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Price Acceptance

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April 16, 2008 – Comments (4)

I remember how expensive housing seemed when I was first shopping around.  I knew where it had been, and there was no question that it was up.  It took a while to accept what the prices were and I watched in disbelief prices go up an additional 20-25% before I jumped in.  Prices did come down some, but I found that after I was in the market and had paid the outrageous price, I had a greater degree of "price acceptance," that home was worth $x and that one $y dollars and so on.  But there was a period of price rejection in beliefs and before actually committing to buying.

I often think my look at the market is similar.  Housing about tripled in a 7 year period.  I didn't invest in the market when I was younger, but I did get guidelines about and I did form beliefs around it.  The first was that because you capital was not safe, you should receive a premium for the risk.  I expected that you should make about 10%.

Reading Mogambo Guru I am pointed to what the value of the market would be at different P/Es. 

"For the S&P500 (currently about 1360) to fall to the range of historical fair value of a P/E of 15, this means the S&P500 index should fall to, according to the chart, 993!"  At a market bottom, at a P/E of 10, the index would have to fall to 662.

I started looking at the market with 1980s beliefs around pricing the market.  I figure people who in the market had to have gone through a gradual change in price acceptance.  I tend to think that if you did a Rip Van Wrinkle and looked at the markets after your nap, price acceptance would be non-existent.  Equity valuation has gradually been changing so that investors have been paying more and more.  I was Rip Van Wrinkle and in shock at the valuation levels I saw all over the market.  I just didn't bother with the market past learning some valuation standards of a generation ago.  My price acceptance has been at odds with much of the market.

Mogambo says the S&P is trading at a P/E of 21 and the Dow at a P/E of 53.  If that is indeed the case, for the Dow to be at the historical fair value of a P/E of 15 it would have to decline to 3500, and at 2330 for a P/E of 10.  Now I'm going to take a closer look at those 30 stocks because a P/E of 53 is in the "I can't comprehend how you thought buying here would work out for you" category.

I never got to price acceptance in the market.

 

On another point, Las Vegas is having a rough time.  I was through last June and I felt like I was being price gouged.  I was there for 3 days.  It says that peole are going for 3 days instead of 4, staying in cheaper hotels, and just seeing one show.  Hmmm, my visit -- 3 days, cheaper hotel, saw one show...  What'll induce me back?  4 nights for the price of 3, half price shows, free internet in my hotel...

4 Comments – Post Your Own

#1) On April 16, 2008 at 4:23 AM, PDTBiotech (94.13) wrote:

Where the blue blazes did he get a PE of 53 for the dow?  If I use market cap and ttm net income so I can back GM's -$43B (wow) into the equation I get a current PE of 17.9.  If you don't include GM it's right at 15.

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#2) On April 16, 2008 at 4:35 AM, PDTBiotech (94.13) wrote:

Where the blue blazes did he get a PE of 53 for the dow?  If I use market cap and ttm net income so I can back GM's -$43B (wow) into the equation I get a current PE of 17.9.  If you don't include GM it's right at 15.

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#3) On April 16, 2008 at 4:39 AM, PDTBiotech (94.13) wrote:

Always wondered about all the duplicate posts on CAPS, guess it's better not to use the back and forward keys on the browser.  Sorry about that.

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#4) On April 16, 2008 at 9:24 AM, dwot (68.24) wrote:

I don't know where he got it, perhaps taking the last quarter forward 4?  That is what I assumed he did.  Results are averaged over 4 quarters so it takes a long time to see how bad things have turned when they do turn.  I always weigh the last quarter heaviest and assess whether changes are a new trend or a one time adjustment.

He referred to a chart on a site that I could not find.  But he is very good at take a worst spot point data and focusing on it, like the $60 billion increase in deficit in a week.  That is beyond dire and mind boggling, but it is unlikely that every week will be that bad so to suggest multiplying it by 52 isn't a state of the economy, but it sure show how bad that week was.

But, the government's deficit running to a trillion dollars would not surprise me.  Seriously, the bills are so far from being paid and the talking heads are suggesting more tax cuts.

As for duplicate posts, try opening new windows in a new tab when you want to be able to go back to a starting window.  The other thing, I think it gives a postscript warning before doing a duplicate post, so cancel. 

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