FatPat

51.68% in 165 Days

I do not know if this is a beginning of a bull or a bear. But, certainly, at these level the US market is not a buy. Even in the positive scenario that the S&P earns its 10 year average of 50 in 2010 it would stillbe a P/E of 20. Then consider that the consumer will not return and that the government cannot forever sustain its current cost to income ratio of 180% and you will have to come to the conclusion to sell.

Gold Is the Only Long Term Bull Market

The Dow:Gold ratio is the best way to determine when gold is expensive compared to stocks.

Historically God is expensive at 1.
Stocks are expensive at 40.

Right now we are at 9. So Gold is still cheap considering the economy. We are not quite in the middle yet and momentum is on our side.


On Jan 27 08:35 AM yellowhoard wrote:

> I have held physical gold for 15 years. Having slowly accumulated
> my position, I am now wandering about an exit point. What metric
> should I use to determine the optimal price for a conversion into
> bonds or equities?

S&P 500 P/E Ratio: Still Above Long Term Lows

not quite, deflation kills stock prices as assets on balance sheed need to be written down earnings diminish, earning power also deteriorates

Inflation generally is better than deflation as nominal future earnings potential increases. Stock picking in inflation important as company needs to have pricing power to increase prices with costs. In inflationary scenario firms that do not have big lon-term assets fair better as inflation inflates capital expenditures.

Best scenario for stocks is small inflation.

Next to inflation the interest rate is important for p/e. That is the reason why Japan/Switzerland worldwide highest p/es. They have the lowest interest rate this translates into smaller opportunity costs for holding stocks.

Depressionary Tales

I see it very similary. I think it is not the right choice to invest in banks right now. I think that investment banks are the most vulnerable. But also insurance companies that have unhedged equity exposure. Increasing interest rates would be a death sentence in this environment. Banks need a steep yield curve in order to make profit. The problem is that the flight to savety decrases the yield on lon-term governments thereby effectively flatening the yield curve. At the same time the real short-term borrowing rate for banks is much higher as 2%, since banks do not trust each other anymore and are afraid of collapsing banks due to highly leveraged balance sheets. The government is also worried about inflation, it said today. I think this can only be a bad joke. Inflation was high due to increasing prices for commodities and increased import prices due to a weak dollar. This period is over. I personally think there has to be action and is has to come fast:

1. Prohibit short selling. That is what leads to stock prices of financial institutions leading to zero. This in turn scares away customers and deteriorates credit rating. The revenue base of the institution fails and refinancing debt becomes more expensive. A death spiral.

2. INJECT MORE LIQUIDITY. Inflation is not a problem. Federal tendor offers are oversubsribed 4-fold. What is a 2% repo rate good for if nobody can really use it. We need a steep yield curve.

3. Prevent house prices from falling. The easiest way to do this, is by ensuring that homebuilders that DECIDE to fault on a mortage for financial reasons are not allowed to do this for poorly speculative reasons (if theay can afford to pay the loan). This will prevent many houses from getting on the supply side.

4. Grant government loans at very low interst rates and long maturity to homebuilders who really cannot afford to pay mortages any more.

By taking these steps most of the other problems (falling stock market due to banks, insurances, real estates firm writing down/collapsing) will be solved simutaneously. Many people are asking: How does this affect the real economy, it is paper money burning here. This is far from the truth. The American stock market capitalization is bigger than the entire GDP. Most people are stockowners. Retirment plans are mostly defined contribution not defined benefit any more. This means, people WILL START SPENDING LESS when they see their saving of year shrink dramatically. This will lead to less spending, sell of houses, lower prices, lower stock markets, and so forth. We NEED INTERVENTION.

And the moral?

FIRST: I think we see now how dangerous financial derivatives really are. This time it is credit derivatives. But, the same is true for equity derivatives. They allow uncontrollably high leveraged balance sheet and fuel contagion between institutions and nations.

I see this crisis as very, very dangerous.