Dow 14,198?

[Dakota (Premo)]

Originally Posted by Gilligan

Today was a good day.

You forgot

It has been down all day.

[Dakota (Premo)]

OH

I see the president was yapping this morning about 'closing loopholes and taxing the rich' this morning.... SO...... that is why it is down - coupled with the lack of faith they will come up with a budget.

[Tilted (Premo)]

Originally Posted by Gilligan

Today was a good day.

A pause or the beginning of a significant (though perhaps not technical) correction?

Equity markets were due for at least a pause (and possibly a correction), they've been on a tear since mid-November and in particular since late December.

Originally Posted by Dakota

OH

I see the president was yapping this morning about 'closing loopholes and taxing the rich' this morning.... SO...... that is why it is down - coupled with the lack of faith they will come up with a budget.

Was he talking about taxes on carried interest? I noticed a mention of that issue, but didn't dig into exactly what was said.

As for why the (U.S. equity) markets were down yesterday, it probably has more to do with Europe. Their equity markets were in the toilet yesterday and U.S. equity futures were down significantly pretty early - before President Obama would have been speaking I think. If you overlay the U.S. premarket charts with the DAX or FTSE or CAC, you'll see the pattern. There were some goings on (i.e. accusations of bad behavior) in Spain that the markets over there (and then here) didn't take too well to.

[Gilligan (Premo)]

Sure is volatile...big bounce after opening bell.

[Tilted (Premo)]

Originally Posted by Gilligan

Sure is volatile...big bounce after opening bell.

Yeah, the equity markets are short-term volatile. The biggest difference between yesterday and today is that the major European equity markets aren't down 150% today, so they don't represent new fear for U.S. equity markets.

[philibusters]

With earnings improving I see equity prices improving.

If there was such a thing as a rational investors, he would look at his expected return on an investment when deciding whether to buy or sell that investment.

When you factor in that there are two major competing areas of U.S. Financial markets equity (stocks for the most part) and debt (bonds for the most part), you'll realize that if bonds are not offering a good rate of return (i.e. a low interest rate), the rational investor won't require stocks to have a good rate of return (in other words the investor will accept high P/E ratios). This breaks down, if you think like a hedge fund manager and are willing to invest outside the U.S. Financial markets, but if you are stuck in the U.S. financial markets like most mutual funds are, this holds true.

Right now if 10 year interest rates are 3%, that means $100 of bonds will produce $3 of interest per year or $30 dollars over ten years. In order for stock to match that rate of return a stock only needs a P/E ratio of lower than 33.33. Granted stocks are more risky than bonds so a rational investor will require stocks to have a slightly higher projected return rate than bonds to buy the stock. Thus, the S&P 500 has 10 year trailing P/E ratio of 20 to 1. Until bonds offer a better rate of return (higher interest rates), the rational investor won't require lower P/E ratios so stocks should continue to rise as earnings improve.

Thus in the next year I see a lot of votality with stock markets generally ending up a little ahead. However, sooner or later these quantativate easements will result in inflation and higher interest rates and when they do investors will require lower P/E ratios to stay in the equity markets (as again, the equity markets have to produce a slightly higher rate of return than the bond market in order for the rational investor to park his money there). Thus my prognosis is over the next 10 years the stock market does poor.

One issue I would like to get Tilted's feedback on is whether he thinks the 10 year or 1 year trailing P/E ratio is the most telling P/E ratio given the Great Recession and the recovery of the last few years.

[philibusters]

By the way, I am taking profits when the S&P 500 hits 1550. I have already predetermined that I am doing that. Do other people have a sell off (take your profits plan)?

[GURPS (Premo)]

Originally Posted by Tilted

Equity markets have indeed been a wild ride lately -

how about Commodities Markets ....

[Tilted (Premo)]

So... the DJIA had its highest close since October 2007 at 14,018.70. That's still nearly 150 points short of its all-time closing high and 180 points below its all-time intraday high (both from October 2007). I remain on the fence as to whether it will take out 14,198 in the short term. The S&P 500 also closed at a 5-year high.

How will the markets react tomorrow to the President's State of the Union Address? I have this crazy fantasy that the reason Apple CEO Tim Cook is attending (apparently with Michelle Obama) is because President Obama is going to announce his support for a patriation tax holiday or cut so that companies like Apple can justify bringing some of the money that they currently have overseas to the United States. I believe Apple has intentionally, though subtly, been making a political point about that issue during its earnings conference calls. I know, I know, that's an extreme long shot - but we can dream...

Anyway, it's something I suspect Mr. Cook has bent the President's ear about if he's had the chance. More likely though, if there's an actual point to having him attend it's to use the example of Apple trying to bring manufacturing jobs to the United States or to acknowledge concerns expressed by Mr. Cook and his predecessor, Steve Jobs, regarding what's not been done to make more domestic manufacturing plausible.

But oh boy... if President Obama were to announce his support for such a patriation holiday... that likely would push the DJIA to all-time highs and do a fair bit to help the employment situation in this nation.

[Tilted (Premo)]

Originally Posted by philibusters

One issue I would like to get Tilted's feedback on is whether he thinks the 10 year or 1 year trailing P/E ratio is the most telling P/E ratio given the Great Recession and the recovery of the last few years.

I think I'd care more about the P/E for the trailing year than I would for it over a trailing 10 year period. What was happening 5 or 10 years ago may not have much to do with the current prospects of a business. To the extent I'd be interested in that time frame, I'd probably care more about growth metrics - have revenue and earnings grown constantly over that time, how much have they grown, is there reason to believe or not believe the growth prospects remain the same now? The forward P/E is worth paying attention to also (certainly more than a P/E considering the last 10 years), but its value of course depends on the reasonableness and reliability of the (forward) earnings estimates used to calculate it.