Tuesday , 21 May 2024

2000 & 2007 All Over Again? Yes & Here’s Why

“Follow the munKNEE via twitter & Facebook or Register to receive our daily Intelligence Report (Recipients restricted to only 1,000 active subscribers)

It’s that time again.  The Dow surpassed its all-time high and the S&P 500 is not investingthat far from the tops of 1553 on March 24, 2000 and 1576 on October 9, 2007.  Just as in 2000 and 2007, the economic, valuation and political background does not support the budding euphoria. [Let us explain precisely why that is the case.] Words: 680

So says a commentary* by Comstock Funds (http://comstockfunds.com) originally entitled It’s 2000 & 2007 All Over Again

This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

The commentary goes on to say:

The economy has been limping along at about a 2% growth rate despite the near-zero percent Fed Funds yield and huge amounts of Fed bond purchases.  At the same time fiscal policy has become a significant headwind.

  • The agreement to avert the fiscal cliff could slice about 1% off GDP with the sequester reducing it by another 0.5%.  A 1.5% hit to a GDP that was only growing at about 2% leaves the economy on awfully thin ice, and very close to recession.
  • Consumers are still in the process of deleveraging their debt, and with wages climbing so slowly, are in no position to go on a spending spree anytime soon.
  • Businesses, sensing a lack of consumer demand, and worried about the dysfunction in Washington, are not likely to step up capital expenditures to any great degree.  Unlike the stock market, they are building up their cash in anticipation of the next crisis.

The market has climbed on the basis of an almost childlike faith in the Fed as well as record corporate profits.  As we have previously stated the Fed has not been successful in channeling money into the real economy.  Moreover, corporate earnings growth has come to halt and is threatening to turn down.  In fact, third quarter S&P 500 operating earnings declined from a year earlier, and fourth quarter reports seem to be falling short as well with the vast majority of companies having already reported.  Two quarters of declining year-to-year earnings growth has been seen only in recessionary environments. Earnings for the full year were up a miniscule 0.6% from 2011.

Although earnings estimates have been coming down analysts are still forecasting an increase of 14.7% for 2013 and another 12.8% for 2014. This outcome is highly unlikely, and will probably disappoint on the downside, particularly in view of the decline in fourth quarter productivity.  In April 2012 the consensus forecast for 2012 operating earnings was $104.89, and ended up at $96.99.  Even the prediction for 2013 has been reduced to $111.28 from $118.85.  If anything, the downward revisions appear to be accelerating.  Fourth quarter earnings turned out to be 13% lower than forecasts made as late as September. To make matters worse, profit margins are at historical peaks, and whenever this has happened margins have reverted to the mean.

Rosy forward-looking earnings forecasts that come crashing down are nothing new for the market.  These forecasts are almost always wrong, and most often on the high side.  In mid-2000 the forecast of forward operating earnings was $64 and eventually came in at $38. At year-end 2007 the consensus estimate for 2008 was $89 and remained there until the end of May.  Even at the end of October, only two months from year-end, the estimate was $72.  The actual number came in at $46 just a few months later. The estimate for 2009 was even more laughable at $110 in May 2008.  At year-end it was still $99, but eventually ended up at only $57.

Given all of the problems with using forward operating earnings as a measure of market valuation, it’s amazing that it continues in such widespread use.  Currently, a large number of analysts are using the 2013 operating earnings forecast of $113 in estimating the P/E ratio at 13.7, which they regard as reasonable or even slightly undervalued. History, however, indicates that such euphoric forecasts at turning points are often hugely overestimated.  When the actual earnings are reported it becomes apparent that the P/E ratio was far higher than it appeared at the time.

We also note that for the purposes of this comment we have gone along with the “Street’s” predominant use of operating earnings.  As long-time readers know, we prefer the use of trailing cyclically-smoothed reported (GAAP) earnings, which gives a truer picture of valuation.  On this basis the P/E ratio is about 19, which would be highly overvalued for any time before the series of bubbles that started in the late 1990s.

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://comstockfunds.com/default.aspx/act/newsletter.aspx/category/MarketCommentary/MenuGroup/Home/NewsLetterID/1707/startrow/1.htm (© 2013 Comstock Partners, Inc.. All rights reserved; Join our mailing list)


China Calling!

We can obtain distributors for your products there – we’re already doing it for others
Chinese market is 4x bigger than those of the U.S. and Canada combined!
MAJOR need for:
– pollution treatment/prevention equipment (water & air),
– disease detection/treatments (diabetes & cancers),
– green energy products (heating & power).
Visit Global Linkages and then contact us to discuss opportunities
We’re off to Beijing & Shanghai again this month
Contact us today

Related Articles:

1. S&P 500 Is Still Undervalued By 5.3% – Here’s Why


[In spite of the Dow now being at] a record high the Risk Premium Factor (RPF) Valuation Model shows that the broader market, based on S&P 500, is still undervalued by about 5%.  [Let me explain further.] Words: 550; Charts: 1

2. Will It Be Different This Time? Will the Dow and S&P 500 Go Up, UP and Awaaay?


Since the late 1800′s, the Dow has experienced three periods where it traded sideways, ranging from 13 to 17 years, [which always] resulted in upside breakouts . The S&P 500 finds itself within a few percentage points of where it was 13 years ago [so the question is “Has the time now come for the Dow and S&P 500 to once again go Up, UP and Awaaay?” Let’s take a look at some charts.] Words: 299; Charts: 2

3. Bull Market in Stocks Isn’t About to End Anytime Soon! Here’s Why

Investing financial markets

As we all know, money printing always leads to inflation. It’s just a matter of figuring out which assets get inflated. This time around gold is not the only beneficiary, stocks are, too, and I’m convinced that the chart below holds the key to the end of the bull market. Words: 475; Charts: 1

4. The Sports Illustrated Swimsuit Issue Indicator Suggests Another Year of Outperformance for the S&P 500

swimsuit 2013

The Swimsuit Issue Indicator says that U.S. equity markets perform better in years when an American appears on the cover of Sports Illustrated’s annual issue as opposed to years when a non-American appears on the cover. [What is the nationality of this year’s cover model? Can we expect returns above the norm or will we see a year of underperformance for the S&P 500 this year? Read on.] Words: 323 ; Table: 1

5. QE Could Drive S&P 500 UP 25% in 2013 & UP Another 28% in 2014 – Here’s Why


Ever since the Dow broke the 14,000 mark and the S&P broke the 1,500 mark, even in the face of a shrinking GDP print, a lot of investors and commentators have been anxious. Some are proclaiming a rocket ride to the moon as bond money now rotates into stocks….[while] others are ringing the warning bell that this may be the beginning of the end, and a correction is likely coming. I find it a bit surprising, however, that no one is talking of the single largest driver for stocks in the past 4 years – massive monetary base expansion by the Fed. (This article does just that and concludes that the S&P 500 could well see a year end number of 1872 (+25%) and, realistically, another 28% increase in 2014 to 2387 which would represent a 60% increase from today’s level.) Words: 600; Charts: 3

6. Investors, Get Fully Invested! S&P 500 On Verge of Entering Euphoria Stage of Cyclical Bull Market


[In spite of all that is seemingly wrong with the U.S. economy] I think we are on the verge of entering the euphoria stage of this cyclical bull market where traders become convinced that QE3 is a magic elexir with no unintended consequesnces. [As such,] I see a strong acceleration and a significant and sustained breakout above the S&P 500 September high of 1475. (Words: 264 + 3 charts)

7.  Start Investing In Equities – Your Future Self May Thank You. Here’s Why


8. These 4 Indicators Say “No Stock Market Correction Coming – Yet”

Investing financial markets

While I remain cautious on stocks and the risk trade, the technical picture shows that the uptrend to be intact and the bulls should still be given the benefit of the doubt for now. At this point, any call for a correction is at best conjecture [as evidenced by the following 4 indicators]. Words: 399; Charts: 4

9. Will It Be Different This Time? Will the Dow and S&P 500 Go Up, UP and Awaaay?


Since the late 1800′s, the Dow has experienced three periods where it traded sideways, ranging from 13 to 17 years, [which always] resulted in upside breakouts . The S&P 500 finds itself within a few percentage points of where it was 13 years ago [so the question is “Has the time now come for the Dow and S&P 500 to once again go Up, UP and Awaaay?” Let’s take a look at some charts.] Words: 299; Charts: 2

10. You Need to Stay in the Stock Market Despite an Impending Economic Collapse – Here’s Why

investing hold buy sell

You need to stay in markets despite an impending economic collapse. [Really?! Yes, really.] Normally such an expectation would be addressed by getting out of the way of the oncoming disaster and taking ones chips off the table [but,] in this situation, there is no place to hide. Low-risk assets, like bonds and near-cash, produce little to no return…and the threat of rising interest rates and inflation make them dangerous.  Higher risk assets are unavoidable, given current conditions. [Let me explain further.] Words: 830

11. You Can Insure Your Portfolio From Potential Capital Loss – Here’s How


Most everything you’ve heard about investing from the mainstream media, your mutual fund advisor and your tax accountant is a lie. You’ve been told…that the entire point of portfolio diversification is to mitigate downside risk yet when the market experiences the inevitable decline, every sector pushes significantly lower – and your “diversified” portfolio suffers as a result, [right? Well, there IS a better way.] Hear me out. Words: 895

12. The U.S. Stock Market Is Overvalued By More Than 50%! Here’s Why


Key stock indices are becoming significantly overpriced. The value of the U.S. stock market stands at about 133% of GDP. The average for the past 60 years has been around 82%. By this measure, the U.S. stock market is overvalued by more than 50%! Words: 398

13. Stop! Don’t Forget Market Risk – Remember What Happened in 2000 & 2007/8.


Investors are more bullish now than at any time since 2002 but the current rally has not been fueled by improved prospects of actual growth and wealth creation. Instead, it’s mostly due to:

  1. investors desperate for income denied them elsewhere by central bank policies;
  2. printed stimulus cash seeking a home and
  3. sheer technical momentum

but nowhere do they seem to be considering market risk – the risk that your investment will lose value because it gets dragged down in a falling market. Words: 615

14. Insider Trading Suggests That a Market Crash Is Coming


What you are about to read below is startling. Every time that the market has fallen in recent years, insiders have been able to get out ahead of time… [What] is so alarming [this time round is] that corporate insiders are selling nine times as many shares as they are buying right now. In addition, some extraordinarily large bets have just been made that will only pay off if the financial markets in the U.S. crash by the end of April. So what does all of this mean? [Could it be that they] have insider knowledge that a market crash is coming? Evaluate the evidence below and decide for yourself. Words: 570

15. This False Stock Market Bubble Will Burst, Major Banks Will Fail & the Financial System Will Implode! Here’s Why


At some point we are going to see another wave of panic hit the financial markets like we saw back in 2008.  The false stock market bubble will burst, major banks will fail and the financial system will implode.  It could unfold something like this: Words: 660

16. Ignore Wall Street Cheerleaders: Market Technicals, Fundamentals & Other Info Says Otherwise!


[In spite of what] the typical Wall Street cheerleaders, I mean strategists, are predicting, we see the equity market ever more closer to its cyclical top, miners about to retest a major bottom and hard assets with a new catalyst. [This article analyzes 9 pieces of information, complete with charts, that show what is actually going on in the marketplace at this point in time and what the short-term future holds.] Words: 930; Charts: 8

17. 5 Sound Reasons Investors Would Be Better Off On the Sidelines Than In the Market

Investing financial markets

New year festivities have continued on the stock market even as the Christmas trees have been put away. The “death of the fiscal cliff,” not horrible job numbers and supportive comments from Mario Draghi on the other side of the pond have led to bold and bullish behaviors over the last three weeks. While no one can predict the exact peak, here are five reasons you’re better off on the sidelines than in the market.

18. These Charts Suggest a Possible +/-60% Decline in the S&P 500 by 2014

Investing financial markets


20. Goldman Sachs’ Leading Indicators Signal Steep Market Crash Ahead