Large Caps Could Lead the Market Much Higher

A few weeks ago, I was participating in a research meeting with one of my clients. The most bullish client in the bunch, who has been that way since May, was trying to make the case that stocks are attractive. While they typically focus on small companies, we were going through big stocks, one at a time. Sure enough, every time we looked at one, it seemed pretty attractive on a PE basis compared to its history. More recently, we were focused on stocks near their all-time highs, some of which happened to also make the list in the prior discussion. As one who has been reluctant to embrace this rally as sustainable, I can't deny what is plain and clear: Big stocks are potentially cheap and technically capable of extending their rallies.

I continue to think that the economy will be challenged for quite some time and that the earnings estimates out there are too optimistic. But what if I am wrong? If rates stay low and earnings recover, what is the upside? What follows is a simple excercise. I took the largest 20 stocks in the S&P 500. Here they are ranked in descending market cap (click to enlarge):

The combined market cap of the top 4% of the index represents about 1/3 of the total market cap of the index. As you can see, the typical forward PE is 15X, though the median for the past decade has been closer to 19. Furthermore, if one looks out two years, the current median PE is about 12 (as earnings are projected to rise substantially in the following year).

In the table below (click to enlarge), I projected the total return for each stock by assuming that a year from now it trades at its 10yr median PE and earns its current dividend. I then added up the total returns by their contributions and, as you can see below, got an astounding one-year return of 53%:

Again, while this is not my prediction, I do accept that PE ratios should be high when rates are low and when earnings are closer to trough than peak. So, if companies hit the projected earnings and multiples rally to median levels, just these 20 stocks could propel the market higher by almost 18% (33% of the market up 53%). I don't believe that smaller stocks wouldn't rally as well - the same dynamics are at work, though perhaps to a lesser extent.

So, absent higher interest rates and/or companies failing to meet projections over the next two years, a reversion to the mean would fuel a massive rally. I have not embraced this potential, but my eyes are certainly open to it. The market made two horrible mistakes earlier this year: Overestimating earnings declines and placing low multiples on trough earnings. Surely we could be overestimating the recovery now, but the multiples are certainly not extreme in the other direction. I found it helpful to look at these stocks one by one. If you click the link below, you can go through the 10 largest stocks and see what the PE history and price history look like. I have included the targets that are derived from the exercise of reversion to the median.

Download Top 10 S&P 500 Stocks

While some stocks don't seem likely to perform as well as the exercise might suggest, others appear capable of doing even better. If the worst is behind us and better times ahead, stocks could have an even better year in 2010 than they have in 2009.

Disclosure: Long JNJ and CVX in a model portfolio

Comments

[j-dub:]

"I continue to think that the economy will be challenged for quite some time and that the earnings estimates out there are too optimistic. But what if I am wrong?"

In actuality, you are not really doubting yourself, are you Mr. Brochstein?
You don't think, you know that this is the case. Reality , logic and reason force that economic case upon us as a country.
So what you are really thinking in your heart of hearts is:
"Can the market can continue to disconnect itself from reality or will reality catch up to it?"
You assume that reality must take hold, as it always eventually does. But maybe, JUST MAYBE, you think, "this time is different."

I have bet very heavilly this past week that it's not. No responsible money manager should seek out new models proving that it is.

Oct 18 03:13 AM

[Dave Wrixon:]

Unless of course it is to drive his own commission fees!


On Oct 18 03:13 AM j-dub wrote:

> "I continue to think that the economy will be challenged for quite
> some time and that the earnings estimates out there are too optimistic.
> But what if I am wrong?"
>
> In actuality, you are not really doubting yourself, are you Mr. Brochstein?
>
> You don't think, you know that this is the case. Reality , logic
> and reason force that economic case upon us as a country.
> So what you are really thinking in your heart of hearts is:
> "Can the market can continue to disconnect itself from reality or
> will reality catch up to it?"
> You assume that reality must take hold, as it always eventually does.
> But maybe, JUST MAYBE, you think, "this time is different."
>
> I have bet very heavilly this past week that it's not. No responsible
> money manager should seek out new models proving that it is.

Oct 18 04:01 AM

[User 501463:]

While I agree that the market will rise short term, possibly as high as 11,200, the long term affects after that level is reached are very ugly. I have written may reports on this point on my site explaining what is coming.

For those interested in learning the truth about the future of both the DJIA and GE check it out. There is to much information to place on this small space.

Richard W. Wendling

Oct 18 04:23 AM

[Alan Brochs...:]

As I said, I am not convinced that the possibility to which I allude is a probability, but I will say that after 31 years of following the economy and stocks, I have learned that having a handle on the economy (or thinking one does) doesn't make predicting the direction of stocks as easy as one might hope. It's always a question of "what's priced in".

I became bearish on the economy in the summer of 2007, so I wasn't late to the game. I had an "aha" moment rather late last year (around Thanksgiving) that "this time is different". I still cling to that notion - that the economic recovery is doomed because "we went over a cliff".

Here we are almost a year later, and things are much better than most of us, including me, might have imagined at the time. Of course, the intervention and support of the government has had a massive role and has tainted the recovery, but, nonetheless, even crappy companies are refinancing their debt. Heck, we even have IPOs and M&A again.

Mr. Wendling, who started his bearish website in 2007 rather than 2009, could be correct generally (a big rally followed by a worse bear market move). I guess that is what I fear not expect. It is certainly not consensus, even among the bulls. As long as rates remain low, liquidity high and the animal spirits alive, there is a risk that the scenario I described plays out.

It is not clear to me that this is sustainable, or I would act accordingly. So, this article is truly an exercise in "what if". Dave Wrixon, nice try, but I don't earn "commissions", so that's clearly not my motivation either. I hope that my additional comments reinforce the point I was trying to make - this is not my expectation yet but rather a scenario that could play out and for which I will look for signs (does IBM break to an all-time high, for instance).


On Oct 18 03:13 AM j-dub wrote:

> "I continue to think that the economy will be challenged for quite
> some time and that the earnings estimates out there are too optimistic.
> But what if I am wrong?"
>
> In actuality, you are not really doubting yourself, are you Mr. Brochstein?
>
> You don't think, you know that this is the case. Reality , logic
> and reason force that economic case upon us as a country.
> So what you are really thinking in your heart of hearts is:
> "Can the market can continue to disconnect itself from reality or
> will reality catch up to it?"
> You assume that reality must take hold, as it always eventually does.
> But maybe, JUST MAYBE, you think, "this time is different."
>
> I have bet very heavilly this past week that it's not. No responsible
> money manager should seek out new models proving that it is.

Oct 18 08:22 AM

[Tom Armistead:]

Based on the line of thinking you have applied to the 20 largest S&P stocks, I am long three of them - JNJ, XOM and PG. While mean reversion based on historical averages can't be used in all cases, it tends to be more appropriate with lagre cap/strong brand type companies and very possibly that is where the easy money can be made over the next few years, almost a no-brainer.

A paradigm shift can be a very powerful phenomenon in the investment field: if you catch one you score big, if you miss one you will be severely punished. So it is important to be aware of the possibility.

But paradigm shifts are rare and to call one on the US economy is a big decision. Noting that GDP is now growing slowly, and that corporate profits as a % of GDP is lower than it has been for some time, and also growing, the path of least resistance is to project that somewhere between 3 and 5 years out things will be back the way they were. That will give you 8% a year from where things are now, like clockwork, just like the good old days. If you miss that one you will need to make a mid-life career change.

Oct 18 08:52 AM

[CaptainJJack:]

We have had a HUGE run-up of P/E multiples since March. In fact, I could argue that the ONLY thing that has really changed since March are the P/E multiples.

Anybody who has been in this market over the last year knows how notoriously bad the forward earnings numbers are -- just take a look at forward estimates at the start of this year for THIS year.

While there is a lot of manufacturing leverage now that companies have cut so much payroll, the current fixed infrastructure is currently being supported by large government (both US and Abroad) stimulus.

The key question is: What happens when the stimulus is withdrawn?

The key metric is the top line, not the bottom line: Those forward earnings are only as good as the sales projections.

As an aside, there has been a significant tax cut which, if I remember the numbers right, amounted to 2/3 of the tax stimulus proposed by some Republicans ( there never was a unified Republican stimulus alternative, but the number $400 billion was often used as the tax cut required --- and the only stimulus needed).

We should have seen the top line numbers rising by now if the tax cuts were as powerful as they were being promoted, and I for one, do not see it.

As far as I can see, the $250 Billion tax cuts have had almost zero effect, and this is similar to the tax rebates of last year--coming into effect in at the end of the 2nd quarter, after the recession was 2 quarters old, and just before the economy tanked.

Oct 18 09:11 AM

[j-dub:]

Appreciate the timely reply.
See, this is the effect that the gunning of the stock market is trying to produce. Money managers wondering if they are mising an economic expansion (perpetually, always a quarter or two away)about to occur (even if the math says it can not). Thus producing the snowball effect of moving the markets even higher .

I wish you luck and, yes, large caps with world-wide exposure certtainly might producce the highest returns in the next five years.


On Oct 18 08:22 AM Alan Brochstein wrote:

> As I said, I am not convinced that the possibility to which I allude
> is a probability, but I will say that after 31 years of following
> the economy and stocks, I have learned that having a handle on the
> economy (or thinking one does) doesn't make predicting the direction
> of stocks as easy as one might hope. It's always a question of "what's
> priced in".
>
> I became bearish on the economy in the summer of 2007, so I wasn't
> late to the game. I had an "aha" moment rather late last year (around
> Thanksgiving) that "this time is different". I still cling to that
> notion - that the economic recovery is doomed because "we went over
> a cliff".
>
> Here we are almost a year later, and things are much better than
> most of us, including me, might have imagined at the time. Of course,
> the intervention and support of the government has had a massive
> role and has tainted the recovery, but, nonetheless, even crappy
> companies are refinancing their debt. Heck, we even have IPOs and
> M&A again.
>
> Mr. Wendling, who started his bearish website in 2007 rather than
> 2009, could be correct generally (a big rally followed by a worse
> bear market move). I guess that is what I fear not expect. It is
> certainly not consensus, even among the bulls. As long as rates remain
> low, liquidity high and the animal spirits alive, there is a risk
> that the scenario I described plays out.
>
> It is not clear to me that this is sustainable, or I would act accordingly.
> So, this article is truly an exercise in "what if". Dave Wrixon,
> nice try, but I don't earn "commissions", so that's clearly not my
> motivation either. I hope that my additional comments reinforce the
> point I was trying to make - this is not my expectation yet but rather
> a scenario that could play out and for which I will look for signs
> (does IBM break to an all-time high, for instance).

Oct 18 09:39 AM

[Ricard:]

Great article.

"As long as rates remain low, liquidity high and the animal spirits alive, there is a risk that the scenario I described plays out. "

This is the same conclusion I've reached in the past several months. Our economy is centrally planned by the Fed, and as long as 'god' is good, then greed will reign.

I also agree with your assessment that (attractively priced) small caps may have quite a ways to go as well. Along that vein, I've taken a large position in ETFC - I find it to be one of the last opportunities left to profit off the fallacious 'doomsday scenario' from Oct 08. At first I thought it to be highly speculative, but upon finishing my DD, it looks more and more attractive as a solid value play. I'll post something up early next week.

Oct 18 09:49 AM

[Alan Brochs...:]

Hey, it's blatant manipulation, but here's a fact. If the economy goes south again, many of the companies that we thought might disappear due to poor liquidity (too much debt due too soon) won't struggle as much. Many have reset their capital structure. Now this doesn't mean that their prices won't drift slowly towards zero as the economy remains Japan-like for years to come, if that is the case, but there won't likely be the panic such as we experienced in the earlier part of this year.


On Oct 18 09:39 AM j-dub wrote:

> Appreciate the timely reply.
> See, this is the effect that the gunning of the stock market is trying
> to produce. Money managers wondering if they are mising an economic
> expansion (perpetually, always a quarter or two away)about to occur
> (even if the math says it can not). Thus producing the snowball effect
> of moving the markets even higher .
>
> I wish you luck and, yes, large caps with world-wide exposure certtainly
> might producce the highest returns in the next five years.

Oct 18 09:52 AM

[Alan Brochs...:]

I don't totally agree with your point. Yes, PE's have run up from extremely low levels, but it this surprising? Usually PE's do rise when earnings are depressed. Plus, they are linked to interest rates, and corporate bonds have come down in yield this year. I believe, though, that an honest assessment of earnings is that they have been much better than we would have expected. Kudos to companies for taking so much cost out so quickly. Surely, some of this is just slashing headcount, an action that may be expedient in the short-run but likely to poise longer term challenges to economic recover. But part is related to operating smarter. I spend most of my professional time studying smaller companies, and improvements in business processes are certainly helping the cost structure.

To argue your point more specifically, though, Captain JJack, let's look at just the top 10 companies:

XOM = score a big one for you -- 6.41 at year-end to 3.87
MSFT = ditto -- 2.23 to 1.67
WMT = nada - 3.71 to 3.58, but UP from 3.53 at the end of March
JPM = 2.55 to 2.14, but up from 1.63 at the end of March (and from 1.41 bottom)
GOOG = UP 21.74 to 21.93
GE = 1.45 to 0.98
AAPL = UP BIG 5.16 to 5.89
PG = 4.20 to 3.72
JNJ = 4.66 to 4.57, but up since March's 4.49
IBM = UP 9.07 to 9.79

So, while some estimates for this year are clearly a lot worse, several are up and some are unchanged. Perhaps more importantly, the direction of the estimates is now up. So, I believe that there was too much pessimism in March regarding future earnings and that PE ratios were absurdly low.

This tells nothing of the future, but it does help explain the rally. It's not just PE expansion, and PE ratios haven't moved to "absurdly high" levels as many claim.


On Oct 18 09:11 AM CaptainJJack wrote:

> We have had a HUGE run-up of P/E multiples since March. In fact,
> I could argue that the ONLY thing that has really changed since March
> are the P/E multiples.
>
> Anybody who has been in this market over the last year knows how
> notoriously bad the forward earnings numbers are -- just take a look
> at forward estimates at the start of this year for THIS year.
>
> While there is a lot of manufacturing leverage now that companies
> have cut so much payroll, the current fixed infrastructure is currently
> being supported by large government (both US and Abroad) stimulus.
>
>
> The key question is: What happens when the stimulus is withdrawn?
>
>
> The key metric is the top line, not the bottom line: Those forward
> earnings are only as good as the sales projections.
>
> As an aside, there has been a significant tax cut which, if I remember
> the numbers right, amounted to 2/3 of the tax stimulus proposed by
> some Republicans ( there never was a unified Republican stimulus
> alternative, but the number $400 billion was often used as the tax
> cut required --- and the only stimulus needed).
>
> We should have seen the top line numbers rising by now if the tax
> cuts were as powerful as they were being promoted, and I for one,
> do not see it.
>
> As far as I can see, the $250 Billion tax cuts have had almost zero
> effect, and this is similar to the tax rebates of last year--coming
> into effect in at the end of the 2nd quarter, after the recession
> was 2 quarters old, and just before the economy tanked.

Oct 18 10:05 AM

[ArtfulDodger:]

Dear AB, a good, well-written and thinking article.
Thank you for it.

Since we last communicated I've bought only one US stock, NE, and that's because it finally got so out-of-favor cheap that I thought about the only other thing they could do is give it away; and I knew that wasn't going to happen.

I'm still long my China and Brazil stocks and plan on remaining so until there is either serious monetary or fiscal policy change.

I still don't like US stocks, as a rule, because I fear this Ad. and Congress. Every day they float a new anti-business tax or piece of legislation, and sooner or later they're going to start passing them. Why fight these anti-business creeps?

Liquidity driven or not, these people could derail any sector at any time with their leftist policies. Don't you think?

I have an article on the Instablog comparing China and the US. I would appreciate your reading it and making a comment, if you have time.

Regarding the comments, I can only say I hope things are as simple and easy as Tom Armistead seems to think they're going to be.

Thanks again for your work. I'm going to look over the large caps you mentioned.

Oct 18 11:14 AM

[240:]

The money sitting on the sidelines waiting to get in is going to come back into these large caps..hang on to your hats folks its going to be a wild ride...

Oct 18 12:42 PM

[richjoy403:]

I think (almost) all of us can agree it will be a wild ride.

What a disappointment here at SA...one would think only 1% of all U.S. investors were even neutral on the stock market. Bearish readers have taken hold of the comment section and it has a 'chilling effect' on the discourse (mostly it seems to be one bear trying to out-bear another).

We all know the economy (and thus the stock and bond markets) are cyclical, with peaks and valleys about every 4-5 years), and it has been so in all my 35 years of investing.

Does anyone really doubt that the preponderance of evidence says we have seen the low for the cycle and the economy is expanding again (4% to 5% GDP growth in this qtr.)?

I don't know how long the present bull run will last (but I do know stocks won't go straight up without a correction of some sort). Unlike the bears, I have known for most of the 50%+ upward trend in the stock market that this is the time to be invested in stocks to the extent of my normal 60% stock allocation. I presently trust a diversified portfolio, but I especially like commodity stocks and emerging markets for a little extra return. (I also keep stop-loss orders at around 8% to protect my profits.)

OTOH, when the bears finally become convinced the positives outweigh the negatives and they buy stocks, the economic cycle will likely have approached its peak (ala 1987 and 2001) and the stock market will surely fall (hopefully the next time for the usual reasons--an overheated economy).

p.s. It is interesting to note that the S&P seems unable to correct more than 4% from any high because so much (formerly) bearish money keeps moving into stocks on the dips...as Bob Pisanti said on CNBC recently, it is amazing that so many of the persons who state bearish views are in fact long on stocks!

Oct 18 03:13 PM

[TLassen:]

j-dub
Think the author is expressing a very responsible view. Money managers and investors need to learn to think in terms of probabilities. Learned a long time ago, the market does what the market does. Don't fight the market, but make your investments and trade decisions with 'what-if' scenarios in mind.
Thanks for good article AB. In agreement with you that low rates mean higher PE levels.


On Oct 18 03:13 AM j-dub wrote:

> "I continue to think that the economy will be challenged for quite
> some time and that the earnings estimates out there are too optimistic.
> But what if I am wrong?"
>
> In actuality, you are not really doubting yourself, are you Mr. Brochstein?
>
> You don't think, you know that this is the case. Reality , logic
> and reason force that economic case upon us as a country.
> So what you are really thinking in your heart of hearts is:
> "Can the market can continue to disconnect itself from reality or
> will reality catch up to it?"
> You assume that reality must take hold, as it always eventually does.
> But maybe, JUST MAYBE, you think, "this time is different."
>
> I have bet very heavilly this past week that it's not. No responsible
> money manager should seek out new models proving that it is.

Oct 18 04:36 PM

[j-dub:]

He is.
However, I am not going after him because he is talking fundamentals-pe's.
That's great and that is exactly who bizarro world is going after=SOMEONE WHO THINKS IN REAL WORLD TERMS.
If bizarro world can recruit enough that initially believe the market run is a hoax, the bizarro world takes over real world and real world becomes bizarro world.
Anyone who thinks in realistic terms should thinks thrice before drinking the kool-aid and that is the opinion I am offering.


On Oct 18 04:36 PM TLassen wrote:

> j-dub
> Think the author is expressing a very responsible view. Money managers
> and investors need to learn to think in terms of probabilities. Learned
> a long time ago, the market does what the market does. Don't fight
> the market, but make your investments and trade decisions with 'what-if'
> scenarios in mind.
> Thanks for good article AB. In agreement with you that low rates
> mean higher PE levels.

Oct 18 04:56 PM

[TLassen:]

j-dub.
Do you agree with the following statement: The market cycle moves ahead of the economic/business cycle. Yes or no? If yes, then there is nothing wrong with this disconnect you see between the market direction compared to the relative doom and gloom you are surrounded by.

My point was, responsible advisors should ensure to advise their clients to keep risk vs reward in mind, therefore the need to think in terms of what-if's

I may agree with you that there are serious economic and political problems in your country (I'm Canadian) but I will never bet against the US. You will get through this tough period.

pur some rye in that cool-aid and u will be just fine, eh? LOL


On Oct 18 04:56 PM j-dub wrote:

> He is.
> However, I am not going after him because he is talking fundamentals-pe's.
>
> That's great and that is exactly who bizarro world is going after=SOMEONE
> WHO THINKS IN REAL WORLD TERMS.
> If bizarro world can recruit enough that initially believe the market
> run is a hoax, the bizarro world takes over real world and real world
> becomes bizarro world.
> Anyone who thinks in realistic terms should thinks thrice before
> drinking the kool-aid and that is the opinion I am offering.

Oct 18 05:14 PM

[User311247:]

you are spot on. While people rant about the 50% plus rally they seem to forget that when a stock,or market goes down 50% it has to go up 100% to get back to where it was. Further, take out the absolute panic selling from Lehman and the real bottom would be in the neighborhood of 8000 on the Dow, hence the real rally has been quite mild, more like 25 to 30%
Good piece, makes sense to me. I'll stay invested

Oct 18 05:23 PM

[Charlie J:]

Yes, I doubt that GDP is expanding 4% to 5%. I own a small e-commerce business, one that is nationally known in its niche space. Sales are still way down, with no improvement yet. We have continued to deplete our inventory as much as possible, and thus have not been ordering much, which is what many retailers are doing.

I'll let you know when business picks back up, but it surely isn't happening yet.


On Oct 18 03:13 PM richjoy403 wrote:
> Does anyone really doubt that the preponderance of evidence says
> we have seen the low for the cycle and the economy is expanding again
> (4% to 5% GDP growth in this qtr.)?

Oct 18 09:43 PM

[dingding:]

Everything you say is based on the fallacious assumption that within the next couple of years things will revert to the mean. Ask yourself if unemployment, US national debt, and the USD will do so in that time span.

Oct 19 12:07 AM

[BPYHO:]

Big mistake buddy, take it from someone who has lost 35% of his portfolio value since may by betting heavily against this BS rally, IT IS A MISTAKE. DO NOT FIGHT THE TAPE! If you dont want to make money of this ride then just sit it out, but I wouldnt bet against the market until we have some sense of its direction....


On Oct 18 03:13 AM j-dub wrote:

> "I continue to think that the economy will be challenged for quite
> some time and that the earnings estimates out there are too optimistic.
> But what if I am wrong?"
>
> In actuality, you are not really doubting yourself, are you Mr. Brochstein?
>
> You don't think, you know that this is the case. Reality , logic
> and reason force that economic case upon us as a country.
> So what you are really thinking in your heart of hearts is:
> "Can the market can continue to disconnect itself from reality or
> will reality catch up to it?"
> You assume that reality must take hold, as it always eventually does.
> But maybe, JUST MAYBE, you think, "this time is different."
>
> I have bet very heavilly this past week that it's not. No responsible
> money manager should seek out new models proving that it is.

Oct 19 12:10 AM

[untrusting ...:]

Charlie,
Thanks for posting the update and your actual declining sales experience. Mirrors our experiences and what our contacts say as well. If there is supposedly a GDP expanding at 4-5% somwhere in the US, we certainly see no evidence of it nor do we know anyone that sees it. Maybe Washingon, DC, some politicans, some lobbyists, GS and JPM are seeing some increases, but we sure don't see it at any local or state levels here.

Further the declines in tax revenues collected at either the payroll tax or sales tax level are getting worse not better. So there is no evidence of increasing GDP in the real world that we can see. In our state they are now planning the 2nd round of library, swimming pool, and other city and state cutbacks. They simply don't have the tax revenues to support it. Further education cutbacks are in the works. Police agreed to salary increase deferrals to avoid layoffs. DMV is increasing furlogh days to save even more payroll costs.

Guess we are just wondering when this phantom 4-5% GDP increase is going to show up anywhere except DC and Wall Street.


On Oct 18 09:43 PM Charlie J wrote:

> Yes, I doubt that GDP is expanding 4% to 5%. I own a small e-commerce
> business, one that is nationally known in its niche space. Sales
> are still way down, with no improvement yet. We have continued to
> deplete our inventory as much as possible, and thus have not been
> ordering much, which is what many retailers are doing.
>
> I'll let you know when business picks back up, but it surely isn't
> happening yet.

Oct 19 03:31 AM

[tidy bownl man:]

the last few years economic activity has been misdirected into the real estate sector. Due to this there is pent up demand in many other areas. Demand is the fuel of growth.

Oct 19 01:32 PM

[Bjarne Jensen:]

Do I recall correctly that increases/decreases in the stock market is a component of GDP? Does the market run up explain positive GDP? Does anyone know the answer?

Oct 19 06:06 PM

[Alan Brochs...:]

No, perhaps you are getting confused with the Index of Leading Indicators. GDP is the sum of production and has nothing to do with asset values.


On Oct 19 06:06 PM Bjarne Jensen wrote:

> Do I recall correctly that increases/decreases in the stock market
> is a component of GDP? Does the market run up explain positive GDP?
> Does anyone know the answer?

Oct 19 07:12 PM

[mbr:]

The weak link in this demonstration : "the typical forward PE is 15X". Forward PE is based on projections and we know how wrong these can be. Show the trailing PE and we will see. Actually it is close to 20 vs. a 15 historical average. The wall street bandwagon uses whatever it can.

Oct 20 03:21 AM

[danepol:]

It seems to me that extrapolating from fundamental analysis in order to predict the market is not helpful and can be harmful. It all seems to happen the other way around: the market decides and the fundamentals fall in line. That implies that technical analysis may be a more reliable tool for basing investment decisions. But that too poses problems because it depends on what signs you choose to believe. My own position is to prefer Elliott wave analysis and the views of the top practitioners in that field are well known - which would be that we are on the cusp of the next wave down. That does not imply bearishness or bullishness, only watchfulness and being prepared to act in advance of the predicted turns.

Oct 20 05:11 AM

[Charlie J:]

What? The market decides and the fundamentals fall in line? Are you saying that the stock market makes its moves, then a companies fundamentals go accordingly? So if the market is up, my business should be up?

Next, Elliott Wave stuff predicts a market downturn, but that is not bullish or bearish?

On Oct 20 05:11 AM danepol wrote:

> It seems to me that extrapolating from fundamental analysis in order
> to predict the market is not helpful and can be harmful. It all seems
> to happen the other way around: the market decides and the fundamentals
> fall in line. That implies that technical analysis may be a more
> reliable tool for basing investment decisions. But that too poses
> problems because it depends on what signs you choose to believe.
> My own position is to prefer Elliott wave analysis and the views
> of the top practitioners in that field are well known - which would
> be that we are on the cusp of the next wave down. That does not imply
> bearishness or bullishness, only watchfulness and being prepared
> to act in advance of the predicted turns.

Oct 21 10:04 PM