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Ghost of Igloi
RE: Down goes the Dow

In my opinion QE has inflated asset prices to unrealistic levels. think of it this way, if there is no real coast to borrow, dollars are allocated in an inefficient manner. There is no adequate price discovery, and it encourages conservative savers to take unnecessary and imprudent risk. What will be the view of Federal Reserve policy, from a historical sense, if the market is cut in half again? Not likely, perhaps, but it has happened twice in the last fifteen years.

Valuations have risen on the expectation that investments will continue to go in an upward trajectory. However, a stock or a bond, is representative of a stream of income that will be delivered to investors over time. So, if one pays more for an investment than they would have six month or three years before, they should expect a lower return. Therefore, price should always be a consideration when buying a stock or a bond. Simple fact, but forgotten point my many. Instead, the current view of many investors is purchasing stocks that are traded as stories that have no connection to price or valuation. This investment strategy works fine until valuations become so stretched and investor risk preferences become more conservative.

Yes I do believe the S&P can go down to 1,100. The S&P was at 1,074 in October 2011, that is not ancient history. The last two cycle lows were 768 in October 2002 and 666 in March 2009.

Revenues are of more predictable of future stock valuations than earnings. Look to recent reports, earning hit their numbers but revenues were down. Earnings are more open to manipulation, for example, stock buybacks.


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