The S&P 500 Has Peaked for 2011

[MediumTex]

There is nothing normal about a 100% stock rally in 24 months against a backdrop of 9% unemployment.  Suggesting there is anything normal about that is weird.

Playing devil's advocate here...

Now that we have smart people like Obama, Geithner and the Bernanke on the case, it makes perfect sense that we have a fantastic recovery.  They are the most competent people for the most powerful economic policy jobs in existance.  Just think how great things will be after six more years of these Masters of the Universe!

Of course, if things turn south again, it also tells us something about these three...

I will be generous and say that the people you mention are intelligent and have good intentions.  The question, however, is whether success is even theoretically within reach.  I don't think it is.

This economy is sick.  Curing it will take a long time.  Just because it perks up after one of those Pulp Fiction adrenaline shots to the heart doesn't mean that it is well and ready to leave the hospital. 

When things break in a bunch of large economies like they did in 2008, it normally takes decades for things to get back to normal.  Sadly, I'm not sure we are even headed in the right direction right now.  The financial institutions need a lot more revamping before they are going to be ready to provide any kind of useful function in the efficient deployment of capital.  They still just look like a bunch of casinos with sneering pit bosses like Blankfein and Dimon calling the shots.

In particular, the whole mark-to-make-believe accounting issue is a mile-deep pothole that is going to have to be filled in before we can take any meaningful steps in the right direction. 

[fnord123]

In particular, the whole mark-to-make-believe accounting issue is a mile-deep pothole that is going to have to be filled in before we can take any meaningful steps in the right direction.

That's why we have ZIRP.  The Fed loans money to the banks @ 0%.  They then buy 10 years treasuries @ 2%, or better yet lever up 10x, turning their return into 20%. Do this with hundreds of billions of dollars and even deep potholes get filled eventually.

Sure, grandma's CDs return nothing, commodity prices cause gasoline to go sky high, and governments that are not commodity producers (e.g. Egypt) fall.  But Jamie and Lloyd and friends keep getting their record bonuses, and the politicians on both sides of the aisle get their campaign contributions.

Is this sustainable forever? Probably not - but Japan has shown that insane monetary and fiscal policy can last decades longer than most people would expect.

[MediumTex]

Sure, grandma's CDs return nothing, commodity prices cause gasoline to go sky high, and governments that are not commodity producers (e.g. Egypt) fall.  But Jamie and Lloyd and friends keep getting their record bonuses, and the politicians on both sides of the aisle get their campaign contributions.

...and the middle class is slowly suffocated.

The word I like for what we are seeing is "kleptocracy."

[craigr]

This thread has reminded me that I should check my rebalance bands for my stocks. It could be close to popping.

[fnord123]

The word I like for what we are seeing is "kleptocracy."

My theory why large numbers of people are not complaining about this is that the only people mostly in CDs are either older than the baby boomers, or people who got burned badly in the 70s, neither of which is a large voting bloc.  For the rest, either the "wealth effect" mollifies them (baby boomers who have a lot of paper equity assets) or people who don't pay attention to interest rates because they have no CDs/savings and/or like low interest rates because they have lots of credit cards (Gen X, Y, Z).  The rich demographic doesn't care because they have lots of paper equity assets, and the poor, who should be hurt by gas and commodity prices, but are not politically active about fiscal/economy issues mostly.

I suspect this might change once gasoline gets high enough to start pinching the middle class - maybe $4/gallon or $5/gallon, but that might take a while (or not...hard to say).

[MediumTex]

Checking in on this prediction, things are looking good so far.

The S&P 500 has not closed above 1332 since the OP.

[dualstow]

Checking in on this prediction, things are looking good so far.

The S&P 500 has not closed above 1332 since the OP.

Accurate, yes. Good ... maybe not. 

[dualstow]

Getting awfully close today...

[MediumTex]

Getting awfully close today...

Yes.  Very close.

[moda0306]

I constantly hear different valuations of P/E ratios, some indicating a fairly-priced market, some indicating an expensive market.  Could someone lay out for me the most commonly used P/E ratio calculations and why there seems to be such a difference in reporting P/E ratios?

[dualstow]

We have 1334. What a relief.

[MediumTex]

We have 1334. What a relief.

Got...to...hold...it...through...the...close.

1332.41.

Did it.

We'll see what happens on Monday.

[dualstow]

Let's make it Tuesday. :-)

[MediumTex]

It looks like we got 1332.87 today.

We are less than a point off my prediction--I'm still in the ballpark.

BTW, I will be happy to be wrong on this call.  I was wrong on my stocks call last year as well.  Plus--and this is the real benefit to blown predictions--I think that there is a lot more to be learned from wrong predictions than from right ones.

[moda0306]

I think right predictions early in life may prove to be damaging in the long-run.

For instance, in 2003 I bought a rental with my dad while I was in college.  Why?  Because housing could only go up (as could interest rates at that time, right?).  While we hardly bought at the peak, we basically sold it for what we got it for.  That one wrong decision will be a nagging thought in the back of my mind for the rest of my life.

[MediumTex]

That one wrong decision will be a nagging thought in the back of my mind for the rest of my life.

It sounds like it wasn't too big of a disaster.

***

One more comment on the topic of predictions and why we would want to make them, track them or discuss them in a forum like this is that I think it allows us to understand, day by day, how predictions either come true (in which case it often tends to look more and more like luck) or don't come true (in which case we have the opportunity to see the thesis fall apart a little at a time, as it happens, and see what was either flawed in the original argument, or what factor(s) came along that we hadn't foreseen).

In the case of my stock market call from last year, I really did simply misunderstand the nature of what the Fed was doing.  My logic was good, it just left out an important factor.  This year may be the same story.

[moda0306]

MT,

It could have been worse, but we put a lot of money into it and it was a very illiquid asset, so it makes me appreciate steady return much more. 

How did you misunderstand the nature of what the fed was doing?

[MediumTex]

How did you misunderstand the nature of what the fed was doing?

It didn't occur to me that Bernanke would come out and say that the Fed would use its balance sheet to boost stock prices (and presumably follow through with this tactic).

I assumed the Fed would basically be buying bonds as part of its QE adventures.

[Drewskers]

Pardon me for butting in, but I am firmly convinced the best thing a person can do early in life is to learn how to forgive themselves for making mistakes!

There's absolutely no value in letting a mistake "nag" you through life. It's a waste of energy and can keep a person from successful innovation in their life.

Learn (and remember) the lessons a mistake teaches, but also learn how to forgive yourself for the mistake, how to let it go.

The risk of not learning to let go of past mistakes is that the fear of making mistakes begins to exert inordinate power. A person begins to play it too safe. And that is the biggest mistake of all!

I suggest the book "Failing Forward" by John C. Maxwell.

[MediumTex]

One of the nice things about growing older is that your past mistakes often reach a critical mass where it is no longer possible to remember all of them, and thus any lingering regret tends to float away as well with time (assuming, of course, that the consequences of the past mistakes are not still with you in a way that can't be forgotten).

[AdamA]

If I hadn't had the opportunity to make a zillion investing mistakes, I don't think I would have appreciated the PP for what it was when I finally found it.  Might have blown it off as "too conservative," or may have been simply too inexperienced to have even understood it.

[dualstow]

...
I'm still in the ballpark.
...
BTW, I will be happy to be wrong on this call.  
...

Still, you seem to have hit on the magic number. It's uncanny.
Time to start selling a newsletter to non-PPers?

[MediumTex]

...
I'm still in the ballpark.
...
BTW, I will be happy to be wrong on this call.  
...

Still, you seem to have hit on the magic number. It's uncanny.
Time to start selling a newsletter to non-PPers?

My argument for a market top seems to be getting traction, but that's just luck.  Just as often, a good argument will be ignored by the market to the point that it is useless, even if ultimately correct.

You may have seen that article about Marc Faber that talked about how he called the tech bubble correctly, except after he called it the NASDAQ doubled in value before starting its decline.  Anyone who took Faber's advice when he made his call and shorted the NASDAQ got killed.

I may look smart today, but I will look dumb on plenty of other days.  It would probably be premature at this point to abandon the PP and subscribe to "MediumTex's Magic Market Mutterings."

[dualstow]

It would probably be premature at this point to abandon the PP and subscribe to "MediumTex's Magic Market Mutterings."

Of course, of course. But trying to convince true believers that these mutterings aren't magic would be like trying to convince numerologists that it's all in their minds.

[MediumTex]

1335.54.

It may be breaking free of the MediumTex tractor beam.