Q & A

Q: Do you really think we get through this crisis without ever having an undervalued market?

A: First, the crisis is past us and now we're faced with sorting through the wreckage which is more painful than the actual crisis itself. The general public now has the taste of bitterness necessary to feel that maybe there is a difference between saving and investing or the distinction between investing and speculating. The public now knows, by force of nature, that a home is a place where you live and not an investment. These realities, which faded after the Dow first hit 10,000, are in the recesses of the collective subconscious. While the lessons will be quickly forgotten, reminders will reappear in stark contrast to the hopes of the ever optimistic public.

In many of my postings and in the right hand column of my site you'll see that I expect this to be a bear market for at least the next 7 to 9 years. My 2016 date (based on cycle analysis) is the approximate year that I expect that either the market will hit its ultimate low or the point when valuations are expected to be at the most extreme low levels. Even after the year 2016 I do not expect the market to immediately go to new highs. Instead I expect that the market will meander for another 6-8 years before exceeding the previous high for good.

Within the context of a secular bear market there will be cyclical bull markets or bear market rallies. Great examples of the kind of market action that I expect are years from 1906-1924 or 1966-1982. Remember, a secular bull market has the ability to exceed the previous market high by at least 16.5%.

We will see a period when valuation are at historical low levels. Unfortunately, it will be very difficult to convince the retail investor that buying stocks en mass is the right thing to do. As an example, 1982 was a great year to buy stocks but with treasuries yielding 12% there was no way to convince the public that the Dow with a yield of 5.5% was worth it. Guaranteed money at 10-12% versus stocks at 5% seemed like a no-brainer.

Q: Do corporate earnings just recover from here while the market moves sideways to allow P/E and dividend yields to catch up?

A: I believe that we'll see earnings remain flat as corporations continue to cut costs but the shocker will be that we'll see earnings. The problem will be that corporations will cut costs too much which will lead to a general rise in prices and an increase in the value of corporate assets. Chapter 2 of the book Dow 3000 by Thomas Blamer and Richard Shulman clearly explains what most investors forget at the end of a bear market. Essentially, companies will become more valuable even though the stock price and earnings don't go anywhere.

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

Mackay, Charles. Extraordinary Popular Delusions and the Madness of Crowds. preface. 1852.

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2 responses to “Q & A

  1. Thanks for taking the time to provide your thoughts in answer to my questions.

  2. Dividend Inc. Team

    Great questions require a response. Thank you for taking the time to read my blog. Touc.