JRI, good post. I just wanted to add one more very important factor in the elevation of P/E's.
(this isn't it)
I find the whole Idea of "Fair" P/E's very weird. I've always considered a product fairly priced when the buyer agreed to buy it, and the seller agreed to sell it at that price. Argueing that CSCO was overpriced at 130X was ridiculous because there were people buying it at that price. Of course, things change. :) And what people were saying is that they thought the price was overinflated for the near term, and would fall. They were right.
(this is it).
40 years ago, (1960's), people remembered the stock market crash and the depression of the 30's very vividly. Most people considered the market a lot like Las Vegas, and were very content earning meager interest from their local banks while inflation ate away their savings and (pretty much) retirement accounts and wealthy people were the only one's in the market. Retirement accounts knew that Index Funds were excellent money making vehicles that generate minimal taxes and returns that beat 97% of active managed funds YEARS before Boogle told the masses. That is, fear was in full force. Now, it is pretty much universally known that the stock market is one of the ONLY places you can make actual post-inflation dollars on a consistent basis for the long term. This knowledge (and the charts showing fairly consistent returns over almost ANY 10 year period have given us a totally new world. I've seen stats that say 50% of the US adult population is in the market. In general, this has given the US (and the world) a confidence in the market that is very new. Of course, a lot of people would say that the market has gotten OVER confident on many occassions, and I wouldn't disagree with them at all. But when you have more and more people coming in to buy the product (like GE or CSCO, for instance), then I would argue that the elevation of the price for that product would most necessarily occur. In other words, of course P/E's are higher. It would be VERY weird if they weren't. P/E's would only fall to 40's level if (among a lot of other things) people were as afriad of the market as back then. I hope that doesn't happen. Anyone with a savings account in 2000 is throwing their money away.
Now, the real question:
In future weeks, (or months, or years, etc), what is the P/E that you think Cisco buyers and seller will agree to? I have NO idea. Some people that read charts like other people read pig intestines tell me it's going lower. They very well might be right. Perhaps something will convince people that the stock market isn't the great wealth machine that they think it is now. Perhaps a comet will hit the earth. Perhaps we will (as Douglas adams put it), decide that not only was leaving the tree's a bad idea, but that we shouldn't have ever gotten out of the ocean.
Anyway, I agree with JRI, except when we rephrase Bambs to mean what I think he means:
ie: The market is "dumb" because it should be able to see that the near term price for the market is obviously going to be a lot lower than it is now. Another word for this is "Calling the Top". Hard to do, but evidently Bambs figured it out. :) Perhaps he can also "Call the Bottom", so we can stop watching the game. Anyway, I think calling the top an the bottom are hard. |
