Fireant's Account Talk

[Fireant]

CHAPEL HILL, N.C. (MarketWatch) — Here’s a sobering thought as earnings season begins in earnest:
There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. Stocks on each of those four occasions would soon suffer big declines.
This modified P/E was made famous in the late 1990s by Yale University professor Robert Shiller, particularly in his book “Irrational Exuberance.” In this modified P/E, the denominator is not current earnings per share but average inflation-adjusted earnings over the trailing 10 years. This modified ratio — sometimes called P/E10, or CAPE (for Cyclically Adjusted Price Earnings ratio) — has a markedly better forecasting record than the simple P/E.

According to Shiller’s website, the CAPE currently is 23.5, or some 43% higher than the CAPE’s long-term historical average. The four previous occasions over the last 100 years that saw the CAPE as high as they are now:

• The late 1920s, right before the 1929 stock market crash
• The mid-1960s, prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms
• The late 1990s, just prior to the popping of the internet bubble
• The period leading up to the October 2007 stock market high, just prior to the Great Recession and associated credit crunch :worried:

http://www.marketwatch.com/story/history-bodes-ill-for-stock-market-2011-04-12

 

[Fireant]

2008 Was The Preview To The 2011 Blockbuster

By: Tony Pallotta | Mon, Apr 11, 2011
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The world is evolving a lot faster than I suspect most realize. The Fed has created the aura of a V shaped global recovery in the form of continually rising equity markets. Bernanke has created the mirage of prosperity. The unemployment rate has fallen below 9% as more disgruntled workers leave the work force. Paper stock wealth is up nearly 100% in two years. Indeed the Russell 2000 is up 43% since QE2 as the chairman has so eloquently declared.
The similarities between 2008 and today are very real with a few exceptions. In 2008 the US Treasury market was far healthier, government austerity was a few years down the road and there was no global revolution. In reality 2011 is far more dangerous than 2008. Government is no longer a source of stimulus. The measly $38.5 billion, or 2% of the 2011 deficit that was cut is a negative stimulus. $110 oil today is driven by speculators as in 2008 but also by wars in the Middle East. That was not the case in 2008 (Iraq oil was flowing freely). In 2008 interest rates were falling as the Fed lowered short terms rates very aggressively. Today they are rising.
In 2008 housing prices were still falling but programs like tax credits and HAMP where there to stem the slide. Today home prices are falling again yet those programs are no longer available. Today, a true free market is the only source of price discovery aided by dwindling bank credit. FASB accounting prevented a major run on bank balance sheet capital levels in the spring of 2009. Today there are few if any accounting games left.
http://www.safehaven.com/article/20579/2008-was-the-preview-to-the-2011-blockbuster

 

[Intrepid_Timer]

We have started the first leg down of the final big leg down, but nothing moves in a straight line. A re-test of the fall '08 and/or March '09 lows is in order, followed by a bounce into the early fall, followed by more devastating downward moves that will likely last into early-to-mid 2010. Note the duration of the bear market at roughly 2.5 years.
Another potential crude template (off in magnitude and timing) is the Panic of 1907. The following chart is stolen from www.thechartstore.com with my scribbles on it:

A similar conclusion is reached for the shorter-term: re-test the fall '08 or March '09 lows, then a weak bounce into the fall. This template, however, suggests the final leg down will be the most severe and worse than the Panic of 2008. This is certainly not out of the question!
And finally, the ultimate bear market of 1929-1932, during which the Dow Jones lost 89% of its value (chart stolen from http://www.technicalanalysisbook.com):

Even I'm not quite this bearish for the current cyclical bear market at this point, but I can't rule out the possibility that this replays. We're talking Dow 1400 and S&P 500 at 175 if a similar decline is coming.
In any event, this bear has a long way down to go and this is why my bullishness on the Gold mining sector is geared towards realism rather than irrational exuberance. No stock sector can make much progress higher under such conditions. Of course, once the dust settles, it will be time to bet the farm on Gold miners. But until the S&P 500 gets below the 500 level, I won't be looking to "buy and hold" anything besides physical Gold as the ultimate cash equivalent.

Now I know why you don't like me. You once thought you knew it all but failed. That DOES NOT mean I will. Sorry about your luck...............

That post above was from 07-08-2009.......................