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Old 01-26-2011, 07:44 AM   #21
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This is the chart I'm looking at

The PE-10 chart is one that many of us refer to. Something else that's worth noticing in the chart, though, is that the SPX has been over 20x almost consistently for the past 20 years, which makes it a little bit weak as an investing indicator for most of us mere mortals.

One reason PE-10 may not be mean reverting to historic norms is that corporate profit margins have been persistently above historic norms. Rather than correct in the Great Recession, margins have increased. So trailing and expected PE both look very reasonable while PE-10 looks overvalued. Those who swear by PE-10 swear that corporate profit margins will mean revert, but they haven't, and it's not clear when they will, or what would drive that.
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Old 01-26-2011, 07:51 AM   #22
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What is next? Market divination via the entrails of a chicken?
One of my favourite quotes from Peter Lynch:
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Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fedís policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they canít predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.
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Old 01-26-2011, 08:35 AM   #23
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Those who swear by PE-10 swear that corporate profit margins will mean revert, but they haven't, and it's not clear when they will, or what would drive that.
A fundamental fact of capitalism is that aggregate ROA and thus profit margins must revert to the cost of capital. Why it seems to be hung up now I really don't know, but if one can trust anything it ought to be this. A least I would rather trust reversion than a continued high plateau, though it clearly is not something a prudent person would want to bet either on or against.

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Old 01-26-2011, 08:41 AM   #24
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This is the chart I'm looking at
S&P 500 PE Ratio Chart
Combined with the second figure (scatter plot) here
P/E ratio - Wikipedia, the free encyclopedia
... which means that I'm liquidating as sell criterias get hit and either put it the money into short/medium duration bonds and low beta dividend stocks.

I'm not trying to hit anything dynamically. It's more the observation that statistically speaking market P/E > 20 never bodes well for long-term performance, like never ever. Granted, I may feel rich for a year or two if I hang on, but it would be hard to find the exit point. I will, therefore, forgo all the excitement and just start getting out now.
This is the dilemma- play momentum, or stick to time tested value parameters?

Here is a good essay by Jeremy Grantham, IMO the thinking man's momentumist.

https://www.gmo.com/America/CMSAttac...a4ldy3iQ%3d%3d

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Old 01-26-2011, 11:35 AM   #25
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A fundamental fact of capitalism is that aggregate ROA and thus profit margins must revert to the cost of capital.
But cost of capital isn't fixed.

I don't think we can assume that higher than historically average profit margins means firms are earning "economic profits" in aggregate. If there is some calculation that shows this, I've never seen it, but would like to.
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Old 01-26-2011, 11:45 AM   #26
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In other news:

U.S. Households Poised to Increase Stock Holdings: Chart of the Day - Bloomberg
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Old 01-26-2011, 12:09 PM   #27
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I will, therefore, forgo all the excitement and just start getting out now.
One of the problems with RE at an early age; you have a bunch more years to worry about ...

As for me? I remember the S&P 500 at 1530 (hey - we're a long ways from that). I don't get too excited about these perceived "highs"...
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Old 01-26-2011, 12:10 PM   #28
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Yes, that is another concern. High bullish sentiment is a contrary indicator.

MarketGauge by DataView, LLC
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Old 01-26-2011, 12:25 PM   #29
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Yes, that is another concern. High bullish sentiment is a contrary indicator.

MarketGauge by DataView, LLC
Wow, look at the performance of that indicator.

It was bearish from mid-2003 to early-2004 as the SPX ran up. It bounced between bearish and neutral from 2004 to 2006 as the market continued its advance. It moved pretty solidly into neutral territory and toward bullish from 2006 to 2008 as the bubble was in its last years of inflation. It actually ticked into bullish territory in early 2008 right before the bottom fell out. It never moved into bearish territory all through the crash, but did give a handful of too-early bullish indicators. It moved briefly into bullish territory at the bottom of the market, but has been in the neutral area for the duration of the last 80% market advance.

As far as contra-indicators go . . .
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Old 01-26-2011, 12:41 PM   #30
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But cost of capital isn't fixed.

And if you have evidence that economic profits for the entire market are currently positive I'd like to see it.
naw, just deal me out of the discussion.
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Old 01-26-2011, 02:09 PM   #31
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Dex, I thought you went to all cash. Why are you fretting over bolinger bands?
I can never remember and am too lazy to go back and look, is Dex the one from that thread where dumped equities to cash in late August at DOW < 10k?
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Old 01-26-2011, 02:12 PM   #32
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I can never remember and am too lazy to go back and look, is Dex the one from that thread where dumped equities to cash in late August at DOW < 10k?
Yup. And the reason given was something about 50 day moving averages crossing 200 day moving averages which, as it turned out, perfectly nailed the bottom of the correction.
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Old 01-26-2011, 05:45 PM   #33
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Dex, I thought you went to all cash. Why are you fretting over bolinger bands?
That was my first thought too. I'm holding...but best of luck to all.
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Old 01-26-2011, 07:08 PM   #34
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I can never remember and am too lazy to go back and look, is Dex the one from that thread where dumped equities to cash in late August at DOW < 10k?
The one and only!
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Old 01-26-2011, 08:30 PM   #35
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I've never been a market timer but it's an urge that I've fought for years. My gut tells me to get out of the market soon or, at the very least, shift from 60/40 to 40/60. In looking at the relative near future and seeing continued high unemployment, serious debt problems at all levels of government, reduced government spending, reduced government employment, higher taxes, still floundering housing market, etc, I'm not seeing the impetus to keep moving this market higher. I held through this most recent unpleasantness so I guess I can hang in there again but something tells me we won't bounce back nearly as well or as quickly this time. The fundamentals just seem really poor for the next 5 years or so and I plan to FIRE in 7. What to do, what to do?
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Old 01-26-2011, 09:35 PM   #36
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IThe fundamentals just seem really poor for the next 5 years or so and I plan to FIRE in 7. What to do, what to do?
You've must of read this.

China Will Face Crisis Within 5 Years, 45% of Investors Say - Bloomberg

Global investors are bracing for the end of Chinaís relentless economic growth, with 45 percent saying they expect a financial crisis there within five years.
An additional 40 percent anticipate a Chinese crisis after 2016, according to a quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 7 percent are confident China will indefinitely escape turmoil.
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Old 01-27-2011, 08:13 AM   #37
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You've must of read this.

China Will Face Crisis Within 5 Years, 45% of Investors Say - Bloomberg

Global investors are bracing for the end of Chinaís relentless economic growth, with 45 percent saying they expect a financial crisis there within five years.
An additional 40 percent anticipate a Chinese crisis after 2016, according to a quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 7 percent are confident China will indefinitely escape turmoil.
2016? Over the long run, the survival rate is zero. So what? These guys cannot predict next week with any degree of confidence.
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Old 01-27-2011, 08:27 AM   #38
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You've must of read this.

China Will Face Crisis Within 5 Years, 45% of Investors Say - Bloomberg

Global investors are bracing for the end of Chinaís relentless economic growth, with 45 percent saying they expect a financial crisis there within five years.
An additional 40 percent anticipate a Chinese crisis after 2016, according to a quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 7 percent are confident China will indefinitely escape turmoil.
Years ago I thought China was a train wreck in the making but have changed my opinions recently. I used to think there was no way the Communist Chinese would be able to run a pseudo capitalistic economy without running the train off the rails but they are smart and have done a pretty damn good job so far. Sure, they've had some problems and they're going to have some more serious problems going forward but, all in all, they've continued to surprise me. If they do screw up now that would certainly not be helpful to us or the global economy.
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Old 01-27-2011, 08:53 AM   #39
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but they are smart and have done a pretty damn good job so far.
Smart people, but not immune to the typical pressures of politically powerful vested interests. Case in point . . .

China has an inflation problem. But in the face of an inflation threat, the central bank is expanding the monetary base. Why? Because the nation's large exporters don't want the currency to appreciate. So China is printing Yuan, and buying dollars to maintain a stable exchange rate. To try to offset the inflationary impacts of loose monetary policy on an accelerating economy, China is resorting, unsuccessfully, to credit and price controls. Which is what the U.S. tried, unsuccessfully, in the 1970's. What's the likelihood that China's experience will be different from ours?

My guess is that one of two things happen in the next decade. An exogenous shock knocks the economy back and, thereby, tames the inflation problem. Or inflation becomes bad enough that a Chinese Paul Volker steps forward and takes away the punch bowl.
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Old 01-27-2011, 09:09 AM   #40
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