dshort

Siegel vs. Standard & Poor's

To SteveTN and pelican

Note that Shiller's P/E10 used the 10-year average of real (inflation-adjusted) earnings. The use of real numbers helps to normalize for the period of high inflation (and accompanying interest rates) leading up to the secular market bottom in 1982. Thus it is reasonable to compare today's P/E10 with the comparable ratios in both inflationary periods, such as the early 1980s, and deflationary periods, such as 1921 and 1932.

Siegel vs. Standard & Poor's

Excellent article. I prefer the valuation method of Yale Professor Robert Shiller over the Siegel's approach. Shiller smooths the P/E calculation by using the earnings average of the previous ten years as the divisor. With this method, the historic P/E10 average is 16.3. The February 2009 close saw a P/E10 of 13.

Does this make the market cheap? With the Shiller calculation, secular lows around the 1921, 1932, 1949, and 1982 bottoms have been in the single digit range. Here's a link with charts to illustrate: dshort.com/articles/20...

Tuesday Preview from Europe: Reeling in the Years

Hi Mole -- The "Four Bad Bears" chart is from my website: http:dshort.com -- I'm happy for anyone to reprint it in return for an acknowledgment link, as I mention on my website. CR always does so. I request the same courtesy from you. /Doug

Long Term Fundamental Value of Stocks Smoother Than Prices

Thanks, John. You get a similar perspective by simply drawing a regression through the data:

dshort.com/charts/SP-C...

Over long time frames, regression to the mean is inevitable. Fortunately, on an inflation-adjusted basis, the overpricing of the U.S. market is less grim than the nominal price would suggest:

dshort.com/charts/SP-C...

Still, regression to the mean after wide variance usually means overshooting on the other side.

Cheers,
Doug

John Hussman: The Market Is Not in Uncharted Territory

If today's market rolls over into another Great Depression (which I doubt), I a more long-term strategy is excellent for portfolio risk management. I follow a 10-month moving average timing signal on the monthly close. Here's a daily chart of the Dow from October 1928 to January 1935:

dshort.com/charts/Dow-...

Here's a monthly chart over the same timeframe with some 10MA signals:

dshort.com/charts/Dow-...

This monthly MA strategy is not suitable for long-term sideways markets (and it certainly won't be of interest to a mutual fund manager). But it has worked reasonably well since the mid 1990s. It would have saved a lot of pain in 1929-1932, and it would have moved your to fixed income in November of last year.

Consumers Buy Into Disinflation

For a visual perspective on inflation and the historic periods of deflation in the US, here's a chart that I update monthly with the release of the Consumer Price Index (CPI) by the Bureau of Labor Statistics:

dshort.com/inflation/i...

The chart also shows post 1982 inflation if the BLS had the same method as it employed from 1913 to 1982. See shadowstats.com for a full explanation of the alternate CPI, which is tracked at that website.

Thoughts on Market Volatility

For a long-term perspective, check out the intraday volatility in the Dow since 1928. Over this 80-year period, the average swing is about 1.8%. There have been only 64 days when the intraday volatility exceeded 8%. That's right -- 64 days out of over 20,300 market days. If they were evenly spread, that would be about one 8% plus volatility day every 15 months.

Here's the amazing part -- fourteen of them have occurred since September 29th. The Crash of 1929 had only eight. Another thirty followed during the ten-year Great Depression. Four were clustered around the Crash of 1987. Only two happened during the nasty 2000-2002 bear.

Now, guess how many of these volatile days ended with a gain versus a loss. Find the answer here: dshort.com/

Portfolio Expectations: What a Difference a Year Makes

Thanks, Richard. This article is another reason why you're in my watchlist.

The 81-year time frame really resonates with those of us who study market history. And when analyzing long-term performance, it's also important to factor in the impact of inflation, as these two charts illustrate:

dshort.com/charts/SP-C...
dshort.com/charts/SP-C...

Thanks again!

The Obama Bottom

The S&P 500 hit its recent low eight trading days ago. If we look at the bear markets in the S&P 500 since 1950, we see that the bottoming process lasted anywhere from six weeks to eight months:

dshort.com/charts/bear...

Drawing trend lines on charts during bear markets is an entertaining pastime. But the impact of the looming global recession on today's markets may keep you busy redrawing those lines for many months to come. The real precedents could indeed date from the late 1920s.

The chart line I find the most troubling is a linear regression on a century or more of market closes. Take your pick:

dshort.com/charts/dow....
dshort.com/charts/SP50...

You can speculate about the new sheriff in town and past being behind us. But I think the past remains very relevant. Take a look at these two charts and ponder one simple concept: "regression to the mean," which frequently involves overshooting in the opposite direction.

Bears Have Rallies Too

Excellent. For a broader historical perspective on the relationship of intraday volatility to bull and bear markets, see this series of chart for the Dow from 1928 to the present:

dshort.com/charts/dow-...

The color coding follows the traditional definitions: A bull market is a 20% rally preceded by a 20% decline and vice versa.

Surviving the Short-Term to Participate in the Long-Term

I've been analyzing the Dow raw data from 1928 to the present, available from Yahoo! Finance. Here are some Dow charts I've not yet posted:

dshort.com/charts/dow-...

I wanted to understand the historical precedence for the amazing volatility we've recently experienced. You have to go back to the first half of the Great Depression to find volatility as dramatic as we've seen over the past few weeks.

After reading the dimwitted CNN Money article, I simply sorted the Dow percent gains since 1928 in an Excel spreadsheet. What I saw was utterly amazing. Here's a link to a table showing the 55 days since 1928:

dshort.com/tmf/dow-5-p...

Actually there were no 5% days in 1928. The first occurred a couple weeks before the Crash of 1929. There's a total of 54 days to date, all from the timeframe of '29 Crash and Great Depression except for one in 1970, two associated with the Crash of 1987, two near the bottom of the Tech Crash in 2002, and two huge days in the past few weeks.

Rather disturbing.

Surviving the Short-Term to Participate in the Long-Term

After I read your article, I saw the CNN Money lead after today's market close: "Dow's 2nd best day ever" the headline declared.

In the spirit of Black Swans, here's a sanity check on the CNN Money headline. Today's percentage gain is impressive -- the seventh best Dow return since 1928. But check out the dates of the top six:

1. 15.34% 3/15/1933 Great Depression
2. 14.87% 10/6/1931 Great Depression
3. 12.34% 10/30/1929 Two days after Black Tuesday, the Crash of 1929
4. 11.90% 6/22/1931 Great Depression
5. 11.36% 9/21/1932 Great Depression
6. 11.08% 10/13/2008 Two weeks ago
7. 10.88% 10/28/2008 <= Today

And it doesn't get any better after that. Number 8 was two days after the Crash of '87.In fact, the next 44 in order of descending gains were all during the Great Depression except for three -- two in 2002 during the Tech Crash and the first day after the Crash of '87.

Indeed, these are interesting times!

Just Your Average Bear Market

Using the S&P 500 as the gauge and a 20% decline as the benchmark, Here's a PDF slide show that demonstrates the wide range of duration, depth and contour of the eight bear markets since 1950:
dshort.com/docs/Bear-M...

Using the 20% decline benchmark, the S&P 500 remains above bear territory. Here's a table of stats on the eight bear markets since 1950:
dshort.com/articles/ne...

One additional stat not included in the table: The average length of time it took these eight bear markets to reach a 20% decline was 10 months following the previous high. At present the S&P 500 is about 8 months beyond the high set last October.

Time will tell, probably soon, whether the current market turns bear. If it does, we may have to wait a while before we see how it compares to these other eight.

Capacity Utilization Figures Starting to Resemble a Recession

Investor newbies and others with short memories may view the S&P 500 March 10 low as the market bottom, no recession. But anyone who remembers the 2000-2002 stock market is probably more skeptical:

dshort.com/charts/SP50...

As the chart shows, there can be some dramatic rallies during an extended downturn. Hopefully we won't see anything like the 49.2% decline during the last bear market.

Since 1950, recessionary S&P 500 market bottoms arrived, on average, about 14 months after the previous high. The March '08 low occurred 5.1 months after the October '07 high. That's mighty early for a bottom, although there is a precedent: The 1990 recession, which lasted 8 months, saw the market bottom out a mere 4 months after the preceding high.

On the other hand, two recessions -- '73-'75 and '81-'82 -- were accompanied by a 21 month peak-to-trough timeline. Here's an overview of recession stat since 1950:

dshort.com/docs/recess...

Given the complexities of today's economic conditions and the elapsed time since previous market highs, both extreme optimism and pessimism are probably premature.

Follow-up on CPI

Actually, if inflation were calculated using the same methods in place before 1982, the current rate is approaching 12%. The chart on the ShadowStats home page uses the BLS calculation methods from around 1990. For a look at inflation as calculated using the original method (pre-1982), see this ShadowStats chart (scroll down to the CPI Data Series):

www.shadowstats.com/al...

For the big picture of inflation going back to 1915, see this link:

dshort.com/inflation/i...

Frankly, I think the BLS was justified in some of the modifications to their inflation calculation algorithm. But the downside is that it obscures the degree to which today's economy is beginning to resemble the grim stagflation of the '70s and early '80s.