http://stockmarketbeat.com/blog1/2006/07/18/be-right-and-sit-tight/ Our beat: The stock market. Our job: Beat it. Thu, 21 Aug 2008 22:24:16 +0000 http://wordpress.org/?v=2.2.1 http://stockmarketbeat.com/blog1/2006/07/18/be-right-and-sit-tight/#comment-4717 Stock Market Beat » Blog Archive » Econoday - Short Take Wed, 01 Nov 2006 14:49:47 +0000 http://stockmarketbeat.com/blog1/2006/07/18/be-right-and-sit-tight/#comment-4717 [...] We have written about the apparent long-term valuation cycles in the stock market, and one of our core beliefs is that right now the markets are in the midst of a long-term valuation contraction. As we have noted in our previous articles, that doesn’t mean the market can’t rise - it just means it is likely to rise at a slower rate than earnings grow. Typically such cycles have not reversed until P/E multiples were in the single digits. Today, there is a different take on the phenomenon presented at Econoday: Remember back if you will to the days of Y2K and earlier when Alan Greenspan was warning of “irrational exuberance.” Perhaps I was the one elbowing you in the Charles Schwab line. Those were times when there was an opposite play between profits and share prices, when share appreciation greatly exceeded profit growth as will be seen in the final graphs of this short take. The graph below shows the ongoing play between profits and shares. The green bars are the same as the first graph, representing year-on-year S&P 500 profit growth. The orange bars are year-on-year changes in the S&P 500 index. The left side of the graph shows that the index was contracting even while profit growth was emerging. Growth between profits and stocks then matches up well in late 2003 and early 2004 before stocks begin to lag again. Stock growth has in fact lagged now for 10 straight quarters up to the third quarter where the bars are highlighted. The graph suggests, at the least, that speculative excess is not a threat to the stock market. [...] […] We have written about the apparent long-term valuation cycles in the stock market, and one of our core beliefs is that right now the markets are in the midst of a long-term valuation contraction. As we have noted in our previous articles, that doesn’t mean the market can’t rise - it just means it is likely to rise at a slower rate than earnings grow. Typically such cycles have not reversed until P/E multiples were in the single digits. Today, there is a different take on the phenomenon presented at Econoday: Remember back if you will to the days of Y2K and earlier when Alan Greenspan was warning of “irrational exuberance.” Perhaps I was the one elbowing you in the Charles Schwab line. Those were times when there was an opposite play between profits and share prices, when share appreciation greatly exceeded profit growth as will be seen in the final graphs of this short take. The graph below shows the ongoing play between profits and shares. The green bars are the same as the first graph, representing year-on-year S&P 500 profit growth. The orange bars are year-on-year changes in the S&P 500 index. The left side of the graph shows that the index was contracting even while profit growth was emerging. Growth between profits and stocks then matches up well in late 2003 and early 2004 before stocks begin to lag again. Stock growth has in fact lagged now for 10 straight quarters up to the third quarter where the bars are highlighted. The graph suggests, at the least, that speculative excess is not a threat to the stock market. […]

]]> http://stockmarketbeat.com/blog1/2006/07/18/be-right-and-sit-tight/#comment-3736 Stock Market Beat » Blog Archive » Break Out The Bubbly Thu, 28 Sep 2006 00:27:54 +0000 http://stockmarketbeat.com/blog1/2006/07/18/be-right-and-sit-tight/#comment-3736 [...] With the Dow Jones Industrial Average well within striking distance of a new high, it seemed an appropriate time to revisit a theme we consider important enough to get right and sit tight. That theme is the concept that the long-term bull market of the 1980’s was due as much to expanding valuations as it was to improving fundamentals. Under this thesis, valuation tends to move in waves over very long time horizons. The chart below, which was taken from Barron’s (via The Big Picture) provides graphic support to the theory. During the flat periods, earnings growth is largely offset by shrinking multiples the market is willing to pay for those earnings. [...] […] With the Dow Jones Industrial Average well within striking distance of a new high, it seemed an appropriate time to revisit a theme we consider important enough to get right and sit tight. That theme is the concept that the long-term bull market of the 1980’s was due as much to expanding valuations as it was to improving fundamentals. Under this thesis, valuation tends to move in waves over very long time horizons. The chart below, which was taken from Barron’s (via The Big Picture) provides graphic support to the theory. During the flat periods, earnings growth is largely offset by shrinking multiples the market is willing to pay for those earnings. […]

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