Fighting Yoda

The Next Bull Market Is 4-8 Months Away

Overall stock market is way overpriced to further go up - unless we have another super bubble.

Current S&P operating earnings top down consensus forecasts are $43 (and Bottoms up $54). Based on even $54 - it is a PE of 16.7 - way too high. Economy is not doing well (even as per the Fed) - so we should not be expecting any significant upward revisions in earnings.

To get a perspective here are historical PEs:
S&P PE average 1936-08 - 16
S&P PE average 1960-08 - 17.1
L10 PE average 1960-08 - 16.9
Bear Market PEs - 1974-84 - Average: 9.47 (high 12.4, low 7.3)
Bear Market PEs - 1948-53- Average: 8.4 (high 11.0, low 5.9)

The Slippery Slope of Declining Petrochemical Demand

We are in a Great Recession - commodity demand is obviously coming down. The supply will not come down as much - as suppliers will only cut slowly and reluctantly. Nat Gas has come down to $3.75, crude and copper etc will quickly follow.

China inspired commodity rally is over- Baltic index down 35% from its recent highs.

Stick with Gold and the Oil Stocks

Everything is going to fall; gold and oil would not be spared. We are in a deep recession – commodities cannot rise. The China story however good (and hopefully accurate) cannot offset the demand destruction in the largest economies in the world – US, Japan, Germany, etc.

Gold demand is falling too, India the largest buyer/importer/consumer of gold, typically imports about 600 Tons+ year, peak of 850 tons in ’07. Guess what the imports are for the first 3 months of this year – negative, it exported by some estimates – 50-70 tons. Dubai, the gold conduit to India and rest of Asia, gold sales down 60% for the first quarter. Indian import forecasts for ’09 are down to 100-150 tons. GLD cannot offset the fall in consumer gold demand. And of course IMF just decided to sell about 400 tons of gold this year.