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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (2477)	11/20/2003 4:15:42 PM
From: mishedlo	Read Replies (2) \| Respond to of 110194

Hussman First, valuations. The S&P 500 Index currently trades at 20 times prior peak earnings. Except for the 2000 bubble peak, prior market cycles have only reached this level at the 1929, 1972 and 1987 market extremes. We know that measured from peak-to-peak, S&P 500 earnings have never grown significantly faster than 6% annually (even during the 1990's). We also know that the impact of favorable productivity improvement on long-term growth is measured in tenths of one percent (see last week's update for more on this). As a result, we can form very good estimates of the long-term returns priced into stocks here. If the price-to-peak earnings multiple is held constant over the long run, stocks by definition must grow at the same rate as peak-earnings, or about 6% annually. Add in a 1.7% dividend yield, and stocks would deliver a long-term total return of about 7.7% from current levels if valuations were to remain at current levels indefinitely. This is the relevant estimate of long-term returns for investors who believe (contrary to all finance theory) that present interest rate and inflation levels justify current stock valuations. Even then, this estimate assumes that current valuations will be sustained indefinitely. In my view, such optimism, if you can call 7.7% long-term returns optimism, is misplaced, because it ignores the concept of peak-to-trough. Specifically, once stocks have reached extremely high levels of valuation, there has always been some point, anywhere from 4-17 years later, when stocks subsequently reached moderate or low levels of valuation. Between those two valuation points, stock returns have been abysmal. hussmanfunds.com >snip> For example, suppose that a full decade from today, stocks do nothing but touch their historical average of 14 times peak earnings. Do the math. If earnings grow at a rate of 6% annually (and again, there is no historical exception demonstrating faster growth over long-periods of time), the annual capital gain on stocks over the coming decade would be [(14/20)^(1/10) x (1.06) – 1 = ] 2.3% annually. Add in a dividend yield of about 1.7% and the total return on stocks would be about 4% annually over the next 10 years. Given that most historical bear market lows have occurred at less than 9 times prior peak earnings (the modest 1990 low reached 11 times peak earnings), a 4% total return expectation might just be a tad optimistic. In short, at current valuations, unsatisfactory long-term returns are baked in the cake. This doesn't speak to short-term returns, which are driven largely by investor's preferences to take risk (what we attempt to measure through market action). But investors taking market risk here should understand that they are taking risk on the basis of speculative merit, not investment merit.

To: russwinter who wrote (2477)	11/20/2003 8:28:30 PM
From: TobagoJack	Read Replies (1) \| Respond to of 110194

Hello Russ, <<"We're not going to sit around and tolerate 50 percent of your enterprises being state-owned, which means they're state subsidized," U.S. Commerce Secretary Don Evans said ...>> This is excellent news! If Walmart is already supposedly quite empty on the 14th of each month, I wonder what a 27.5% (tariff driven) increase in goods price, a cargo security driven middlemen margin squeeze, and a few hundred basis point increase in interest rate will do? I am figuring that the more folks such as Evans are in charge, the wealthier I will get, and so I am enthusiastically OK with the idiocy that is passing for leadership these days. They thankfully lack imagination, and thus making it easy to play against them. FYI, should you be interested, the 50% number mentioned by Evans is about 12 years dated. In any case, the state-owned are not the ones exporting much of anything to the US or anyone else. But, hey, facts do not matter and therefore none of it matters. Let's watch the show :0) Chugs, Jay