first majestic silver

Stocks Grossly Overpriced !

October 29, 2001

The talking heads on CNBC and the other official members of the American misinformation machine are trying to con investors into buying the stock market on the basis that it is now so cheap. This is of course a monumental lie. But Wall Street has become so accustomed to telling lies that they have no concept of what the word "truth" means. Truth to them is what ever it takes to sell stocks. So they go about their business telling investors that stocks are a great bargain because they have declined 20% or 30%.

But stocks have never been more overpriced and more expensive. To demonstrate that fact, you need only glance at the S&P 500. As recently as Thursday October 18th, the S&P 500 PE RATIO had hit AN ALL TIME HIGH! On that day it closed at 35.99 times, eclipsing the pervious high of 35.82 scored in 1999.

What this means is that people are now willing to receive only around $2.80 of earnings per $100 invested in the S&P 500. Of those earnings, only about $1.40 or $1.50 are paid out in dividends while the remainder is included in retained earnings, the legitimacy of which is becoming increasingly dubious given lax accounting standards these days. Of course dividends are then subject to a personal tax on top of the corporate taxes.

By contrast, one can buy a 10-year Treasury (not that we are recommending that) and receive a cash transfer of nearly 5%. Why would one wish to buy stocks when a) the yield on U.S. treasuries are much higher, b) when the cash received from a Treasury investment is far higher and c) when given the historically high PE multiples for stocks the risk of severe lost of principal remains such a high probability.

Being bullish on stocks as a whole makes no sense whatsoever at this juncture. But then who ever said stock investors were rational or acted rational? Indeed quite the contrary is true. When it comes to stocks, the more expensive they are, the more investors want them! Almost anything else we purchase we look for lower prices. Not so with stocks! Higher prices confirm our bullishness. So the CON job by the establishment must continue for the sake of investment bank profits. No doubt greed plays a role on the part of the sellers as well as the buyers of stocks. But the behavior here is insane and the degree of our insanity is surpassed only by the ridiculous excesses of this bull market, which has been fueled by the ridiculously excessive creation of money and credit out of thin air by our bankers and politicians.

So Americans continue to pay ridiculously high multiples for stocks despite the most ominous clouds hanging over our economic horizon since the 1930's. For example, over the past couple of days, the economic news points to a deepening of the economic downturn. Still CNBC trots out bull after bull after bull to sell piles and piles of bull you know what! What CNBC should be doing, at least with equal consistency, for the sake of the investing public is bring out the bears, our favorite being David Tice who manages the Prudent Bear Fund (BEARX) and the Prudent Safe Harbor Fund (PSAFX). For more information, we suggest you visit .

We continue to propose investors buy these funds as a means of protecting your wealth as the economy and stock market continue to decline. As an individuals investors, I do not wish to play the short end of the market myself. But I have not qualms about having a pro like David Tice do it.

This past Thursday was the Fall CMRE meeting. One of the speakers was Marshall Auerbach who writes some splendid columns for David Tice & Associates. Marshall sited already public information hinting that not only gold equity markets too may now be manipulated by policymakers. This is indeed not a new concept to our subscribers, but a gentleman of Marshal's stature saying it adds credibility to those who are beating the conspiracy drums. Marshall is a real decent Brit who makes me glad the U.S. and Britain are such strong allies.

When Will we turn Bullish on Stocks?

Of course we have a few favorites stocks aside from gold shares but for the most part, we are about as bearish as anyone gets. When might we turn bullish on stocks? The answer is when the market finally achieves a real capitulation and when stock values approach or surpass prior low PE multiples. And how low did stocks decline in the past? In 1949 they sold at 5.4 times earnings. In 1974 the PE ratio fell to 7.5 times. In 1982 it fell to 7.9 times. Since we think the current decline is likely to be as bad or worse than that of the 1930's we have no trouble believing that ultimately PE ratios will approach the lows of that cycle.

Now, given that stocks as measured by the S&P 500 are selling at something like 35 or 36 times earnings, as you can see, a gigantic decline in equity values will have to take place before I will become bullish overall about stocks.

How will the market get to a range of 5 to 10 times earnings? Either earnings will have to rise or share prices decline or a combination of the two will have to take place. There are no signs that I am aware of that suggest earnings will begin to increase any time soon. Rather with the economy continuing to worsen, the most likely outcome will be continued declining earnings, no matter how much companies try to stack the deck with increased "September 11 write offs." I believe Ian Gordon is right in his prediction that we are in the early stages of a very severe economic and market decline, the likes of which we have not seen in 60 or 70 years. If earnings remained flat, we would have to see the S&P decline into the 300's before the index would sell at a PE of 10 times. Given our belief that earnings will decline for the foreseeable future as the bubble continues to deflate, we are suggesting the S&P could decline even below the 300's!

Much as we would like to be bullish, historical behavior of markets as well as an objective look at the economy and where it is headed does not allow us to be so. If you're a bull, the picture painted above is not very exciting. But if you are bearish and own the Prudent Bear Fund, you will be among a very small group of investors who not only weathers the economic downturn, but who earns a handsome profit as the market decline continues - no matter that government intervention may delay and in the end worsen the process.

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