Fair Value

Discussion in 'Economics' started by moo, Apr 2, 2007.

  1. moo


    John Hussman has written an excellent article on the fair value of the stock market. He estimates the S&P 500 is now 75% overvalued, and would have to fall by about 60% to reach trough valuations.

    I am betting those trough valuations will be reached.
  2. Arnie


    I read until my eyes started to glaze over. I'm sure the author is a smart guy, but this looks likke an exercise in making the data fit a predtermined scenario. I think the biggest thing he misses is that investors are not pricing risk like they have in the past. A lot of the past times he cites, we had interest rates well above where they are now, and much closer to the historic returns in stocks. We've had 19 consecutive quarters of double digit profits in the S&P 500 at a time when you are lucky to get 2% on deposits. Given that, it makes much more sense to take on more risk for a mutiple of the returns you get in a MM fund.
  3. Yeah, its different this time...
  4. moo


    Arnie, you are stating the arguments of the typical investor, who is backward-looking. Sure, 19 qtrs of double-digit growth sounds great.

    But Mr Hussman is looking forward, and is pointing out that when PAST returns have been so good, FUTURE returns for the LONG TERM are very unlikely to be good.
  5. Arnie


    Well, I think you are making my point. He is extrapolating PAST data based on PAST conditions and applying them to CURRENT conditons, which are unlike anything in recent memory. Right now investors can chose fixed income, or stocks which have been paying over 2x the return of fixed for nearly 2 years, at least. Did this situation exist in any of the times he cites? I think his anaylsis is simplistic.
  6. I'm betting they won't. And I will be glad to put money
    on it. Let's say a 60% fall within the next two years at
    even (1:1) odds. You name the amount.

    PM me if interested.

  7. What about a 10% fall by the end of the year?

    What would the odds on that be?

    I think these values are all relative to each other, ie, stocks vs bonds, and CD's, and in turn they are all relative to the shifting sand of the dollar.

    So if the dollar sinks considerably, will stocks appear to go up in dollar terms or will they fall as foreign investors flee?
  8. Lots of takers at 60%, and I agree, but none at 10%.

    This thing could be down 10% in one or two bad days, IMO.

    Then again, as nutty as people are, it could be up 10% in spite of the abysmal economics.
  9. moo


    So are you, just in a different way.

    Anything but. I'm quite sure the situation has existed before. For example late 1920's and 1960's. Stock returns had been good, and bond yields were low.
  10. moo


    :D Nice try.

    I sure could get much better odds for that bet in the options market. At least 10:1, perhaps even 100:1.
    #10     Apr 4, 2007