Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Dow 10,000 Not a Bubble, Time to Abandon Old Stock Market Valuation Ideas?

Stock-Markets / Stocks Bull Market Oct 15, 2009 - 06:01 AM GMT

By: Andrew_Butter

Stock-Markets

Best Financial Markets Analysis ArticleOne of my favorite comments on an article I posted on Seeking Alpha was on something I wrote in May earlier this year, it went like this:

"Wow...the more I look at this the more I think this is the worst piece of work I have seen in a long time…..big mistake, my friend…The baseline is just so wrong it screams! Ouch!”


I printed that out big and framed it, I posted the same article on Market Oracle but don't get many comments, I do get e-mails from time to time though, some are very nice (thank you), but my all time favorite there was, "Eat sand you ***** raghead"…keep 'em coming !

The particular article in question (http://www.marketoracle.co.uk/Article10604.html ) said that the Dow would not have a serious reversal until it hit 10,000 (at the time it was 8,300). That was a follow up to a series of articles that started in January saying (1) the Dow would bottom at 6,600 (it did) and then rally strongly (it did) [1].

But I wasn't using any of the old valuation ideas that were so popular prior to the recent spate of bubbles and busts (Dot.com, Housing, RMBS (yes that was a bubble, they weren't worth half what people paid for them), oil, and in my opinion now Treasuries, and horror of horrors gold).

Did the penny finally drop that many of those theories in the past that are still rolled out as an explanation for what is going to happen in the future, don't actually work very well?

One thing that I can't understand is that from March this year to at least May, ninety percent of articles published covering the valuation of the New York stock market, explained in gory detail, page after tedious page, one hundred and one reasons why the Dow would go back down below 6,400.

So let me get this straight. According to the immutable theories of valuing stock markets that have been in use successfully  (plus or minus a Black Swan or two, which can of course provide a get out for anything), proved beyond any reasonable doubt that the Dow at 8.300 was complete lunacy and the rally was in the words of Professor Nouriel Roubini a "dead-cat-bouncing-sucker".

What I don't understand is why aren't those same old flat-earth-theories that proved to be so utterly unreliable in the past, being rolled out again, FORTISSIMO; now that the Dow is 10,000?

The silence is deafening!

After all, unemployment is still going up, the consensus appears to be that house prices have another leg down, FDIC is broke, commercial loans are defaulting left right and center, resets are starting to reset, the Fed isn't even hinting it might raise interest rates to signal the end of a recession, there is no end in sight to the "forbearance" on valuations of toxic assets (the current regulation and the "Stress tests" appears to say that you can put whatever value you like on those), and P/E or "Q" ratios or Fibonacci, don't even talk about it!

Here's an idea, perhaps all the yardsticks that were so fashionable BEFORE the recent catastrophe (a) didn't actually work very well, and (b) were part of the problem - like perhaps they were a cause of the problem?

Reality check, what happened, happened, and it happened for a reason, it wasn't a Black Swan; it wasn't greed or skullduggery (that's not new). It was because (many) market participants were not able to understand value. It's no good whining if you paid twice the right price for something (using borrowed money), only to find out that you can't find anyone "dumber than you" to buy it from you at more than half what you paid.

That's the whole theory of bubbles, you buy something from someone smarter than you and sell it to someone dumber than you, the only risk is that can't find anyone dumber than you are.

I remember watching Warren Buffet on TV the other day, a really-really smart interviewer asked him:

"So Mr. Buffet, how do you know if an investment you make is a good investment?"

Great question! The interviewer had clearly been up all night crafting that searching question, perhaps they had had a whole team working on it. He replied somewhat testily:

"I know how to do a valuation".

You mean he doesn't go with Fibonacci? What a Bozo!!

Perhaps that's the secret? A lot of people forget that the stock market wasn't designed as a proxy for a casino which is what many of the "get-rich-quick" formulas and systems seem to be designed to provide:

 "You too can turn $100 into $100,000 in four weeks...Special Offer $99.99 and you can have the magic formula".

The point of a stock market is for decent companies to raise equity with investors who are looking for a reasonable return. Somewhere that idea got lost, and replaced by the 2% and 20% rule, which "incentivized" gamblers to bet big in a game where they got huge pay-offs if they won, but lost nothing if the bets went wrong. But the people who fronted the money for them to gamble with got screwed if they lost, that's a great deal (for the gamblers).

But apart from being, dare I say it "dumb" in the medium term, there is something unethical about that, I have no sympathy for anyone who stakes a gambler on those terms, even if he wears a $10,000 suit and says he is a "professional".  So long as people give the gamblers a stake for that system, there will be bubbles, and there will be busts.

But not until the Dow hits 13,000 which it will, although there may well be a significant dip on the way there particularly if the 30-Year Treasury Yield starts to go up, but that's not about bubbles or busts, that's about the valuation of the base-line.

Once the Dow hits 13,000 that will be an inflection point, depending on whether or not the highly efficient market participants can create a bubble so that they can get their 20% incentives, for a while, just until the day they skip town, or not.

Here's another thought, bubbles are zero sum, all they do is reward (some of) the players, not the investors.

And do they create economic value? Well the head of HSBC, Goldman Sacks and the Bank of England had two words to describe it the other day..."socially useless". Like gambling presumably, which is fun while it lasts, and dig the free-drinks, but is there any difference from all the other addictive things people can do?

Allan Greenspan, the doyen of the "inflation targeting but I can't quite figure out where the target is" school of economic thinking, once said, "you can't tell you are in a bubble when you are in one".

Here's another idea, don't hire people to run your economy who can't tell if they are in a bubble when they are in one, and equally can't tell if they are not in a bubble when they are not in one, before they put the other half of America out of work.

[1]: Links

http://www.marketoracle.co.uk/Article12114.html
http://www.marketoracle.co.uk/Article10101.html
http://www.marketoracle.co.uk/Article9321.html
http://www.marketoracle.co.uk/Article9749.html
http://www.marketoracle.co.uk/Article9131.html

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules