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

To: ild who wrote (20605)	10/24/2004 7:33:15 PM
From: Wyätt Gwyön	Respond to of 110194

Rubble has only one meaning in English, and it isn't a Russian currency. so it sounds funny to hear people talk about "Russian Rubble". dev.siliconinvestor.com maybe Russian Rubble is a relative of Barney? cardboardcutouts.com

To: ild who wrote (20605)	10/24/2004 11:59:07 PM
From: ild	Read Replies (1) \| Respond to of 110194

This Week: October 25, 2004 Law of Large Numbers If you want to understand the difference between good, disciplined investing and rank speculation (and also why I only play nickel slots in Vegas), start by understanding the law of large numbers. By John P. Hussman, Ph.D. hussmanfunds.com Too much bullishness Turning to current conditions, last week, according to Investors Intelligence, the percentage of bullish investment advisors surged to 58.9% while bears declined to a very low 22.1% (19% are in the “correction” camp). Now, it's important to interpret advisory sentiment correctly. If you study this indicator closely, you'll find that the percentage of bullish investment advisors can be largely explained simply by past market performance over a variety of horizons. In general, strong markets have more bulls. Not surprising. Since we also know that there is no large or simple correlation between market movements in the recent past and market movements in the near future, it follows that the part of advisory sentiment explained by past movements is just plain uninformative as well. So before looking at advisory sentiment, we have to factor out the portion that is explained simply by past market movements. Once we've done this, we are left with a much more informative indicator. And that's a problem here. While 58.9% bulls is certainly not a figure that would be surprising if the market was enjoying substantial strength, it is completely out of line with the flatness of market action in recent months. On my own measures, I calculate that bullishness is currently about 17% higher than can be explained by past market performance. Here's the implication. Historically, when that “excess bullishness” has been greater than 15%, the S&P 500 has produced an average annualized return of just 4.51% (specifically, that's a quarterly return annualized. In nearly all cases, valuations were substantially better than they are today). When excess bullishness was between –15% and +15%, the S&P 500 produced an average annualized return of 11.53%. Finally, when excess bullishness was –15% or less, meaning that there were far too few bulls after correcting for past market performance, the S&P 500 produced an average annualized return of 22.99%. Properly interpreted, sentiment does matter, and there are too many bulls here. That said, the statistics above are averages, and they aren't reliable enough to form the basis of specific forecasts. With the Market Climate still modestly constructive (more below), sentiment is simply a factor that helps to determine the particular hedging strategies we use in order to align ourselves with that Market Climate. Excessive bullishness here is not sufficient to warrant an overly defensive investment position or an outright forecast of market weakness. .. Several features of the current market environment are notable. Among the most important is valuation. The price/peak earnings multiple for the S&P 500 is about 20, compared with a historical norm of about 14, while the price/revenue multiple is about 1.5 and nearly twice its historical norm. I realize that some analysts are crowing about the “enormous free cash flow” coming out of S&P 500 companies, but those statements are poorly informed. Capital investment over the past 8 quarters barely matches depreciation, so there is zero net investment going on. Of course free cash flow numbers are going to be larger in that event, but it's ridiculous to assume that these companies will grow with zero net investment. So either the capital expenditure figure should be normalized higher, resulting in smaller valuation numbers on the basis of free cash flow, or the growth rates should be reduced, resulting in smaller valuation numbers on the basis of free cash flow. Gee, does it matter?