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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 (64561)	6/26/2006 11:31:55 AM
From: ild	Read Replies (2) \| Respond to of 110194

Date: Mon Jun 26 2006 10:02 trotsky (the stock market and what moves it) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved one often hears bulls say 'the market should move higher, as earnings are strong and the economy is growing'. the reality is however that neither earnings, nor the fundamental news of the day have any meaningful correlation to stock market returns. the biggest contributor to stock market returns is p/e expansion, respectively contraction. in short, it's not the earnings that count - but what people are willing to pay for them. the logic of this approach should be obvious - after all, why should one, or two, or even three years of earnings count in evaluating paper that supposedly discounts a lifetime of earnings streams? since the manic peak of 2000, the stock market is undergoing a phase of significant p/e contraction. such moves are always secular, moving from one extreme to the other ( i.e., the market will NOT 'revert to the mean' - it will revert to an EXTREME - the pendulum will swing all the way in the other direction from 2000's overvaluation record high ) . thus, the SnP 500 has begun to significantly underperform the returns of a simple money market fund since the peak of 2000. however, households, pension funds, insurers, and so on, all still hold a huge percentage of their assets in equities - as if the bear market hadn't happened. likewise, mutual funds have a strong disdain for cash, in spite of its outperformance - they hold only 4% of their total assets in cash, nearly a record low. this suggests there is an enormous reservoir of potential selling pressure that will continue to contribute to this secular phase of p/e contraction. by the time the UNDERvaluation extreme is reached, people won't want to hear about stocks anymore, just as they cursed stocks in late '74 and again in mid '82. it's going to remain a trader's market, the 'buy and hold' approach still propagated by WS worked in the 1990's , but not anymore. Abby Joseph Cohen may continue to dream about S&P 'fair value' somewhere in the stratosphere, but i can already guarantee her one thing: the market won't be fair.