It “looks as if the bottom has been made” earlier this year. (Bill Miller, December ‘08)
“stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months” (Jeremy Siegel, October ’08)
“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.” (Warren Buffett, October ’08)


"Stocks are reasonably cheap, not spectacularly cheap”..."With the S&P at 900, stocks are cheap in the U.S. and cheaper overseas. We will therefore be steady buyers at these prices."...[but]..."Two to one it will be down quite alot next year" (Jeremy Grantham, November ’08 and link to excellent interview)
“this is not a time to be committing large amounts of money. Stocks are cheap but they can get cheaper; we know that. We got back to the Dow having a multiple of 5.9 in December of '74, which was the foundation of Warren Buffett's wealth because he started buying at that level” (Donald Coxe, November ’08)


“Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing and even lower corporate tax rates. That world, however, is in our past not our future.” (Bill Gross, December '08)
Stocks “are still expensive on any historic valuation method…We may be hitting ‘a’ bottom. I don't know if it's ‘the’ bottom.” (Jim Rogers, November ’08)


(graph from Robert Shiller, updated and annotated by the scribe)

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  1. Anonymous // 12/05/2008 02:12:00 AM


    The best out-of-sample forecast model for US equity is made by a rocket scientist (no lie!!) Steve Lecompte at CXO Advisory. He's very thorough and integrates two models RTV or Reversion-to-value, and REY-Reversion to Earnings Yield. He is fastidious about well everything in the model - including trying to get a handle on the best measure of inflation. Both models indicate some of the widest (discount!) disparities between current market levels and those forecasted by models with good historical basis. So they ARE very cheap - at least relative his forecast earnings yields or forecast value-reversion models. But this is a spread statement, and as we know with spreads convergence can occur in many ways (stocks rallying, earnings falling or stocks falling and earnings fallings more etc.) - but most likely (IMHO as a betting man) by future earnings forecasts continuing to diminish. That said, they probably won't diminish so quickly as the apparent cheapness as seen through the lens of current info allowing/encouraging (as you point out Rogers says) a reasonable rally from somewhere near here. My most popular weather-wane contrarian indicator is soo deep into the deflation camp now, having flip-flopped from the biggest commodity and oil bull, risk-aversion almost has to diminish - even if for quarter or two. The telltale will be the Time or Economist cover calling the Depression of 2009.

    It's instructive to look at the meaningful rallies in Japan (and more importantly their duration). It took a decade to grind the last participants (except moi) out of the market.

    Finally (since you;ve consistently been so helpful to me!) it IS important to remember that even two years of zero aggregate earnings do little to estimated fair values given the time horizons equitys discount. Quarterly earnings performance, outside of their impact upon the "fluff-value", "fudge-factor" or more technically the equity risk premium, have almost no impact in physics of financial discounting provided earnings (in the long run) grow at their historic rate of 6% - some of which is real and some money illusion. Unless we really aren't in Kansas anymore....

    So as much as it feels like its right to be short here, I think the risk/reward is tactically unfavorouable for staying short irrespective how ugly the news flow is. If nothing else, swap an outright short for long out of the money put and short out-of-the-money call, OR swap the outright short for a long put and short VIX position.


  2. RJH Adams // 12/05/2008 09:31:00 AM


    many thanks for the CXO links and generous commentary (as usual)! Plus you got me uncannily pegged on sentiment in the final para...


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