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valuemoney (99.99)

Me blabing random stuff on the markets and other info.

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March 22, 2010 – Comments (4)

Parden my spelling and gramar.

First of all I don't make my purchases based on what I think the market is gonna do. PRICE is my focus when buying equities.

OK I am gonna step back now and look what has occurred, starting with some CHARTS.

My market timing on CAPS has been closely linked with the charts from the 1970's. That in my mind is the only time frame which is comparible to what has happened in the markets these last couple years. Stock evalutations ( relative prices and I am talking stock PE's ) At both periods of time - the 1974 lows and the 2009 lows were completely absurd. Pull up a 8 month chart from September's 1974 bottom (63.5) to June of 1975 (95.2). That comes out to a 1.5 gain. Now go to Feb of 2009 bottom (735) and go out 8 months. Oct.of 2009 (1100 on the S&P 500) That comes out to a 1.5 gain. The BEARS last year kept saying too far too fast last year I can post many examples. But that turned out to be false. It is kinda crazy in my opinion that many people say you can't go back and look at the past to predict the future. The past IS the key to predicting the future. Why? Are system is set up that way. And humans have the same behavioral patterns. It is hard to change. We can't help it. And if u use common sense and look at the BIG picture when looking at investments it is quite easy. Companies can be looked at in the same way. The companies don't change on a dime for the most part. So past performance is likely to continue if nothing major changes inside the companies.

Now lets look forward on the S&P. I am going to go with 1235 on the S&P by December of this year or January of 2011. That is based soley on the same time frame from the June of 1975 (95.25) to December of 1976 aproximately (107) about a 1.125 gain. Now these next 4 to 5 months I am looking for a pretty decent pullback hence I down arrowed some of the 3X bull etfs. Something has to happen in these next 5 months for the market to correct. Why now? Cus it happened before and it WILL happen again. Longer term the S&P is going back to 1500. It will take awhile though. Why wont the market go up like crazy these next couple of years? RISING INTEREST RATES. Earnings will go way up in these next five years companies will have record earnings again in a few years but the stocks share prices are not gonna scream up with those earnings. What a person pays for earnings should depent on RATES. PE gets involved here. Lets use a PRICE TO EARNINGS MULTIPLE OF 15. 1/15 = 6.66%    Think of that 6.66% as a yield (BOND YEILD) on your money. Now that yield will be pressured by INTEREST RATES and US TREASURY YEILDS. The governments around the world just fought the finiancial crisis( because of housing market and land values took a nose dive) by pumping money into the system. This WAS needed but it will have its drawbacks. INFLATION will happen big time and the price of treasuries will fall like no other hence YEILD on bonds will go up. Interest rates have to go up to fight inflation. Anyone remember what rates were in the early 80's? They were around 17-20%. My mom remembers that because she was a real estate agent. I think at that time commodity prices soared along with GOLD. What has been going on with commodities. Look at the last 10 years. Gold has been on a tare lately. I HATE GOLD but I do understand why gold is going higher. That is also why I the charts from that period because rates and yeilds are going to react the same way thus putting the downward pressure on stock PE's. Now the great thing about the rising rates is EVALUTIONS on stocks will probably not get out of control. PLUS one can dollar cost average in for the next 6 years and when the rates finally peak. It will be like a loaded coil. When rates are at there highest there is only one way for them to go- LOWER. Guess what happens to stock prices? They soar. RATES go down and PE's go north. And when stock prices start to soar EVERONE needs in on it. Thats when your bubble occurs. Hence housing bubble in 2004-2007 Low rates and low cost of borrowing.  Which is probably a long long way out. Its dumb though because no one wants to buy a house when RATES ARE HIGH. And that is the BEST time to buy because PRICES ARE LOW. Mom said it was really tuff back then to move the houses. Look what happens though when rates start falling the prices soar!

Basically keep buying stocks and stay away from bonds and CDS and cash. If one has a 10 to 20 year time horizon this is a great time to buy equities even at these levels. If your a trader.... good luck and I would watch out for a correction these next 4-5 months. If anyone could get anything out of my random blabing, good. If not thats OK, because I don't think I can go through this blog and figure out what I am saying either.

4 Comments – Post Your Own

#1) On March 22, 2010 at 9:00 AM, russiangambit (29.33) wrote:

>  Why wont the market go up like crazy these next couple of years? RISING INTEREST RATES.

I am glad you mentioned that. In the 70s I think the rates were higher . Ths time aroud I think the FED will drag their feet as long as possible before raising the rates and the they'll do it very slowly and will end up behind the curve. I am wondering what kibnd of bubble it will create and where? The only hope is that market will force the rates higher due to out of control spending but it hasn't happened so far. I think financial firms are happy making the spread regadrless of where the baseshort-term rate is.

If anything I have more faith in Chinese pragmatism and them letting yuan to rise and thus causing the tightening.

And your bubbling is welcome. I don't remember anything from the 70s I was a kid back then so it is hard for me to tell how they compare to now except for the fact that information spread was so much slower and immidiate gratification attitude was less wide spread.

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#2) On March 23, 2010 at 4:40 PM, Upstar75 (< 20) wrote:

Thanks for the blog. My lesson learned from your blog is to look at historical facts but dont trust them entirely.

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#3) On March 24, 2010 at 11:49 AM, mrindependent (89.35) wrote:

Valuemoney,

 Great blog.  I especially agree with your following statement:

"The past IS the key to predicting the future. Why? Are system is set up that way. And humans have the same behavioral patterns. It is hard to change. We can't help it. And if u use common sense and look at the BIG picture when looking at investments it is quite easy. Companies can be looked at in the same way. The companies don't change on a dime for the most part. So past performance is likely to continue if nothing major changes inside the companies."

That may be why we tend to have similar opinions on investments.  I also agree that the 70's are the best historical template for understanding the current environment.  As you know from my blog, however, I don't expect a significant correction in the next 5 months.  But I would not be even a little bit surprised if you are right and I am wrong.  Either way its ok, because I make my investments for the long term.  As long as I know that my investments are undervalued companies with reasonable long term prospects, I don't get nervous if short term trends go the wrong way.

Russiangambit has a good point because current interest rates are much lower than the rates I recall from the seventies.  I think this, along with the changes that have been made to the methodology for calculating inflation, will give the FED more leeway to keep monetary policies loose.  These loose policies will buoy the stock market until price inflation becomes undeniable.  Then the boat will sink.

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#4) On March 25, 2010 at 6:28 PM, valuemoney (99.99) wrote:

But I would not be even a little bit surprised if you are right and I am wrong.  Either way its ok, because I make my investments for the long term.  As long as I know that my investments are undervalued companies with reasonable long term prospects, I don't get nervous if short term trends go the wrong way.

mrindependent   that is my EXACT thinking and adding to that, I hope the market goes down because new monies added  will have better returns. As u know I am buy and hold unless I see a way better deal along the way. My time frame on most all my investments are 5+ years in my real money accounts.

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