I think deflation today hangs a very heavy weight around equity prices. At any rate, it should not take long to find out what kind of a bear market this is going to be.

During the past 110 years the US has gone through a series of Economic Cycles which has been reflected in the stock market. If we compare the Historical PE Ratio to the Inflation Adjusted Chart of the S&P Composite a few things standout. First each Cyclical Bear Market has not bottomed until the PE Ratio has dropped below a value of 7. This occurred in 1982, 1932 and even further back in 1921. Currently the PE Ratio is like 100+ so if history repeats itself then it would have to drop back to around 7 before a bottom would occur. Meanwhile if we compare the charts of the “3″ previous Cyclical Bear Markets to the most recent one the overall pattern looks similar to that of 1968-1982 and 1906-1921. Both of these Cyclical Bear Markets were drawn out affairs in which the S&P Composite took the form of an elongated ABC type corrective pattern that lasted from 14 to 15 years. When you breakdown the 1906-1921 and 1966-1982 time periods what’s amazing is that after completing their “B” Waves it took 9 years for both of them to complete their elongated “C” Waves. Now if we look at the current Cyclical Bear Market a similar ABC type corrective pattern appears to be developing as the “B” Wave completed in late 2007. Meanwhile if we compare the 1968-1982 time period to the current pattern it appears we are basically in the same spot as we were in the mid 1970’s in which the S&P Composite had a decent rally from 1975 through the early part of 1976 before going through an extended downtrend which finally bottomed in 1982 as the “C” Wave ended.

Sept / Oct can bring a 10% to 15% correction but I think after that we move higher into Q1 2010 …

However, I do not know how equities were valued then and now. I do not know if headline P/Es are relevant now. Do those tables use “as reported” earnings now, or just bottom-up “operating earnings”?

Again, with sentiment, most people do not believe that recession (or depression) has been conquered.

I do not think anything would change my outlook in the near term… sentiment feels toppish, but I am inexperienced. I did not pay any attention to the market in March 2002. I cannot say that this is a repeat of that situation. However, some contrary evidence comes from Ned Davis who said that the sell-offs happen when more people are even more optimistic. (The Treasury sell-off in late 2008 and 2009 didn’t happen when people were bullish on Treasuries though; it happened when the Treasury bears capitulated.) Also, he notes that investment grade bond yields have to rise in order to spark a sell-off, and that the P/E has to approach 20 (which according to Davis, this hasn’t happened.)

Regarding the 2002 peak, Robertson Morrow said:

” In mid-2001, as recession hit, the stock market wobbled. From April to September, the S&P 500 fell 30%, but September 11th masked the downturn. Easy victory in Afghanistan and no further acts of mass terrorism reassured Americans. By March 2002, most believed that we had conquered the recession. Magazines and newspapers headlined the triumph, and the Dow reached almost 10,600, just 10% off its January 2000 peak. But the victory was an illusion based on foreign money. In April 2002, the dollar began to break, falling more than 15% in four months, and the stock market followed the dollar down. By July 2002, the market had lost almost 30%, and Americans began to turn pessimistic. The late bubble was over.”

The recession hasn’t been conquered though. But Robertson Morrow has been very insightful and his helped his boss’ hedge fund achieve outstanding returns although his boss fucked up when he put his money where his mouth is when he asserted earlier that Google and over tech companies were “undervalued.”

Mike, if you haven’t click on “fucked up” do it; that is a nice dictionary entry for that phrase.

That makes her about completely worthless.

http://www.cnbc.com/id/32315896