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Scotbgaw (91.17)

Lower P/Es/Investor Sentiment Will Signal the End of the Bear Market

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May 04, 2009 – Comments (7) | RELATED TICKERS: SPY , DIA , RSW

I have read some compelling research by John Mauldin, Doug Casey, James Montier, Richard Russell and others that support a much smaller P/E ratio for the S&P 500 and consequently a lower price. Further, these investors all agree that market psychology consistently drives patterns of investment behavior, and quite frequently results in overreaction. The rise was dramatic, but the fall has not been dramatic enough to overwhelmingly reverse investing sentiment yet (there are still an overwhelming number of bulls who rejoice at each new bit of “better than expected news” to put more money into the market). I think it is pretty clear from many of the posts in Fooldom that "fear" has not truly gripped the markets as of yet. You have to look for the contrarian indicators (i.e. Newsweek’s recent cover story: “Cheap Oil Forever”) to know when you should start putting serious money back into particular investments.

A lot of the posters here seem to think they're getting good values for stocks today, and they are probably right for the long run. But please, don’t confuse that with the idea that a new low off of the recent rally isn’t possible. These can both be right. I think that purchasing solid companies with tremendous cash flow, low debt, and a record of aligning management interest with shareholders is always a winning formula. But I think many of the posters here will have a significantly better buying opportunity in the not-so-distant future. In fact, investment history repeats itself more often than not: bear market rallies are usually followed by harrowing drops and I believe lower P/E ratios are in cards.

7 Comments – Post Your Own

#1) On May 04, 2009 at 4:36 AM, maxhoffa (43.86) wrote:

didn't p/e get down to around 11 thogh?

close enough to single digits i'd say, to match up with historical precedent 

time will tell

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#2) On May 04, 2009 at 10:27 AM, wolfhounds (29.20) wrote:

Bear market troughs have ended with P/E's well below 11, around the 6-8 area. I'm not in the prediction business on the market, but I have to agree that this rally semms to follow too much shallow news to be a new bull market. I have been, and will continue to be red thumbing financials. Their still perilous condition is an indicator to me that the wrong group is leading this market up.

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#3) On May 04, 2009 at 12:08 PM, lenri (79.79) wrote:

The 11 was for trailing p/e. Forward p/e is what you should be looking at while in a downturn. The 11 will not last for long if the future is not bright. I believe Scot is correct if only because like in the 70s there will be some amount of trepidation remaining in the stock market. Call it the hangover effect.

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#4) On May 04, 2009 at 8:37 PM, Scotbgaw (91.17) wrote:

I'm inclined to agree with lenri on the P/E issue. However, I also understand that predicting future earnings with any accuracy is difficult no matter what the circumstances. Given the amount of government "assistance" and deficit spending in this current deleveraging, that task is further complicated. As I said in the original post, low P/E will be a symptom of investor sentiment, people will be so sick of the market they'll sell at absurd valuations just to be rid of it. Add to this that earnings are likely to continue shrinking given higher unemployment and lower wages for those who do work, and you get a nasty outlook for an economy that prides itself on ~70% GDP coming in from consumption. The transition from the consumption to savings will be hard for us, as a country, to swallow, but it will happen because it must. We have been overextended for far too long for the trend to continue. We've finally hit the wall, but it hasn't really hit the corporate bottom line yet. I would imagine that with imbalances of the magnitude that we have seen, very large companies will be going bankrupt before this is all said and done. The banks and Chrysler bankruptcies were the "first shot fired" in that regard; the car companies and super leveraged financials were just low hanging fruit.

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#5) On May 04, 2009 at 8:41 PM, Scotbgaw (91.17) wrote:

I'm inclined to agree with lenri on the P/E issue. However, I also understand that predicting future earnings with any accuracy is difficult no matter what the circumstances. Given the amount of government "assistance" and deficit spending in this current deleveraging, that task is further complicated. As I said in the original post, low P/E will be a symptom of investor sentiment, people will be so sick of the market they'll sell at absurd valuations just to be rid of it. Add to this that earnings are likely to continue shrinking given higher unemployment and lower wages for those who do work, and you get a nasty outlook for an economy that prides itself on ~70% GDP coming in from consumption. The transition from the consumption to savings will be hard for us, as a country, to swallow, but it will happen because it must. We have been overextended for far too long for the trend to continue. We've finally hit the wall, but it hasn't really hit the corporate bottom line yet. I would imagine that with imbalances of the magnitude that we have seen, very large companies will be going bankrupt before this is all said and done. The banks and Chrysler bankruptcies were the "first shot fired" in that regard; the car companies and super leveraged financials were just low hanging fruit.

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#6) On May 04, 2009 at 8:41 PM, Scotbgaw (91.17) wrote:

I'm inclined to agree with lenri on the P/E issue. However, I also understand that predicting future earnings with any accuracy is difficult no matter what the circumstances. Given the amount of government "assistance" and deficit spending in this current deleveraging, that task is further complicated. As I said in the original post, low P/E will be a symptom of investor sentiment, people will be so sick of the market they'll sell at absurd valuations just to be rid of it. Add to this that earnings are likely to continue shrinking given higher unemployment and lower wages for those who do work, and you get a nasty outlook for an economy that prides itself on ~70% GDP coming in from consumption. The transition from the consumption to savings will be hard for us, as a country, to swallow, but it will happen because it must. We have been overextended for far too long for the trend to continue. We've finally hit the wall, but it hasn't really hit the corporate bottom line yet. I would imagine that with imbalances of the magnitude that we have seen, very large companies will be going bankrupt before this is all said and done. The banks and Chrysler bankruptcies were the "first shot fired" in that regard; the car companies and super leveraged financials were just low hanging fruit.

Report this comment
#7) On May 04, 2009 at 9:04 PM, Scotbgaw (91.17) wrote:

I'm inclined to agree with lenri on the P/E issue. However, I also understand that predicting future earnings with any accuracy is difficult no matter what the circumstances. Given the amount of government "assistance" and deficit spending in this current deleveraging, that task is further complicated. As I said in the original post, low P/E will be a symptom of investor sentiment, people will be so sick of the market they'll sell at absurd valuations just to be rid of it.

Add to this that earnings are likely to continue shrinking given higher unemployment and lower wages for those who do work, and you get a nasty outlook for an economy that prides itself on ~70% GDP coming in from consumption. The transition from the consumption to savings will be hard for us, as a country, to swallow, but it will happen because it must. We have been overextended for far too long for the trend to continue. We've finally hit the wall, but it hasn't really hit the corporate bottom line yet. I would imagine that with imbalances of the magnitude that we have seen, very large companies will be going bankrupt before this is all said and done. The banks and Chrysler bankruptcies were the "first shot fired" in that regard; the car companies and super leveraged financials were just low hanging fruit.

Report this comment

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