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Hey Tracker, this may be of interest to you. It looks like one of your "beleiver" criteria may be occurring. It may be a one time fluke, but it also could be a start of a trend towards Job Growth. Only time will tell. May be something to keep an eye on.

Link: http://story.news.yahoo.com/news?tmpl=story2&cid=568&u=/nm/20031106/bs_nm/economy_dc_12&ncid=749


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Tracker wrote:

"How likley are numbers 1 and 2 to be repeated? I'm being realistic. Sorry if that makes me a non believer. For me to be a believer I need to see a few things.

1. Job growth
2. Shrinking consumer debt as compared to income.
3. Shrinking National Deficit."

Link: http://boards.fool.com/Message.asp?mid=19786354

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>>Hey Tracker, this may be of interest to you. It looks like one of your "beleiver" criteria may be occurring. It may be a one time fluke, but it also could be a start of a trend towards Job Growth. Only time will tell. May be something to keep an eye on.<<

As I have stated before I already believe that the economy is showing sign of improvement. As I have also stated there is some confusion(ie: a disconnect) as to how this relates to the stock market. Good news is no reason to pay $50 per share for companies that are only worth 75 cents.
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>>Hey Tracker, this may be of interest to you. It looks like one of your "beleiver" criteria may be occurring. It may be a one time fluke, but it also could be a start of a trend towards Job Growth. Only time will tell. May be something to keep an eye on.<<


KJKRAUT,

I read these articles everyday and I am well aware that the economy is showing signs of improvement. As I've said before this is great news.

However, Let me ask you a question..Does this news make you want to go out and pay over 40 times a companies true worth for shares in its stock? The average p/e across tha board right now is approaching 40. The historical norm is 15. Granted you could come back and say that you only buy certain sectors with lower valuations. However, if the broad indexes come down these sectors will most likley come down with them.






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You have really been pushing on this $50 for 75 cents of value thing. I realize that there are some shares that are pulling this kind of valuation, but they are the relative few and there are also a good deal with out there with more reasonable valuations as well. I also realize that you are probably exagerating some to out a little punch behind your opinion on valuations. Personally, I agree that stocks, in general, are a little higher valued than I personally would like. However, my posts on GDP and Jobless claims really were not intended to back up my responses to your post on Warren Buffet or to debate stock valuations. They were instead directed toward the health of the economy.

I do doubt that we can keep up the 7.2% estimate in upcoming quarters, but this could be the extra energy to get our economy to start adding jobs, which IMO, is the important thing here to sustaining our economy at this time.
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>>I realize that there are some shares that are pulling this kind of valuation, but they are the relative few and there are also a good deal with out there with more reasonable valuations as well. I also realize that you are probably exagerating some to out a little punch behind your opinion on valuations. <<

Actually KJI am not exaggerating. Do yourself a favor and pull up the valuations of the most poplar stocks. How can I be exagerating when the average p/e is no well over 30?
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I am sure you do, but some people here may not. I just found it interesting that a day or so after you mentioned your "believer" points, that one of them looks to be strengthing.

Since you are sticking to this valuation of the stock market, I will go with you on it a little further before I log-off for the day. You are right on the Historical norm and the difference between that norm and where we are today. I also agree that this definitly is something of importance. However, I wouldn't put all my energy into those ratios. It is an important part, but there is more to the valuation of a company than P/E ratios. I wish it were that easy.

As I stated earlier, I do think that overall valuations are high. However, just like any shock to the stock market, the pendulum tends to swing back the other way for a while. If we had truely gone all the way back to an average P/E of 15 from the bubble, our economy would be in a whole lot more trouble than it is now.

Another aspect at "a bottom" (which I am not calling, as I am not all-knowing), is that P/E's usually get relatively high. The reasons is that earnings are just starting their rise. Now currently, have we gone too fast back from the bottom, I don't know. However, a lot of financial strategists also use retracement models to help them try and guess the general market, or a particular stocks, next move. One of the publications that I read uses Fibonacci retracement levels, 23.6%, 38.2%, 50%, 61.8% and 100%, to help them make decisions in their market strategy. Others use less detailed 33% or 50% rules. Most stocks and markets tend to support or resist at these levels. Right now we are reaching the 23.6% level in the NASDAQ and are nearing the 38.2% level in the S&P from the big pop in 2000. I would expect to start to see some resistance here.

So yes, I do think valuations are high. I haven't bought anything since March. However, I also think that if the economy rebounds enough, we may not seen the big bear that everyone fears come back, but instead some consolidation until the fundies pick back up.

Anyway, as always, I enjoyed the debate. I will return tomorrow if you wish to continue this conversation.
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Tracker:

"Actually KJI am not exaggerating. Do yourself a favor and pull up the valuations of the most poplar stocks. How can I be exagerating when the average p/e is no well over 30?"

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As I mentioned in my last post, I don't value stocks strictly on their P/E ratios. That is why I don't get too jazzed up about current P/E values. I look at them, but they have different significance at different points in a cycle. Since the cycle is near impossible to predict, it is really hard for me to believe that just because P/E's are relatively high that market is going to correct right now. I tend to use technical and fundamental analysis in the market. It has served me well in the past.

Couldn't help it. You posted your response before I could reply with the last. See you tomorrow.
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It's hard to find a legitimate valuation method (book value, average yield, etc.) that does not show stocks in general to be valued like 1929 or 1999. That is, higher than at any other time over the last century, excepting only 1999/2000.

Just as after the long 1970's bear, people get used to a new level of valuations, and they seem normal. In 1980, a market p/e of 8 seemed normal, and only people like Richard Russell and Warren Buffett (and me)were saying that it was a good time to buy stocks. Those two worthy gentlemen are both singing a different tune at the moment, as are all the pundits that make sense to me such as Jeremy Grantham, Steven Roach, Katherine Welling, Alan Abelson, Marc Faber, etc.

There is no doubt in my mind that we are still in the bubble.

The market took a look at the wonderful economic news that showed up today, shrugged, and took a nap. It sure looks like the bull is getting really tired. Looks like my call of the top about a month ago may turn out to have been pretty close after all. Time will tell.

Good luck,

Ed.
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"Just as after the long 1970's bear, people get used to a new level of valuations, and they seem normal. In 1980, a market p/e of 8 seemed normal, and only people like Richard Russell and Warren Buffett (and me)were saying that it was a good time to buy stocks." - EddieLuck

Things are significantly different today than in 1980. If you will recall, in 1980, the 10 year Treasury bond yield was soaring. By 1982 it peaked at almost 15%. Doing the math, the P/E of the 10 year treasury bond in that era was 6.7:1. If an investor could get 15% on a government bond, why would stocks be a great investment? That makes no sense.

However, as the Reagan economic plans took hold, the Treasury bond yields started down and they have continued down until this year. There have been some slight reversals along the way, but the trend has been down and down and then down some more. We were looking at a Treasury yield below 4% just a few months ago...the P/E of the 10 year Treasury was 26.7:1! Growth stocks with a P/E of 30 still look decent compared to that figure. The question is, "Where will the money go?" I think I know exactly where it will be going.

Back in 1982 the money was flowing to the high yield bond market. That is what drove the yields down. Heck, I was buying high grade municipal tax-free bonds yielding over 11%! Why risk buying stocks?

But, today the picture is completely different. Who will buy 10 Year treasuries at 4% when there are blue chip, growing businesses paying a 4% dividend or better? There are many, many great businesses out here paying swell dividends with P/E ratios below 8! The driving force is toward these businesses and toward growth stocks with escallating earnings potential. The key is not what is going on today but what will be going on in six months to a year. As the economy continues to strengthen, the earnings should ramp up as the "lean and mean" businesses flow the revenues through to the bottom line.

In my opinion, today's P/E ratios are bogus reference points because there is no way to know what is going to actually be there a year from now. If the earnings do as they very well may, a P/E of 30 today might well be P/E of 10 in a few years. It all depends on the business and the economy...but mainly it has to do with the alternatives. Even if the 10 year treasury bond kicks back up to 6%, that represents a P/E of 16.7:1...still pretty high compared to a great growth stock with increasing earnings.

What will actually happen? That is the real question. I can see it both ways. The economy can falter and earnings can disappear once again...or the economy can continue growing at a decent clip and the earnings picture may be very rosy. I just know that I am not going to bet against the momentum I see today. With the low interest rates and the booming growth, stocks seem like the best bet right now. Especially, the ones that were unfairly driven down along with the overpriced ones. The market threw the babies out with the bathwater as everyone fled the bubble and ran to bonds, driving the yields to 50 year lows. The key today is to buy the real babies. They are still out here if you will just look for them.

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>>In my opinion, today's P/E ratios are bogus reference points because there is no way to know what is going to actually be there a year from now. If the earnings do as they very well may, a P/E of 30 today might well be P/E of 10 in a few years. It all depends on the business and the economy...but mainly it has to do with the alternatives. Even if the 10 year treasury bond kicks back up to 6%, that represents a P/E of 16.7:1...still pretty high compared to a great growth stock with increasing earnings.<<


Lets not forget that many of these p/e's of 30 were probably spruced up to get them that low. Last week I posted an article referencing the fact thaat pension fund deficits are now at record levels. How can pension fund deficts arrive at record levels after a big run up? This rally should have helped this problem - not made it worse - unless the companies were not applying money to pension funds during the rally as they should have been. Where else could this money have gone? Earnings maybe?

Another issue that has not been mentioned out here lately: Insiders are continuing to sell like crazy as they have been since March. These guys can be 'wrong'for a while - until the public enthusiasm wears off but they are always right in the end. If you think you know more about the DELL company that Michael Dell(who has been selling like a mad dog since March) then all the power to you -you are a beter man than me.
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>>As I mentioned in my last post, I don't value stocks strictly on their P/E ratios. That is why I don't get too jazzed up about current P/E values<<


KJ,

You are right there is a better indicater than p/e. Its called the insider sell/buy ratio. The insider sell/buy ratio is now just below 6. This means that insiders have been selling almost 6 times as much stock in their own companies as they have been buying. Why would they do that? Do you think they are selling because they think their stock is going higher?

As I mentioned to another poster - if you know more about the state of corporate america than the insiders who run the various companies, than all the power to you -you are a better man than me.
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Last week I posted an article referencing the fact thaat pension fund deficits are now at record levels.

Companies that will provide the overwhelmingly superior returns do not even have a pension plan yet. The dinosaurs you are talking about aren't worth investing in. They are a small percentage of all the stocks but make up a large percentage of the indices. Index investors will probably get cremed but anyone willing to think a little should do good.

Andy
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>>Companies that will provide the overwhelmingly superior returns do not even have a pension plan yet.<<

Maybe not - BUT the companies with the heaviest weightings on the major indexes, NYSE,NASDAQ, etc do. If these comapnies take a fall, the major indexes take a fall.
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"As I mentioned to another poster - if you know more about the state of corporate america than the insiders who run the various companies, than all the power to you -you are a better man than me."
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WOW! That is about all I can say on that line of text. Everyone here is offering their own opinions on this stuff. However, I have yet to hear anyone specifically state that they know more than a particular companies CEO when it comes to the health of a particular stock or even the "state of corporate america" as you mention.

On the Insider/Buyer ratio, it is important to know the severity of insider buying to selling. However, I would be careful as to how much I read into this or any other one particular indicator. Personally, as a disclaimer, I really don't follow this indicator very much, but I do find it interesting. If corporate america is selling six times more than they are buying, it may be something of a concern to be mentioned. However, there are varying reasons to sell stock by corporate insiders. They also may not be buying because they think we are due for a little correction and waiting for levels to come into a better buying opportunity.

Personally, I think a small but reasonably sized portion of that selling may be that corporate America has gone the way of the stock option, and since the economic downturn a group of CEO's and other officers have made a big deal of cutting their wages if the company hasn't been doing all that well. Most of the time they still get options. If I was use to spending the amount of money most big wigs spend and I had to cut myself off for a time, I think that I would probably be selling stocks after a good gain in the market to get some income. So although you may have a good point, I don't see this as a big "the market is reversing" point unless there are other factors involved.

I also agree with ajaskey in that a good deal of the pension funds you are also mention are in the larger dinos. You are now discussing valuation of a type of sector and not the whole market. I agree that this group of companies are headed for rough water, but this really doesn't concern me much. They should have been using more conservative accounting measures. What bugs me the most is that these companies think that this aggressive accounting helps them, and it does for a while. Maybe long enough for the officers to cash out their shares before releasing the real numbers. But sooner or later, the company is most likely going to have to pony up. The disapointment I have there, is that they did it at their shareholders expense. Rather disgraceful of them.
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Actually, it was Carter's economic plan that crimped inflation. He told the head of the Federal Reserve at the time to stamp out inflation and he went at it with gusto. It worked but was pretty hard on the populous.

It is not clear just what Reagan's economic plans did. He did cut taxes for the wealthy but increased them for the middle class (I actually paid more taxes than before). You may recall he wanted a revenue neutral tax cut. "Loopholes" that were closed included deducting such things as interest on time purchases, gasoline tax, grocery tax, and a part of health insurance (of things that come immediately to mind). I have felt that what seemed like unbelievable Federal deficits did seem to eventually work, but my economist friends claim they were not huge enough to have prevented us from going into an economic black hole (where I thought we were headed). You can't have just tax cuts and reduce Federal spending accordingly because, if you do that, you decrease Federal spending and increase personal spending (maybe) which counteract each other. In fact Greenspan has said that if you cut taxes for the wealthy and they just buy Treasury bonds instead, you come out behind.

brucedoe
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>>Things are significantly different today than in 1980<<


Things are not so different that you can overlook the fact that the two most positive pieces of economic data(7.2 percent GDP growth and today's job growth number) that have come out during this ralley have both come out in the past week and both have had almost zero affect on the market.
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"Things are not so different that you can overlook the fact that the two most positive pieces of economic data(7.2 percent GDP growth and today's job growth number) that have come out during this ralley have both come out in the past week and both have had almost zero affect on the market."

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Estimates of GDP growth of about 6% were out a month or two ago. This was most likely priced into the little ralley we have been having.

As far as the job growth number, it is still considered a lagging indicator by a lot of folks. It could be used to bolster the case that this bull rally is for real, but doesn't necessarily mean it will advance the market. However, it may stop a bear market decrease.

I was always taught that if you want to beat the market you need to be six months a head of everyone else. In hindsight, it looks like that comment is justified as earlier in the year economists were already estimating a high growth and earnings period in the later quarters of the year. The stock market started to make its move around that time as well.

Currently, economists are estimating a return to high but more normal numbers in the 4% and 4.6% growth in GDP in repective quarters. Most companies cost cutting measures have now be expended and these companies are going to have to look to revenue growth to keep the earnings and stock prices growing. IMO, that is where we sit today. Can companies continue to increase earnings? Jobs will definitely increase overall spending as long as debt doesn't need to be repayed, but it is not going to make me want to jump head and tails into stocks.
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>>Jobs will definitely increase overall spending as long as debt doesn't need to be repayed, but it is not going to make me want to jump head and tails into stocks.<<

Good post. I agree with the whole thing, especially the part about not jumping into stocks over this economic data no matter how good it may be. I gave you my criteria for being a believer in the economy in a past post. So far we have data thats makes me think that the economy is improving - but I still need to see these numbers repeated next quarter to be a tru ebeliever.

Now I will give you my criteria for believing in the stock market.

1. I want to see mutual fund cash reserves back over 8 percent, preferably over 10 percent. Right now they are hovering around 4 percent.

2. I want to see the general public margin debt levels much much lower.

Once I see the above 2 things in place I will invest in the stock of the best companies no matter what the p/e's are.

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>>Now I will give you my criteria for believing in the stock market.

1. I want to see mutual fund cash reserves back over 8 percent, preferably over 10 percent. Right now they are hovering around 4 percent.

2. I want to see the general public margin debt levels much much lower.<<



Forgot to mention my 3rd criteria.



3. I want see insiders such as Michael Dell stop bailing out of their own companies in droves.
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The market shrugged off good news today for the second day in a row. It's acting like a beat-up old horse. There comes a point where the whip doesn't work any more.

One possible explanation is that the 4 billion or so withdrawn from Putnam funds the last week or so has not yet found its way back into the market, while Putnam has probably been selling like crazy all week to keep up with redemptions. (How nice to see bad guys getting screwed, although of course Putnam employees in general will be suffering for the sins of their leaders, like the employees at Arthur Anderson. Anyway, it does your heart good to see crooks getting ruined.)

Net cash flow into stock mutual funds this week was negative for the first time in ages, probably for the same reason.

Ed.
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