The Stock Market: We Picked the Wrong Week to Give Up Sniffing Glue

There are now some impressing bargains out there...

What was the S&P in December 1996 when Alan Greenspan gave his "irrational exuberance" speech anyway?

Comments

[CSTAR]

Time to take out the red banners!

[Jrossi]

Using Shiller's data from 8-08 (last available) I figure and P/E10 of about 12.3 on the S&P 500, assuming S&P= 750 and assuming the ten-year dividend stream hasn't changed much since August. This works out to a long-term real return of about 8%, assuming no change in the long-term P/E. As Prof. DeLong wrote, impressive bargains out there. Hell, the whole stock market might be one big impressive bargain.

[Leila Abu-Saba]

So our practice of failing to do anything about the allocations in hubby's 401(k) is probably working for us right now, 'cause we're still buying stock, every two weeks. Dollar-cost averaging, right?

[Doctor Jay]

Yeah, I was just noticing that GE has a P/E of about 6 and Philip Morris 11. Apple is 16 and Google is 18.

[The Raven]

On December 5, 1996, the S&P 500 closed at 745.10. Caw!

[RC]

Doctor Jay,

Look beyond the P/E on GE and you'll see a different story. The balance sheet shows only $13billion in tangible assets and about $98billion in Goodwill+intangibles. Guess what happens to the shareholder equity if any of this Goodwill becomes impaired?

http://finance.yahoo.com/q/bs?s=GE

Notice also that GE's tangible assets have decline almost $5billion in the last year!

[Robert Waldmann]

Yes the Dow has breached the 800 barrier. Do you therefore predict that it will rise or fall below 1,250 ? Or are you, perhaps, not really converted to chartism after all ?

The graph does suggest a new nickname for the naughties, that is, this decade. I don't think it can beat Krugman's "The Onion Years" that is the years when "The Onion" made better predictions than serious newspapers, but please don't Lynch me if I call it the Twin Peaks decade.

[Robert Waldmann]

I meant the 8,000 barrier. Sorry was confused about both the series and a factor of ten. This, in turn, shows that I don't really believe in the equity premium (I've been out of stocks since 1960).

Pretty impressive bouncing 800 and 1,600 barriers you got there. I *know* that no one is enough of a chartist to predict that it will bounce as it did in 02.

[Jrossi]

Leila, The "fair value" price of the stock market is not a natural constant but instead emerges from the individual behavior of its participants. So of course fair value can change over time. That being said, Shiller has shown that, at least since 1871 when his data set starts, the less you pay for a chunk of the S&P 500, the better your long-term return. The same pattern has been seen in many other countries that did not undergo severe political dislocation (ie revolution).So is it a good time to purchase a diversified bundle of stocks? If you have a long-term horizon and a tolerance for risk, I would have to say yes.

[MattYoung]

Investors might be waiting indications of government direction. I cannot see the new government becoming stabilized for another eight months, a long time for the market to languish.

But, if the market expects a breakthrough on pension reform, then the market would consider it worthwhile to wait.

[bigTom]

Great bargains, if (and unfortunately only if) earnings hold up reasonably well. With economists being surprised on the downside with every additional piece of bad news, I am not so sure that future earnings will be there. Stock prices ought to be based upon the discounted stream of expected future earnings. If the economy is so bad, that that future earning stream is seriously under question, they could be overpriced.

[Graydon]

Stock markets come after a reliable money supply; you have to have a stable medium of exchange to price things with.

With a fiat currency, banks create money when they put loans on the books and count the value of the loan as an asset.

Regulation of the financial sector is there to make sure they do this when there's a real expectation of future value; the central bank is there to make sure they play fair with each other. And normally it's a powerful tool for growth; good ideas get funding much faster.

The entire US banking system has had an increasing dissolution of regulation since Regan's presidency; it seems to have elected to abuse fractional reserve banking to invent profits more or less to the fullest extent it could under the reduced-or-absent regulation. That means some unknown but non-trivial fraction of the US dollar money supply is, for practical purposes, counterfeit.

No one knows how large a portion; no one knows how, or if, this will be fixed. There are enough dollar-denominated assets everywhere else that the global pricing structure is broken. (Hence the upsurge in government-to-government barter of bulk commodities; rice for oil, etc.)

Until that gets fixed, stock prices will continue to fall because there is no way to increase them in an environment where the pricing structure's broken; the price of everything depends on the prices of other things, and some of those prices are nonsensical, and no one has anything like a complete list of what's sane and what's crazy. (And given how money is fungible and how value is traded, the crazy is likely in absolutely everything.)

I have absolutely no idea how quickly it's physically possible to replace the pricing structure; I am quite sure it's going to be a lot slower than everyone would like.

[Jonathan King]

As far as there being bargains out there goes...what is the dividend rate up to on the S&P500? Last I looked it was still 1.6% or so. Call me old-fashioned, but I still think the underlying value of a stock is connected to the present value of its future dividend stream, and the growth rate of dividends overall in the S&P500 has not been so large that one can overlook the pretty poor yield.

One other point about bargains: Citi's dividend rate right now is 13%! Total bargain!! Not.