During the past 5 years, the VIX has only gone below 19 on 4 occasions and then only briefly (never for longer than a month). On 3 occasions, what followed were significant downtrends in the market. On two occasions, severe downtrends followed. Maybe you're right that "this time will be different". I'm not betting my money on it.
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When a company is only making 20% of what they used to make, going to 40% of what they used to make is not so far fetched, and that would cut the P/E in half. Things could start looking like great values very quickly IF (big IF) the economy starts to revive.
I'm not sure how you figured that, but I couldn't disagree more. First of all, most companies on the nasdaq 100 have not made ANY money lately and many never will. So doubling their PE amounts to zero. Secondly, even assuming that PEs were cut in half, going from a PE of 157 (SUNW) to 75 hardly represents a bargain (ask AMZN shareholders). Thirdly, earnings continue to go down, not up, so the reality is that PEs are not going down at all, they're going up at a rate rarely seen in history (excepting the bubblemania circa early 2000). Finally, even once the economy revives, it will be some time before most companies generate sustainable earnings.
Your thesis of the extremely low VIX not preceding a severe market correction could only be valid if we enter another bubble, where PEs again reach unsustainable astronomical levels and where stock prices are again divorced from economic and business fundamentals. If this happens, the bursting of that bubble will make the outcome even worse (remember what happened when the last bubble popped?). Of course, I'm not ruling this out, especially given all of the recent liquidity the Fed has added into the banking system (one of my credit cards called to offer me $50000 until 9/02 at Zero percent interest.... I would only have to make a $15 monthly minimum payment...they even offered to waive the cash advance fee). I'm just not going to bet my money on it.
best...
LIG |
