> My bet is that there will be a major crash (euphemistically:
> "correcion") within a year.
Can you define (a simple percentage will do) what you would accept as a 'crash' ...? Let's try something simple: do you think the DJIA will see 6,000 before it sees 12,000? Don't forget that a DJIA 6,000 is just taking us back to November '96, barely a year and a half ago. The "crash" of '29-33 took nearly thirty years to erase.
> I think we should stick to his actual words as referred in the SMH:
>
> >Market valuations are justified because they are not
> >anticipating better times...we're in better times.
>
> He says NOT ANTICIPATING better times.
>
> My native language is not English. With that reservation, I
> understand this to mean that further serious appreciation of
> stock prices are not to be expected.
I don't think he means this. I think he means that the justification for the current levels does not come from people hoping for better times; his claim appears to be that the 'better times' one might hope for in some other scenario have actually happened. So the risk that we don't actually attain those hopes is not in the equation; in a sense, we're already there. I think this is what Doug said earlier.
> If this is a correct interpretation on my behalf, he must mean
> that today's prices are flattening out, but will stay stably high,
> so that the public should not withdraw from stocks in the fear
> that they will lose money.
Again, as he is a feverent bull, I'd believe his outlook is for the market to move higher. In fact, DJIA 10,000 seems easily attained by the middle of summer.
> When prices flatten out, the only factor remaining to support the
> price level of stocks, is the earnings, which at this P/E level
> are obviously to low in relation to prices.
I'm sure many would argue with you on this point; in particular, the issues of supply and demand are still at play even if the momentum appears to stabilize.
-----
Getting back to the political aspect of this, I believe that at least part of this bull market has been engineered to incent workers to take part in "owning" the responsibility for their retirement. The tax code changes since the mid-80's and simultaneous Fed policies of lowering interest rates and unemployment have led to both a decrease in collective labor power (who wants to strike if it means taking time out from participating in the 401k plan?) and a radical increase in the demand half of the equation in the equity markets. Add to this the fact that total supply of stock is down (due to M&A activity, principally, but fueled by stock buy-backs and to a smaller extent employee stock option exercise), and you've got a "magic" environment where, without a viable alternative, there's no 'good' reason to see the markets go down.
These actions have helped to alter the "normal" behavior of stock prices; the day after a big crash, everyone wakes up with a new slice of retirement savings that has to be invested. Will they suddenly stop investing it? The cash has to go somewhere. Many of these people believe that buying mutual funds is now their civic duty.
>> I think this statement gives you away as someone who thinks that
>> there is structural support for a "reasonable" return on a stock.
>
> Of course it is. Why do you think the market is so much more
> nervous now than a couple of years ago?
Nervous? I'm not sure where you see it from, but I'd say it's downright giddy. Perhaps scarilly so. Ordinary folks *loving* the idea of a dip in the market, seeing it as a buying opportunity.
This is not the sign of a nervous market.
> Because everyone knows deep down inside that there are
> some sort of "fundamentals" (or call it what you like) that by
> today are outrageously violated. Do you deny this?
Do I deny that it's true, or do I deny that people think this?
Well, now that you ask, yes I do deny that there is any kind of fundamental support for stock prices. The price to earnings ratio is downright hilarious. 57 for MSFT? What could these people possibly be hoping for? I saw a funny interview with John Reed where he compared Citicorp to Microsoft. He said that he formed CCI's global commercial banking division in the same year that Bill Gates formed Microsoft. In the years since, CCI has been more profitable than MSFT in every year (this is about to change), but MSFT's P/E was three times CCI's. Why is that? Reed said "I gotta get me an Internet browser!" ...
Here's another thing I believe: people are naturally long. They get up in the morning and hope for the best, they see success as something to be attained and up as the direction to head in. It's probably the reason so many people buy stock hoping it will go up rather than sell it hoping it will go down.
So I guess I deny both.
> Why should an investor buy stock at a price which gives a risky
> return on his investment at the puny magnitude of -say- 3%, when
> he can buy risk-free gvt. bonds or even deposit his money in the
> bank at higher rate of return?
I'm not sure if this is a setup, but in the last two years the average equity fund in the US returned well over 20%; show me a govt. bond that pays 20% (ok, Mexico doesn't count - I mean one with little currency risk) and I'm sure I'll be interested. In fact, find me a *corporate* bond that pays that much, and I'll be interested.
> Any stock is overvalued when the P/E is so high that the risk
> premium + gvt. security return rates are higher than the return
> rate on the stock.
That's a nice heuristic, but so far you're dead wrong. I mean, if you have a good way to evalute "risk premium" in this market, you're wasting your time at University. Another thing that needs to be taken into account is sector rotation; the market is so incredibly liquid that sector rotation is possible even among individuals. So who cares if yesterday's stock is overvalued? Switch to today's high flier and win some more.
> Concerning the stock market, I could just as well go to the
> Sydney Casino and play black jack.
Keeping your own proclivities out of the equation for a minute, why are you so sure that we're going to see a crash? And were you as convinced at this time last year? What about the year before that, as we soared past the "unreasonable" 5000 mark?
Finally: if you're so sure, why aren't you buying puts?