Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19
Will Labour Government Plant More Tree's than Council's Like Sheffield Fell? - 4th Dec 19
What the UK Economy GDP Growth Rate Predicts for General Election 2019 - 4th Dec 19
Gold, Silver and Stock Market Big Picture: Seat Belts Tightened - 4th Dec 19
Online Presence: What You Need to Know About What Others Know About You - 4th Dec 19
New Company Tip: How To Turn Prospects into Customers with CRM Tech - 4th Dec 19
About To Relive The 2007 US Housing Market Real Estate Crash Again? - 3rd Dec 19
How Far Will Gold Reach Before the Upcoming Reversal? - 3rd Dec 19
Is The Current Stock Market Rally A True Valuation Rally or Euphoria? - 3rd Dec 19
Why Shale Oil Not Viable at $45WTI Anymore, OPEC Can Dictate Price Again - 3rd Dec 19
Lib Dem Election Dodgy Leaflets - Sheffield Hallam Battle General Election 2019 - 3rd Dec 19
Land Rover Discovery Sport Brake Pads Uneven Wear Dash Warning Message at 2mm Mark - 3rd Dec 19
The Rise and Evolution of Bitcoin - 3rd Dec 19
Virtual games and sport, which has one related to the other - 3rd Dec 19
The Narrative About Gold is Changing Again - 2nd Dec 19
Stock Market Liquidity & Volume Diminish – What Next? - 2nd Dec 19
A Complete Guide To Finding The Best CFD Broker - 2nd Dec 19
See You On The Dark Side Of The Moon - 2nd Dec 19
Will Lib Dems Win Sheffield Hallam From Labour? General Election 2019 - 2nd Dec 19
Stock Market Where Are We?  - 1st Dec 19
Will Labour's Insane Manifesto Spending Plans Bankrupt Britain? - 1st Dec 19
Labour vs Tory Manifesto Debt Fuelled Voter Bribes Impact on UK General Election - 30th Nov 19
Growing Inequality Unrest Threatens Mining Industry - 30th Nov 19
Conspiracy Theories Are Killing This Nation - 30th Nov 19
How to Clip a Budgies / Parakeets Wings, Cut / Trim Bird's Flight Feathers - 30th Nov 19
Hidden Failure of SIFI Banks - 29th Nov 19
Use the “Ferrari Pattern” to Predictably Make 431% with IPOs - 29th Nov 19
Tax-Loss Selling Drives Down Gold and Silver Junior Stock Prices - 29th Nov 19
We Are on the Brink of the Second Great Depression - 29th Nov 19
How to Spot REAL Amazon Black Friday Bargains and Avoid FAKE Sales - 29th Nov 19

Market Oracle FREE Newsletter

UK House prices predicting general election result

Dow Stock Market Bottom or Dead Cat Bounce?

Stock-Markets / Stocks Bear Market Mar 09, 2009 - 03:15 AM GMT

By: Andrew_Butter

Stock-Markets Best Financial Markets Analysis ArticleAccording to my calculation the DJIA is currently selling for about 40% of its long-term equilibrium value. That doesn't mean that prices won't go down, but I don't think they will go down very much more; for a few reasons, not least that following the 1929 Crash prices bottomed (my calculation) at 39% of long-term equilibrium value.


Early January I predicted 25% down on end 2008, so Friday was significant for me because the markets hovered around that number. If that was the bottom I was right, although I would have been wrong about the timing, I didn't expect this until 2010.

Perhaps I got it completely wrong?

Outside of the chartists there are, as always, two camps. There are some traders who are saying that the market will turn soon, one I respect is Steve Leuthold of the Grizzly Short Fund who made 75% gain shorting over the past year. He came on Bloomberg last week and said that now is not the time to short, i.e. "don't buy my fund". That's a lot more believable as a prediction than one that ends up "do buy my fund". But he's not going long either; or at least that's what he said...(maybe he lied)?

The other camp is looking at P/E ratios, which bottomed at below 7 on three previous occasions in the past 100 years. They point out that P/E now is about 15 which is only slightly shy of its long term average and on top of that, earnings are going down.

If that argument is right the Dow could bottom at 3,000 and the S&P 500 could bottom at 300 or so, less than half where they are today.

It's a compelling argument, but I don't believe it.

Gut feeling...my "Blink Instinct" says, "go with Steve". But none of us has been here before, even Steve, even though it looks like he's been around the block more than a couple of times. So gut feeling might be deceptive, we all rationalize what we want to believe.

My logic, which I trust less than my gut, is as follows:

1: This may sound completely asinine, but P/E as a predictor of price it is dimensionally incorrect. What we are talking about here is a price at which the market turns. "P" divided by "E" is not the same dimension as "P". It's like saying "(one apple + two oranges = three oranges)".

The correct dimension for PRICE (apart from what's on the price-tag today) is either:

(a) Some measure of future earnings, (or dividend, or net free cash flow, take your pick - and that could be a prediction, the company projections, or the last ten years, take your pick on that too), divided by an interest rate, preferably a long one. That's got dimensions "E" divided by interest rates, "I".

(b) And/or some variation of Book (net assets less liabilities), preferably worked out using depreciated replacement cost not mark-to-market (which defeats the whole point). Working that out is tricky, particularly for intangibles like brand value, (and what gets written up as Book, isn't necessarily that number - it's a construct based on tax codes).

Where you are trying to reach is an estimate for where the market would be IF the market was working properly, that's the base line. The assumption is that in periods of uncertainty and fear, (or debt fuelled recklessness), the market does not properly reflect value. Knowing where that point is, at least gives a landmark, like when you go surfing, you pick a spot on the shore to tell you how far you drifted.

2: The basic logic for the P/E argument, as far as I can see, is that the "Black Swan" this time will look just like the ones last time, all three of them in the past 100 Years.

That just does not make any sense to me; it's one thing to base a prediction on a thousand points of data, but THREE points? I thought what that book says is that even with a thousand points there is a 0.1% chance (or something) that you get to go 20 Standard Deviations from the mean (actually a P/E of 7 is "only" 1.4 standard deviations from the 100 year mean). I don't dispute that markets deviate from the mean, what worries me is basing a conclusion on three points of data.

3. Chad Brand pointed out correctly that the times that P/E ratios were low, earnings were through the roof (http://seekingalpha.com/article/124672). Nowadays things are bouncing around so much you don't even really know what earnings are, and the point is not what they are today, it's what they will be.

You still need to reconcile the P&L to the balance sheet, and that's based on what these days?...Mark-to-market! That's great, talk about basing a projection on dependant variables! In my opinion you would be better basing a price on brand value than the junk that comes out accounting profession with an SEC stamp on it these days (and don't forget, it was lousy valuations that got us here in the first place).

4: Run a regression of "E" against "P" for 100 years, and you get garbage, account for interest rates and it gets worse. There is a reason for that (see above).

So, right now, according my "Opinion of Value" based strictly on International Valuation Standards is that the Dow (and the S&P and whatever - they track), is exactly 159% of the PRICE (price is 38% of value).

That's a buy, perhaps not today, and right now my model (which said SELL/SHORT on 17th September 2008 (it got that right)), says STICK...but I say, someday soon.

My model also says that after it goes up, it will come down one more time (not to where it is now), before life begins again (earliest 2011).

Then I could be completely wrong, all I can say is that if the Dow goes down below 6,000 I'm going to give up and go fishing (too old and fat to surf now).

But one thing is sure, some time in the future, and hopefully by then all of the Dumb Asses that brought us this mess are either broke, or in jail, or both; life will resume, and in the end of the day, the markets never lie.

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