I am chiming in with some thoughts on the incredibly overvalued U.S. stock market. From the Sydney Morning Herald, New York correspondent Brian Hale, on Tuesday 28 after the Monday 27 downwards dip:
"..but Wall Street's best-known bulls, like Prudential's Mr. Ralph Acampora and Gruntal's Mr. Joe Battipaglia, were out front once more, exhorting investors to 'give the market a few days' and stay with the faith. Mr. Battipaglia said: 'Market valuations are justified because they are not anticipating better times...we're in better times.' "
The last statement is very interesting, because it shows that either Battipaglia is a deliberate liar, or that he has no understanding of stock price dynamics. The first alternative is possibly true, but let us for argument's sake take his "logic" seriously. He says that stock values can remain stably at P/E ratios *far* above (is it 25-30 now?) what corresponds to reasonable returns on a financial investment *even* when the market does not any more anticipate further appreciation. But the only factor that can support stock prices far above sustainable P/E ratios is *expectations* of further appreciation. When such expectations gradually evaporate, the overvalued stock is like the cartoon figures running of a cliff, standing in thin air, and when they look down and discover the fact, then they fall.
I have a working paper on the web with a model and simulation of stock market dynamics that among other things account for this effect. It is in pdf format and I will send it as an attachment to anyone interested. Just drop me a note.
Cheers,
Trond Andresen (currently) Dept. of Economics & Finance Faculty of Business & Technology University of Western Sydney PO Box 555 Campbelltown NSW 2560 Australia Phone 61-46-20-3631, Fax 61-46-26-6683 e-mail : t.andresen at uws.edu.au
Home phone 61-2-9559-6671 Mobile 61-417-453547