, which is one of the best leading indicators.
I suppose just when it all looks the best is right when it crashes. And in October, with the dollar hitting new lows, the stock market overbought and with bearish divergences, we could be on the brink of a big drop. But we just as easily may continue on up for another several months.
One thing is for sure, once the stock market starts declining considerably, I will wholeheartedly agree that the economy will be in for a major deflationary depression. And once it starts, you will be in the spotlight big-time. And I will be a buyer of your funds.
Our Response:
We can’t argue with too much in your comments. We don’t concur that the valuations have been trending up, except during the bubble and presently. At major cyclical turnng points over the past 80 years the markets have peaked at a little over 20 times earnings and troughed just below 10 times earnings. The bubble drove the peak P/E to just about double the historic peaks and the valuations now are ludicrous.
We do understand that when the markets have been trading near their resistance levels as they have been recently, even if the markets are very vulnerable to major market declines they usually rise above the resistance to trap the maximum number of speculators possible. They just did this earlier today, although a big portion of the gain was erased later in the afternoon . We believe this will turn out to be a “bear-trap”, where the speculators who drove the market through the resistance will wind up losing a lot of money.
To summarize, we really don’t know what the market will do over the short-term, driven by reckless speculative fervor, but we do believe strongly that the market will decline to much lower levels within the next 6 months to a year.
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Charlie and Marty,
First off, I am a long time reader of your website and I do appreciate your commentary. However, at this time, I think you are missing the boat [in the short term only!!].
Could it be possible that things are not as bad going forward as they appear? The treasury yield curve is steep; the leading indicators have been on the rise for the past several months and are near all-time highs (ECRI weekly leading index), and although the employment situation is very bad, don't the recent numbers suggest that it is turning around?
While I agree that the stock market is decidedly overvalued, I would like to point out that PE's have been rising on average for many years, so using a historical average that does not adjust for this long term trend may not be appropriate. Although price to sales, dividend yields, and many other ratios are also decidedly unfavorable, that might simply reflect that the current environment is dominated by speculators, rather than investors. Many market participants are simply looking to make a trading buck, rather than investing. I think the statistics support this (margin debt, dollar trading volume, etc). It is indeed a signal of a financial bubble, and will ultimately have devastating consequences. But in the short term, given the technical market strength, I cannot imagine how being short ANY stocks would have made you any money.
If the dollar collapses, the war escalates, rates suddenly rise (and the real estate bubble pops), or all the speculators suddenly quit (for whatever reason) then sure, the investors are going to take a huge beating. And ultimately, we will either sit for a very long time at the current levels or crash. But attempting to make the case that the economy isn't improving seems contrary to the evidence, and indeed, the stock market, which is one of the best leading indicators.
I suppose just when it all looks the best is right when it crashes. And in October, with the dollar hitting new lows, the stock market overbought and with bearish divergences, we could be on the brink of a big drop. But we just as easily may continue on up for another several months.
One thing is for sure, once the stock market starts declining considerably, I will wholeheartedly agree that the economy will be in for a major deflationary depression. And once it starts, you will be in the spotlight big-time. And I will be a buyer of your funds.
Our Response:
We can’t argue with too much in your comments. We don’t concur that the valuations have been trending up, except during the bubble and presently. At major cyclical turnng points over the past 80 years the markets have peaked at a little over 20 times earnings and troughed just below 10 times earnings. The bubble drove the peak P/E to just about double the historic peaks and the valuations now are ludicrous.
We do understand that when the markets have been trading near their resistance levels as they have been recently, even if the markets are very vulnerable to major market declines they usually rise above the resistance to trap the maximum number of speculators possible. They just did this earlier today, although a big portion of the gain was erased later in the afternoon . We believe this will turn out to be a “bear-trap”, where the speculators who drove the market through the resistance will wind up losing a lot of money.
To summarize, we really don’t know what the market will do over the short-term, driven by reckless speculative fervor, but we do believe strongly that the market will decline to much lower levels within the next 6 months to a year.
