http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2012/06/19/national/a130255D05.DTL
Why stocks may be even riskier than you think
By tovarichpeter Follow Tue, 19 Jun 2012, 3:15pm 999 views 8 comments
In South San Francisco CA 94080
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climbing the wall of worries.
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Potatoes
Buy them
Plant them
Value them and defend them when everyone is starving to death in the dark
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APOCALYPSEFUCK is Shostakovich says
What was it you said... oh yes, that's it
Its CASH, POTATOES or FUCK YOU America!!!
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So far, stocks aren't that volatile this year. Furthermore, volume is pretty low. I wonder if the PPT had stepped it up.
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tdeloco says
What will happen to the stock market after the November election? :)
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E-man says
They can let the stock market tank. Whoever wins, they can blame it on the other party or recession in Europe and slowing growth in Asia.
I heard about the PPT back then, but I dismissed them as just another conspiracy theory. However, the stock market this past few months feels very different... is it just me? All this time, nothing really changed. Greeks are still in trouble. The rest of Europe is still on the brink of collapse. Housing is still down, and real estate bubbles around the world continue to collapse.
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The OP link didn't work when I clicked it, but searching on the headline led me to this updated URL:
http://www.sfgate.com/default/article/Why-stocks-may-be-even-riskier-than-you-think-3645594.php
The article talks about bullish analysts' "forward earnings" estimates but those are speculation: usually simplistic extrapolations based on past earnings, often wrong. Better valuation estimates include the Shiller PE10:
http://www.multpl.com/shiller-pe/
That suggests the S&P 500 would need to fall 20% in order to reach their mean and median valuations.
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Yes stocks are slightly expensive by the Schiller P/E, say 10% based on the average since 1950.
However, the thing people forget about this metric is that it is a horrible market timing mechanism.
Schiller did the research showing that if you take the forward 10 year return on buying a the entire market and compare it to the 10 year normalized earnings ratio adjusted for inflation you get a trend line with R2 = 0.25 (I've done it and the relationship is practically buckshot).
First 0.25 is only slightly significant. Second you have to wait 10 years to get that slightly significant result. This isn't what people want, they want to put money to work in the market and know they won't have to suffer a loss. This is not possible. If the stock market gave a risk free return that return would now be 1.6% for a ten year investment. 1.6% is what a 10 year T-note trades at currently and this is the instrument to buy if you have to know with precision exactly how much you will have in 10 years.
If there's another recession, you can bet that the market will fall ~30%. But if the Shiller P/E was 16 and there was a recession, the market would still fall by 30%. In other words, low P/E markets are not safer than high P/E ones. In ten years there is a slightly significant chance of a higher return, but in the near term it all depends whether the economy gets better or worse.