Sunday, December 10, 2006

"Phase Three: The Speculative Blowoff / hussman!"

always enjoy the excellent and sober comments from "hussman". one of my favorites!

immer ein vergnügen die sehr guten und nüchternen kommetare von hussman zu lesen.

... “Phase one is the rebound from the depressed conditions of the previous bear market. Here stocks return to known values. In the second and longest phase, shares advance in recognition of improving business and a rising economy. During the third phase they spurt skyward on the hopes and expectations of a continuing rosy future… The low-priced ‘cats and dogs' historically make great moves in this third phase…”

..... “the final stage is sometimes recognizable because people then buy stocks simply because they go up, and because other people are buying them.”

With the S&P 500 currently trading at nearly 18 times fresh record earnings, on record profit margins, it seems clear that the current bull market is well into its third phase. To anyone who examines more than one or two decades of market history, even a multiple of 18 is very rich by historical measures, and can't be reconciled simply by reference to interest rates or inflation.

On closer inspection, of course, valuations are even more hostile. Over the past three years, profit margins have widened to record levels, which has detached P/E ratios from other fundamental measures – such as price/revenue, price/dividend, and price/book ratios. The S&P 500 is currently about double its historical norms on those metrics. That isn't a forecast that stocks have to eliminate that valuation gap, but it certainly does suggest that stocks are priced to deliver unsatisfactory long-term returns from these prices.

It bears repeating if profit margins were at normal levels – even on the basis of profit margins that prevailed during the 1990's (indeed, anytime prior to the past 3 years) – the price/earnings ratio of the S&P 500 would currently be nearly 25. Unless investors want to speculate on the notion of a “permanently high plateau” in profit margins, the stock market is strenuously overvalued at present. ....
...., the first phase ....” On average, historical bull markets have begun from price/peak-earnings ratios below 11 and generally below 9. .....

Typically, the explosive first-year advance in a bull market has involved a recovery from those very depressed P/E multiples....

Not so for the current bull market, however. As brutal as the market's decline was between 2000 and late 2002 – despite a loss in the S&P 500 of about half and a loss in the Nasdaq of over two-thirds its value – market valuations at the bear market trough never penetrated below historical norms.

To put the 2000 top into perspective, recall that during the late 1990's bull run, the market experienced a series of speculative blowoffs. First, “Buffett-type” large-cap stocks...., and stocks like Coca Cola traded at hefty premiums to historical norms. Next came the dot-com bubble, ..... Though both of those blowoffs easily qualified as “stage three” advances,....

At present, stocks are dangerously beyond “known values,” unless the values observed during the late-1990's bubble are the ones investors really care to know.

Speculative blowoffs
Given the overwhelming historical evidence that profit margins normalize over time, long-term investors should build that expectation into the prices that they pay for stocks, which after all, are nothing but a claim on a stream of future cash flows. A market P/E of nearly 25, on the basis of normalized profit margins, doesn't allow any margin of safety.

.....“it is not history, facts, or intelligence that guide most investors through the final phases of a bull market; it is hopes and wishes.”

Among the current signs that the market is engaged in a speculative blowoff, investment advisory bullishness is running near 60%, which Investor Intelligance notes is about the level where historical bull markets have ended. As for the “smart money, " corporate insiders are aggressively liquidating stock" at a rate of over 7 shares sold for each share purchased, ..... Meanwhile, the new issues market is booming, and low-quality stocks (on the basis of S&P's quality rankings) have for months dominated an otherwise dwindling group of market leaders.

Though CNBC briefly seemed professional in the wake of the 2000-2002 market plunge, airing short conversational spots where the anchors emphasized journalistic responsibility, that tenor has now been replaced by carnival-barking shows like “Mad Money,” complete with its lightning round, featuring a shrill whine of irresponsible speculative “plays” backed by death-metal guitar music, and “Fast Money” promoted by spots that promise, for example, “Tonight, the boys get down and dirty with a hot commodity...” I wish I was making this up. (more on cramer etc. at the new feature labels at the bottom / mehr zu den einzelnen punkten unter "labels" am ende des postings)

Overall, it's late in the game.

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