Comments on: Is Bull Market Back? On Dow Jones New Record High

By: Ray

Ray — Fri, 13 Oct 2006 18:58:30 +0000

Hey that’s all that matters =) I’m not taking the contrarian position anymore, as I think the pendulum has swung and the future is bright. Enjoy your weekend.

By: Frugal

Frugal — Fri, 13 Oct 2006 18:19:57 +0000

Right now, I will definitely choose large cap now over small cap. We certainly agree on that point.

By: Ray

Ray — Fri, 13 Oct 2006 12:47:25 +0000

Frugal,

I will agree with you to an extent. We just came out of a low interest rate period. During periods of low interest rates P/Es are higher due to the cost of capital being lower. Since bonds are low, investors like to own equities, which would fuel even higher P/Es. The historical average is around 15 from my investigation. With the rise in interest rates as of late, I think you are going to see the P/E rates continue to lower as corporate profits shrink because of the rise of rates. P/Es are just one way to look at companies and I wasn’t totally relying on that for my assumptions, but more to say that P/Es of large cap stocks are more inline with historical averages and since the trend long term has been toward small-cap stocks, the next run will be the large cap sector. This is why I see ’07 as being a great year for the S&P 500.

By: NLG

NLG — Thu, 12 Oct 2006 11:49:50 +0000

Thanks for the reply Frugal. It makes more sense reading it a second time.

By: Frugal

Frugal — Wed, 11 Oct 2006 20:40:04 +0000

Ray,

A P/E of 17 to 18 is still high by historical standards. Historically, P/E is more closer to 13 to 14. There are many valuation models, but I usually use treasury bond market as my measure. At 5% bond yield plus 1.5% to 2.5% risk premium, the stocks should yield at about 6.5% to 7.5%. Translating that back into P/E ratio, it’s about 1/6.5% or 1/7.5% which is , it’s equivalent to P/E of 15.4 to 13.3. Therefore, a P/E of 13.3 to 15.4 is probably okay. Since this calculation doesn’t account for growth rate, it’s under-estimating the P/E (in the absolute number).

At the bottom of a big bear market, average P/E falls to about 7. That has not happened since 2000. Maybe it will not happen. But I won’t rule it out yet.

By: Frugal

Frugal — Wed, 11 Oct 2006 20:31:44 +0000

NLG,
By that paragraph, I meant that when market goes high, people who short the stocks will sustain a lot of losses. Since the potential loss from shorting stocks can be unlimited, they can go bankrupt if they don’t cut their losses short.

Not sure if the following post will clear it up a little on the last 2 sentences (maybe it will make it more confusing?):
http://www.1stmillionat33.com/2006/09/why-investing-hypes-never-work/

By: Ray

Ray — Wed, 11 Oct 2006 17:26:22 +0000

I think that 2007 will be a HUGE Bull Market, I’m not sure how it plays out in to ’08 and ’09. I would say most people use the S&P 500 as the standard benchmark for looking at the market. Even with the higher interest rates, and even with the possibilty of profits being down at larger companies, that is offset by lower P/E multiples than ever before. With the avg P/E of around 17-18 on the S&P 500, that in itself should indicate huge bargains in Blue Chips. I wouldn’t shy away from the Russell, but I would place a much larger position in Large Caps than in the previous 5-7 years.

I’d personally like for the market to come down as I have many years ahead of me to invest and I’d like to get more money in at the lowest cost average.

On another note, I think I’m going to invest in the BRUFX fund which was recently rates A/A in an up or down market.

By: NLG

NLG — Wed, 11 Oct 2006 16:16:40 +0000

This post sounds interesting, but I only comprehend a small portion of it. Some of the statements are somewhat vague, and I am not sure what you’re talking about. I can see that you know this like the back of your hand, but for me, I need this spoon fed as though I don’t know anything about stocks.

“Soft landing would be quite unbelievable for all the bears. Yet the market can stay high longer than the bears can stay solvent. Certainly, the market likes to make the market high and long enough to squeeze all the shorts, while bringing on more and more last minute longs to make the final killing. This is always the norm, not the exception. Market overall will reduce the average return of all participants.”