<i>"Ah very interesting, so basically stocks have been overvalued for the last five years..."</i> Absolutely. Highly over-valued per their true PE ratios. Remove the buybacks, cutbacks, layoffs, debt-shift, options rewrites and other accounting gimmicks from that equation. Base PE ratios squarely on organic growth in all companies, i.e. dollars created from pure sales = services delivered net. Set aside all the other writedowns and writeoffs which are mere one-time smoke & mirror ploys. Now where are true PE ratios at? Stocks were overvalued in the mini-bubble ascent. Stocks are now being valued per forward expectations, as always. The next few earnings seasons ahead will be most interesting indeed.
So every bull market is a bubble and every bear market is rational? I guess - without those little periods of rationality and reason setting into the market - stocks were terribly overvalued (again, I am asking compared to what asset class?) since 1984: 23 years of a terrible bubble. Thank God rationality is finally setting in!!!!!!!! Poepl are coming to their senses!!! I wonder when people will stop rationalizing price action with PE and BS arguments. The markets go whereever they need to, the noise increases on every step you take towards shorter timeframes. 10-20% corrections are perfectly normal for stocks, you don't need any fundamental rationalization for such moves, especially on a 30 day basis.
We saw a sea change in the market's character that we haven't seen in 5 years. Buying dips is no longer a guarantee to make money, we are in a bear market. Some people realize it, but others will only accept it when the indices are down 20%, and most of the down move has been made. So many people are reluctant to face a bear market, the bubble in credit and in the stupid are popping right before your eyes. Just open your eyes.
So what happens after we go down 20%. We go down another 20%? And another? Is it too late already (now that we're barely down 10%) to go net short?
PE analysis seems to strike me as sound when combined with real interest rate and forex analysis. In nominal terms US may be okay for a while. Going forward, in real and relative terms investors in US markets look like they may be in for a whole lot of pain.
<i>"I wonder when people will stop rationalizing price action with PE and BS arguments. The markets go whereever they need to,"</i> Makloda, that's a question you need to ask about yourself. With all due respect, you've been posting about how fair-valued the market is for months now. It's recorded in your post history for posterity :>) PEs, earnings, valuations and % the market is up/down this calendar year means jack-squat. Reality is, cheap money just became dear. The impossible to sustain credit bubble cannot be sustained forever. Credit debt comes due eventually. No government = governments can bail out a spiderweb of bogus-valued debt that's imploding. Stocks are reflecting that reality right now. A return to new highs in several months or years? Possible. Return to recent market highs and higher in a week or three like so many bulls in denial hope for? Not happening.
Funny how some of the European and Asian indexes are going down 4-5% and the US index is going down less than 2% a day when the problems are originating from the US. The US stock investor is in denial. Today is going to be painful for the optimistic who have downplayed this credit crisis. Credit spreads are going up huge, mortgage backed securities are almost illiquid now, no one wants them! We are in big trouble folks.
Austin I absolutely agree with you. Who knows, maybe this is the beginning of a multi-year bear market, the market will do what it needs to do. It will go where it hurts the most capital. All I wanted to point out was that 30 day moves in equities, especially 10%/30 days ones have nothing and absolutely zero to do with "people suddenly and overnight becoming aware that stocks were being overvalued since 20 years" and "ultra high PE ratios", but are rather a result of market psychology and (!) forced liquidations on all continents. Selling feeds more selling now and it's a good thing if you're in cash, fully hedged or able to nimbly trade both sides long and short. Many speculators will now we wiped away and flushed out of this market and then eventually we start again with a good base, maybe it takes a few months, maybe a few years, we will see. Eventually I believe there will be awesome opportunities on the long side, one just has to be patient and preserve capital and keep ones mind open for those opportunities because they will come.
<i>"All I wanted to point out was that 30 day moves in equities, especially 10%/30 days ones have nothing and absolutely zero to do with "people suddenly and overnight becoming aware..."</i> For sure, agreed :>) Market sentiment takes weeks and months to shift. People are in shock right now, the media hype from successive all-time highs to -300 Dow moves is too sudden for them to comprehend. That includes a number of investors and "traders" who have never experienced anything but rising tapes. The market has been flying on amphetamines for more than a year. Recently, it had a heart attack. Then another. The shift of internal health went from artificially stimulated to internal destruction, no different than a healthy athlete suffering from an enlarged heart collapsing in front of a crowd. The masses saw no danger for said stricken athlete, medical experts would have easily diagnosed the problem with internal study. "The Market" suddenly became aware that it's cheap money (housing and credits) morphine mainline is shutting off. Withdrawls are never easy to weather for any corrected addiction.