Shockwave Rider

Yesterday, I blogged about politics, something that I don't usually do. Today, I will blog about the stock market, also something that I don't usually do.

The DJIA is suprisingly close to its all-time high and the NASDAQ has nearly doubled off its 2002 lows. Long term bear markets, which I believe we are in currently, don't come all at once. They come in phases, in which minor bulls appear and fade over many years. We've been in an uptrend since the 2002 lows. Whereas most people see this as a sign of a "healthy recovery", I see this as a minor bull in a secular bear, and I am looking for the next top.

Optimism is rampant in the market. It is approaching euphoria levels. And that is usually a bad sign. When everyone and their grandmother is bullish, it's time to be very, very cautious. You might just be near the top of a major peak.

Of course, anyone who makes any decisions based on my thoughts deserves to lose all their money.

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the trend i follow for

the trend i follow for trading is the US$/euro for gold price direction. this has been in a downward bias since 2001, very strongly, and any break and close above 91 on its index would make me nervous about gold prices mid term. conversly, if it holds, back up the truck at your dealer or broker cause its going to get ugly.

Jonathan - haven't you

Jonathan - haven't you heard? The president says everything is A-OK. I guess that makes it true.

This is all well and good

This is all well and good until intrest rates go up and the Real Estate Market crashes.

You have to adjust for the

You have to adjust for the discount rate: namely what was the prevailing risk free rate of interest at the top of the bubble (you should probably pick either a 5 or 10 year USTreasury, but if you want to use Fed Funds that's fine). FYI the prevailing generic 10year Treasury was about 6.5% in Q1 2000 - today it is below 4%. [Of course we should adjust these to reflect the real rate of interest which does compress the difference between the two periods. Inflation was a tad higher in 2000, but I think we should consider the possibility that inflation on a forward looking basis will be higher than what we have now]

Then figure out what the P.E. of the market is on a comparable basis (remember the nasdog's was negative at the peak) to find out what your IRR (internal rate of return) is expected to be compared to the risk free rate.

The very low rates of interest go a long way in explaining the recovery from 2002 (and prompted some of us to buy around that time). That said, interest rates have bottomed so a forward looking person migh conclude it is time to flee.

But WAIT! E's have begun to rise, debts have been lowered and largely refinanced (healing of balance sheets - a big reason the Fed has been so agressive with rates) so profits should be healthier - and all that outsourcing and rising productivity still gives us another boost --- so P.E. ratios should look good on a forward looking basis.

Now comes the hard part - how much better will P.E.'s get before interest rates rise to a uncomfortable levels (and sucks cash back in the bond market). Oh, of course if rates rise much faster and sabbotage the economy then E's will fall... ooops!

Me I put a bunch of money in floating rate notes, flattened out my duration in fixed income, Added some risk in small caps and have put an investment property on the market to (try to) catch the top.

Anyone want to buy a house in Colorado?

"Of course, anyone who makes

"Of course, anyone who makes any decisions based on my thoughts deserves to lose all their money."

Anyone? That doesn't bode well for you , Jonathan.

Anyone? That doesn?t bode

Anyone? That doesn?t bode well for you , Jonathan.

Damn. I'm screwed.