Thursday, September 18, 2008

Stocks Closer to Fair Value

And the beatings will continue until...
This should not be thought of as a timing tool (for that we use our proprietary "What's on TV" timing model*) but rather, as a reality check. Bear markets are as much about stocks trending sideways as earnings grow (multiple contraction) as they are about price declines. Remember the quote attributed** to Keynes (who turned into a pretty fair trader), "The market can stay irrational for longer than you can stay solvent". Chart and commentary from Clusterstock:

...A chart from Andrew Smithers, a London-based strategist, explains:


What is the chart showing you? The S&P 500 relative to the only two valuaton measures that have been shown to have predictive value over long periods of market history: cylically adjusted price earnings ratios (CAPE) and "Tobin's Q.">>>MORE

*Backtested to Fannie and Freddie's big weekend.

Last spring we caught an 1100 point, five week move, making the call within a week of the short term bottom.
(please, please understand: this is just shorthand for giving some weight to the zeitgeist)
March 17:
BUY; BUY; BUY (for now) Bottoming The Market
March 17:
Salvador Dali and Abby Joseph Cohen
April 25:
Based on Our Proprietary "What's on T.V." Timing Model...

**From HedgeWorld's Alternative Reality:

...The words sound like hard-earned wisdom. Indeed, if they came from Keynes, they were. It was in May 1920 that he lost disastrously on currency speculation. His brokers were rather lenient with him and at one point allowed him to meet a margin call by pledging to them the future proceeds of his then new book, The Economic Consequences of the Peace.

But did he actually say this? I google the phrase and arrive easily at 226 sites where he is quoted to this effect. I have not, I confess, thoroughly chased down each of the 226 references. But when I do go to any one of them and look for the primary source in the old-fashioned fact checker’s sense – a book with his name on the title page in which that sentence appears, or a collection of letters, or perhaps the name of a student of his who first heard it from his lips – some Boswell for this Johnsonian aphorism — I come up empty every time....

See also "Economics and similar, for the sleep-deprived" from a comment on the above, which suggests it was used in a lecture.