Friday, March 28, 2008
A Bull and a Bear
So far the bull market in commodities and the bear market in stocks are doing exactly what they should be doing. By that I mean the bear is in the process of taking stock valuations down to extremely depressed levels and the bull market in commodities is in the process of taking commodity prices to levels of ridiculous overvaluation.
Notice the trailing PE has gone from 45 (I think that's pretty close) in 2000 to 29 at the bottom of the last 4 year cycle low. BTW 29 is still ridiculously expensive. 29 is higher than almost every other bull market topped out at. That alone made it clear that the bear was hardly over in 2002. Now today the S&P has despite rallying for 5 years dropped to 18 times trailing earnings. PE ratios are compressing despite record earnings. Still 18 is hardly undervalued. As a matter of fact it's a little on the high side of average. No the bear still has a lot more work to do yet. It won't happen overnight especially with the Fed willing to debase the currency to any extent to keep the bear at bay. Unfortunately all this is going to do is make the process all that much longer and more painful.
Now let's look at the Dow:Gold ratio. Here we see the bull in the process of doing what he does, namely taking commodities to extreme overvaluation. At the top in 2000 it took 42 oz. of gold to buy one share of the Dow. That ratio is now down to 13. Again hardly ridiculous overvaluation yet. Seeing as how the last two commodity bulls took the Dow ratio to 2.5:1 and 1:1 we still have a long way to go here also.
Now look at the last chart specifically from 66-82. The Dow went nowhere. However in valuation terms it dropped sharply. The trailing PE in 74 was around 7 if I'm not mistaken. Also notice that the stock market was unable to make significant new highs during this entire 16 year period. Now look again at the first chart. See any similarities? Keep in mind that in inflation adjusted terms the S&P was still very far below the 2000 peak at it's high in Oct. of last year.