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Politics : Formerly About Applied Materials
AMAT 301.11+6.9%Jan 9 9:30 AM EST
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To: Gottfried who wrote (13539)12/17/1997 11:28:00 PM
From: Jacob Snyder  Read Replies (2) of 70976
 
Reasons for a market crash in 1998:

1. the yield curve is flattening.

2. Historically, the S&P 500 has a PE range, using trailing earnings, of 8 to 20. Moves above and below that range have never been sustained. Today's PE is 23.

3. 20 minus the inflation rate equals fair value PE for the market, again using trailing earnings. This gives an expected PE of 18, well below today's value.

4. The bull market is in it's 8th year.

5. The last recession was short and shallow. The last real recession was a very long time ago (early 1970s).

6. Another valuation yardstick is: stocks are at a fair PE when the PE is equal to the expected EPS growth rate. The forecasts I've seen put expected profit growth at only 5-10% in 1998.

7. Volatility in the market is increasing. This is one sign of a market top.

8. Low unemployment is causing wage inflation, which must result in lower profits or price inflation. Maybe productivity is being seriously underestimated, but noone really knows. The Fed has repeatedly said they will raise interest rates at the first sign of price inflation. An increase of 0.5% in short-term interest rates will give us an inverted yield curve.

9. If East Asia is allowed to greatly increase exports to the U.S., our trade deficit will be on the wrong side of 150 billion next year. This is politically unacceptable. If East Asia isn't allowed to cut imports and increase exports to the U.S., they won't earn the hard currency necessary to service their debts, and there will be a wave of defaults and bankrupcies much larger than what's already happened.

10. Noone is using trailing earnings estimates anymore.
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