by ilene - September 8th, 2010 3:06 pm
Interesting article on P/E Expansion & Contraction by Barry Ritholtz. Notice in the chart below that P/E ratios now are about aveage – not at the depths seen in previous bear markets. Unless the historical norms are truly moving higher, this suggests there’s further downside in P/E ratios. – Ilene
By Barry Ritholtz at The Big Picture
Yesterday, Peter Boockvar referenced two WSJ articles on P/E: The Decline of the P/E Ratio and Is It Time to Scrap the Fusty Old P/E Ratio?
I believe these articles are asking the wrong question. Rather than wondering if the value of P/E ratio is fading, the better question is, “What does a falling P/E ratio mean?” The chart below will help answer that question.
We can define Bull and Bear markets over the past 100 years in terms of P/E expansion and contraction. I always show the chart below when I give speeches (from Crestmont Research, my annotations in blue) to emphasize the impact of crowd psychology on valautions.
Consider the message of this chart. It strongly suggests (at least to me) the following:
Bull markets are periods of P/E expansion. During Bulls, investors are willing to pay increasingly more for each dollar of earnings;
Bear markets are periods of P/E contraction. Investors demand more earnings for each dollar of share price they are willing to pay.
via www.ritholtz.com - click here to read more.
Source: Crestmont Research
Tags: contraction of P/E ratios, expansion of P/E ratio, investors, p/e ratios, psychology, stock markets
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by ilene - May 10th, 2010 2:25 pm
Jesse converses with his pit-dwelling friend and shares what he learned at the Cafe. – Ilene
Courtesy of JESSE’S CAFÉ AMÉRICAIN
"We have always known that heedless self-interest was bad morals; we know now that it is bad economics. Out of the collapse of a prosperity whose builders boasted their practicality has come the conviction that in the long run economic morality pays…
We are beginning to abandon our tolerance of the abuse of power by those who betray for profit the elementary decencies of life. In this process evil things formerly accepted will not be so easily condoned…"
Franklin D Roosevelt, Second Inaugural Address, January 1937
The hubris associated with the trading crowd is peaking, and heading for a fall that could be a terrific surprise. It seems to be reaching a peak, trading now in a kind of euphoria.
I had a conversation this morning with a trader that I have known from the 1990′s, which is a lifetime in this business. I have to admit that he is successful, moreso than any of the popular retail advisory services you might follow such as Elliott Wave, for example, which he views with contempt. He is a little bit of an insider, and knows the markets and what makes them tick.
He likes to pick my brain on some topics that he understands much less, such as the currency markets and monetary developments, and sometimes weaves them into his commentary, always without attribution. He has been a dollar bull forever, and his worst trading is in the metals. He likes to short gold and silver on principle, and always seems to lose because he rarely honors his first stop loss, which is a shocking lapse in trading discipline.
His tone was ebullient. The Street has won, it owns the markets. They can take it up, and take it down, and make money on both sides, any side, of any market move. I have to admit that in the last quarter his trading results are impeccable.
We diverged into the dollar, which he typically views as unbeatable, with the US dominating the international financial system forever. He likes to ask questions about formal economic terms and relationships, or monetary systems and policy. He
…
Tags: AIG, Bear Stearns, derivatives, Dollar, financial industry, Gold, Goldman Sachs, Greece, investigations, Lehman, SEC, stock markets, trading profits
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by Chart School - August 27th, 2009 4:45 pm
Courtesy of Binve at Market Thoughts and Analysis
I have written several posts the past several months talking about the long term. As most of these posts talked about problems in the economy, outlooks of future weakness, and the serious issues with our nation’s monetary policy, I have a decidedly bearish forecast on most asset classes for the next several years. And since many of these observations have taken place in a fairly spectacular bear market rally, I have been labeled a perma-bear and been somewhat ignored. No worries, that is not new territory for me 
But as we start closing in on the end of the bear market rally (Primary Wave 2), I want to rehash some of these issues. Undoubtedly I will be labeled by even more people as a perma-bear, because every government economist is declaring "end of the recession" and analysts are all declaring "new bull market".
But I assure you I am not, in fact I would rather be long. I went long big time at 700 on the SPX. I did cash out of them far too early, and went short far too early, but that is because when I look at the economy I do not see strength. Not now, and certainly not for the future. I try to be honest with myself with my analysis, both fundamentally and technically. I am not a bear for the sake of being a bear. I try to be as realistic as I can be. Sometimes that means I get things wrong (and yes, being too early is wrong in my book), and that’s fine. Just part of the game. But these are my honest opinions.
Fundamentals
There are still so many long term issues that have not been dealt with. The economy is still structurally the same (70% consumer spending) and besides a lot of optimistic rhetoric, none of the problems that got us into this mess have been fixed. There have been a lot of band-aids applied. And even to an open festering wound a band-aid will apply some "relative" amount of relief (vs. doing nothing) in the *very short term*. But if you have a severed carotid artery and you put on a band-aid, it will soak up excess blood for a couple of seconds, before that band-aid…
Tags: bearish, consumer spending, earnings, Economy, fundamentals, Gold, Oil, secular bear market, SPX, stock markets, valuation
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by ilene - May 14th, 2009 11:19 am
As we’ve discussed previously (e.g., Global Unrest Continues to Grow, Hyperinflation First, Then Global War), socionomics is premised on the theory that "social mood drives financial, macroeconomic and political behavior, in contrast to the conventional notion that such events drive social mood." Here is an interesting article on socionomics which focuses on social mood and its relationship to disease. – Ilene
Social Mood, Stocks and Epidemics
The lead article in the first issue of
The Socionomist is beyond timely.
A Socionomic View of Epidemic Disease: A Looming Season of Susceptibility is Part One of an exploration of the mechanisms by which social mood affects our psychology, physiology and susceptibility to epidemic disease. It has been in the works for months. Part Two will publish in June.
_______
Social Mood, Stocks and Epidemics
by Alan Hall
Social mood governs a plethora of human social activities, from stock markets to the economy to societal health. For example: as measured by the stock market, we recently completed a large wave in a powerfully-negative social-mood trend. It bottomed amid extremely pessimistic sentiment. Social stress reached higher levels than it has in decades. Soon after, H1N1 swine flu erupted and came right to the edge of being a pandemic. If this was the only such instance of disease breaking out after a social-mood decline, it might be coincidence, but there are numerous examples in the historical record.
As you can see in the chart of the MSCI World Stock Index below, there are similarities between the 2003 SARS epidemic and today’s flu outbreak.
This chart is not in Part One of
A Socionomic View of Epidemic Disease in the brand-new inaugural issue of
The Socionomist. We didn’t need it. We have five other charts that show the strong connection between negative social mood and increased human susceptibility to epidemics.
SARS and swine flu occur at similar positions in the pattern of the MSCI World Stock Index: soon after a strong
…
Tags: disease, elliott wave, robert pretcher, sars, social mood, societal health, socionomics, stock markets, swine flu
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.
