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Top 22. Oct 27, 2001 6:24 PM

» Kirk - Re: Re: Rallies come fast

In response to message posted by rich8rd:

Quite possible. IF you look at a chart of the S&P500, it sure looks like a CT rally and it will hit its "roll-over point" soon and eyeballing says $700 on the S&P is possible. Traders that want to watch can use stops to stop out and hope to get back in when lower. What do the rest of people do? Wait for a bell to ring? Will they hear that bell ring if they are on vacation or have a family emergency? You saw how fast this move occured... Some go even faster. NO easy answer which is why stocks have traditionally paid a higher return.

-- posted by Kirk

Top 23. Oct 28, 2001 5:43 AM

» Rande - Re: Overvalued Market?

In response to message posted by David_Korn:

David,

It's interesting, but ultimately a waste of time as far as I'm concerned. Malkiel pretty much summed it up when he said that "Even the Almighty cannot determine a single correct value for the market as a whole." Not that it keeps us from trying.

If the market multiple is in the 95th percentile on an historical basis, then maybe we're just in one of those periodic low-inflation, low-interest rate environments right now. Maybe the high-rate, high-inflation environment of the 1970s-early 80s was the really abnormal period and it took the last decade and a half to work back towards where we are today. Whatever, the fact is that the 10-year rate is in the mid-4s, money market rates have never been lower, and the Fed Funds is near historical lows and likely headed further south. Commodity prices are at recent historic lows and inflation is not a problem for the time being. So, a P/E is the low/mid 20s is justified based on fundamentals. The big question is over earnings. But even a 4.5% 10-year rate and $50 earnings on the S&P translate into an S&P 500 of 1,111 and a DJIA of around 9,600-9,700. Right about where we are. If we get down to 4% on the 10-year, then $45 earnings gets to about the same place -- 1,125. Of course, there are areas of "the market" that are more overvalued than others. Take out a lot of the large-cap tech, for example, and "the market" P/E goes WAY down.

In the end, these valuation games serve only two purposes -- intellectual debate or devices upon which market timing gamblers might take action. I tend to agree with Malkiel and prefer to keep such things at the academic level. The thought of taking material action on such calculations is ludicrous. Much better to set the allocation appropriately and simply stay the course.

-- posted by Rande

http://www.nytimes.com/2001/10/28/busine...

Top 24. Oct 28, 2001 5:35 PM

» mdorsey - October 28, 2001

October 28, 2001

This Mr. Sunshine Sees More Rain
By ALEX BERENSON

DOUGLAS R. CLIGGOTT, the senior stock market strategist at J. P. Morgan Securities, is a born optimist.

(snip)

Unfortunately for investors, both commodity prices and business investment are still falling, and there is no sign that a turn is imminent. So Mr. Cliggott expects earnings to skid at least until the spring of 2002, and to recover only moderately for the remainder of that year.

He predicts earnings in the next 12 months will sink as low as $37 per share of the S.& P. 500, compared with a high of $55 a share in 2000. Using a price-to-earnings ratio of 22, which he considers fair, given the current long-term interest rate of 4.52 percent on 10-year Treasury notes, he calculates that the S.& P.'s fair value now is only about 800.

-- posted by mdorsey

Top 25. Oct 28, 2001 6:16 PM

» lcha - Value Line Bullish

Value Line Sees Value
Trusty asset-allocation monitor sends a strong buy signal for stocks

By Ingrid Eisenstadter

Value Line's buy signals are the highest they have been in more than three decades. But that piece of tantalizing news from the New York-based stock picker's asset-allocation monitor comes with a caveat: "Our Asset-Allocation Model is very bullish," wrote Value Line in a notice to subscribers on October 5. "However, there are
offsetting factors, including weak economies in much of the world, a decline in the high-tech sector both here and abroad, and a drop in consumer confidence … It is difficult to say when confidence will be restored."

Still, the company's buy signals for stocks are now higher than at any time since 1989, when it started publishing asset-allocation recommendations. Indeed, Value Line's reconstruction of the model going back to 1968 confirms that buy indications have never been higher.

Value Line's allocation calculations are based on 10 factors -- among them, interest rates, dividend yields, market highs and lows relative to current prices -- that when taken together aim to predict where the market will be in six months.

The asset-allocation formula historically has accounted for 52% of market fluctuation six months ahead, says Samuel Eisenstadt, Value Line's chairman of research, a statistician who has been making market projections since joining the company in 1946. (By then, Value Line's founder, Arnold Bernhard, had already had a major impact on market research.)

The other 48% can be accounted for by calling a top or bottom prematurely, or by anticipating a greater market increase or decline than what actually occurred.

Free reserves -- the amount of money the Federal Reserve lends to banks to meet their cash needs -- are also a consideration in the asset-allocation formula. They skyrocketed in the week after September 11 before returning to normal.

Thus, the down market, plunging interest rates, and the lingering effects of the skyrocketing liquidity have sent Value Line's readings soaring.

The company's allocator is based on a linear formula, which means it can go below zero, where theoretically an investor would be out of the market completely; and it can go over 100, with no upward limit. (Anything over 100 would indicate full investment in stocks.) After the towers were attacked, Value Line's model shot over 200 for the first time.

At present, the company is actually recommending up to 90% investment in stocks, compared with a historical average of 68%. Eisenstadt says he believes his allocator is more bullish than any of the major brokerages. In contrast, Abby Joseph Cohen at Goldman Sachs raised her allocation to 75% on Sept. 24, up from 70%; J.P. Morgan's Douglas Cliggott is sticking with a predisaster 60%; Merrill Lynch's Christine Callies is at 70%.

This week, Value Line is projecting a 36% increase in the S&P 500 over the next six months. Thus, by Value Line's lights, here is a theoretical buying opportunity that is rare.

So, why is this opportunity theoretical? One reason is that the Fed's aggressiveness in adding cash to the system was a one-time event resulting from the attacks on the World Trade Center and Pentagon. (As a result of free reserves returning to normal levels, Value Line's indicator pulled back to 176 Friday.)

Another consideration is that the allocation formula is purely mathematical, and does not reflect how fear of anthrax and other terrorist threats may move U.S. markets.

Nonetheless, a model that has a record of explaining 52% of future market fluctuations -- based only on currently known information -- provides statistically significant insight.

"Other asset allocators may include projections of earnings and interest rates," which Value Line does not, Eisenstadt says, "so their allocations can be no better than the predictions they are based on." So, this may be a good time to get back in the market, but only for the stout of heart: Eisenstadt confirms the obvious … that earnings are down substantially, the market is still not cheap, and many people are predicting worse to come. But I'm a numbers person," he says, "and I prefer the model to any personal judgements, including my own. We all get scared."

He adds: "Indeed, that's the reason for having a model in the first place -- to counteract our emotions." And, the asset-allocation model has been through prior wars and held up -- though Value Line's own chief executive officer, Jean Bernhard Buttner, cautions that those wars "weren't on U.S. soil."

What to buy?

Eisenstadt points to the sectors that normally perform well in an up market -- techs, blue chips, small caps, growth stocks -- and considers that defensive stocks like food, drugs and utilities may lag as they often do in up markets if his model readings prove true.

--------------------------------------------------------------------------------

The asset-allocation formula historically has accounted for 52% of market fluctuation six months ahead.

Six months isn't exactly long term info for the legions of long term investors(you know, the millions of investors who surged into the market back in 1990 smile ). I wonder what the 5 year record would be. None-the-less, this was one of the best counters to the spate of bearish arguements I've seen recently.

-- posted by lcha

Top 26. Oct 28, 2001 6:21 PM

» Rande - Re: October 28, 2001

In response to message posted by mdorsey:

Mr. Cliggott certainly is a voice of reason. Thank goodness for his timely observations:

1. "The biggest assumption we're making when assuming that the trend in the market is still up is that the recent heightened volatility in the market doesn't turn the investment community more cautious on equities," Mr. Cliggott said.

2. "The way we're seeing things is there isn't a heck of a lot of upside from here," Cliggott said.

3. "What's very clear in the composition of mutual fund flows is that investors have become more risk-averse," said Doug Cliggott, U.S. equity strategist at J.P. Morgan.

4. Douglas Cliggott of J.P. Morgan recently has turned more cautious on the market, recommending that clients move more money into bonds.

5. DOUGLAS CLIGGOTT: As we approach the third quarter reporting season we think we'll be in an environment where clearly the economy is weakening. And then when earnings expectations and
actually earnings reports come in weak, then there's some actual downside in the equity market.

6. DOUGLAS CLIGGOTT: You've got your best potential in long-term Treasury securities over the next 12 months. And that there's a higher degree of risk in the equity market now than there was say three or six months ago.

7. ''Going forward, we see the risk that growth will be weaker, not stronger, than expectations,'' Cliggott said.

8. Doug Cliggott, said that until recently, stock investors figured that rising corporate earnings would support stock prices and make up for the poor dividend yield. "We're starting to see a shift in perceptions where the big fear isn't a resurgence of inflation anymore, but rather that economic activity slows down and earnings don't turn out as expected," he said.

When did he make these "sophisticated" observations?

1. Decmber 23, 1997
2. May 16, 1997
3. April 23, 1997
4. February 27, 1997
5. August 8, 1996
6. May 9, 1996
7. November 27, 1994
8. November 23, 1994

etc....

Anyone else see a pattern. Like I said, I think I'll stick with Malkiel:

As I have often argued: Even the Almighty cannot determine a single correct value for the market as a whole. [Burton G. Malkiel in How Much Higher Can the Market Go from The Wall Street Journal (9/22/99)]

At the very least, if you HAVE to listen to somebody, better to pick someone who is optimistic and focuses on the long term. History and the market's long-term propensity to rise has a habit of making the doom-and-gloomers look foolish more often than not. The only thing that could make the chicken littles look good is a long-term future filled with dread and despair. It is the unique characteristic of Americans in particular that we instintively view the best as yet to come. Investing in that future has proven more than optimistic, it's been proven both prudent and wise.

-- posted by Rande

Top 27. Oct 28, 2001 8:52 PM

» Happy - Everyone is discussing value, how about discussing supply and de

Everyone is discussing value, how about discussing supply and demand.

1. Hundreds of billions of dollars are building up in Money Market funds. At the same time very little new stock is being issued.

2. How long will people, saving for their retirement, be satisfied with a return of 2% after inflation?

-- posted by Happy

Top 28. Oct 29, 2001 12:30 AM

» JenL_2 - Re: Value Line Bullish

In response to message posted by lcha:

Value Line's buy signals are the highest they have been in more than three decades.

<img src="/files/mysites/jen7/whatsnottolikeL.gif" width=400 height=333>
http://www.markpoyser.netfirms.com/

....Jen

-- posted by JenL_2

Top 29. Oct 29, 2001 5:48 AM

» Rande - Re: Everyone is discussing value, how about discussing supply an

In response to message posted by Happy:

Money market funds are close to 0% right now, on a real inflation-adjusted basis. Worse than that after tax.

-- posted by Rande

Top 30. Oct 29, 2001 6:09 AM

» mdorsey - Re: Re: Everyone is discussing value, how about discussing suppl

In response to message posted by Rande:

Returns are relative in my mind. 0% sounds a whole lot better than negative 10% or 20%. I think most people would agree.

HOW ABOUT THOSE CHICAGO BEARS. SURPRISED ME.

-- posted by mdorsey