To: RobertHChaney who wrote (47279 ) 9/29/2001 8:07:39 PM From: techreports Respond to 1) Everything that could go wrong is discounted into the stocks. Right off the bat, this can't have happened when 50% of Americans don't even believe for sure we are going into a recession. Most people still can't conceive how bad this thing can get: how high unemployment will go, how many more bankruptcies will happen or be threatened, how far housing prices can fall, how low the stock market can go, etc., etc., etc. I am not saying that all of these things will actually happen, but I believe people must see it as realistic scenario before a final bottom can occur. This factor #1 may not ultimately get checked off until we see some articles and posts about the possibility of this thing evolving into a depression. 2) Factor #1 then leads to total capitulation where everyone who will eventually get out of the market and tech stocks in this cycle, does so. I still see far too many people who just got in for the big ride and are not true investors at heart, that are now hanging on by their fingernails, and will likely get out before this is all over. 3) Valuations must reach historically normal levels for this kind of a disaster (with some adjustment for major differences in the basic environment like the author suggests). In other words, the stocks have to become REAL BARGAINS in historical terms. A study of past recessions shown in an excellent prior post by another member, indicated that EVERY past recession saw S&P 500 PE multiples recede to 15 or below. If you use a $45-50 earnings estimate x 15 = 675 to 750 for the index. I am not predicting this, merely doing simple math to show a very probable scenario based on historical analysis. And, it could get worse than that. Regardless of how you want to do the math, things just are not a bargain in the context of historical analogies, despite what the author claims. I think the investment banks have been successfully selling stocks this year as "bargains" because of their percentage price drops, which I believe history would indicate is an incorrect definition, and not truly meaningful in analyzing a bubble bursting scenario; One other concept I bring up for discussion. Several of the most successful people I know believe that this downturn will get worse, and generate several more "false starts" proclaiming a market bottom and imminent recovery, on top of the ones which have already happened. So, by the time this thing finally bottoms and begins its recovery in actuality, everyone will be so worn out that they won't believe it. Sort of like the "boy who cried wolf" scenario. If this happens, then the best strategy may be to patiently wait until the company fundamentals actually begin to turn-around, and then pay a small premium to play a relatively safe game. Having seen first hand this concept actually play out several times in other bubble bursting scenarios, I believe it deserves serious consideration. 3) Valuations must reach historically normal levels for this kind of a disaster (with some adjustment for major differences in the basic environment like the author suggests). In other words, the stocks have to become REAL BARGAINS in historical terms. A study of past recessions shown in an excellent prior post by another member, indicated that EVERY past recession saw S&P 500 PE multiples recede to 15 or below. If you use a $45-50 earnings estimate x 15 = 675 to 750 for the index. I am not predicting this, merely doing simple math to show a very probable scenario based on historical analysis. And, it could get worse than that. Regardless of how you want to do the math, things just are not a bargain in the context of historical analogies, despite what the author claims. I think the investment banks have been successfully selling stocks this year as "bargains" because of their percentage price drops, which I believe history would indicate is an incorrect definition, and not truly meaningful in analyzing a bubble bursting scenario;
