07/28/09 Jacobus, Pennsylvania
The stock market has abandoned rationality. Sure, it usually rallies ahead of evidence of measurable progress in the economy, but the rally from March to May had already priced in a strong ‘V-shaped’ recovery, which will, obviously, not happen. At best, we’re in for years of stagnation and lower living standards as society inflates away, pays down or writes off bad debts.
The recent rally, starting on July 13, has raised the bar for corporate earnings over the next few quarters even higher, setting market participants up for another round of disappointment.
In the financial, REIT and consumer discretionary sectors, the market completely detached from reality. Part of this can be explained by the growth of program trading based on backward-looking statistical inputs, part by the triumph of technical analysis over critical analysis, and part by the herd behavior of fund managers.
Regarding the triumph of technical analysis over critical analysis, ridiculous notions like the following are clearly driving the market higher: “We just broke through ‘resistance’ at 950 on the S&P 500, so therefore, it’s a mathematical certainty that we’ll go to 1,050 or 1,100.” This kind of ‘analysis’ is dangerous. When we all start watching and reacting to charts and stop thinking critically about what stocks are intrinsically worth based on reasonable assumptions about the future, the adjustment process back to reality can be violent and painful. The 1987 crash is a case in point.
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zerohedge asked a good question about sp500 prices to which i morphed the question into what were earnings for the past 3 quarters plus expected earnings for next….then what multiple is that earnings worth?
even if you think that the sp500 would earn 50 usd and value that 20x then it yields sp500 at around 1000 near where it is now….
given the last quarter results seen so far i think that is preposterous….for me 20x would require double digit profit growth due to comparable sales growth….right now profit growth is coming from cost cutting and that won’t change too much next quarter…gdp is contracting folks.
i would value stocks at 5-8x earnings given the macro economic environment…
“mark to model” accounting. anyone?