Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

NASDAQ-100 Bubble Bust Compared To S&P 500 Stocks Index

Stock-Markets / Stock Market Valuations Jan 13, 2010 - 11:06 AM GMT

By: Andrew_Butter

Stock-Markets

Best Financial Markets Analysis ArticleInteresting remark in a recent article by Karl Denninger:

But in 2003 credit was rapidly expanding, as it was in 2004. This is why the S&P expanded back to (and slightly beyond) its previous high - that was all financial leverage. The Nasdaq, made up of companies that made "things" (and services) for the most part, did not recover because it was not able to play financial engineering.


Now credit is contracting strongly ex-government, and even with the government's borrow-and-spend policies total outstanding credit is not expanding at any meaningful pace.

So if the S&P's recovery in the 2000s was based on financial leverage (it was) while the Nasdaq's "recovery" was what you get minus that leverage what happens to the broader indices that are polluted with the "leverage required" firms when the market figures out that the leverage is not coming back?

http://seekingalpha.com/article/181189-western-government-sovereign-debt-in-trouble

I certainly agreed with the first part of that statement which is that the mistake that the Fed made in 2001 was to create a monetary stimulus that helped those that had made bad investments in the build-up to the bubble get off the hook.  Following that logic through to it’s conclusion was how I came up (in January 2009) with a prediction for the S&P 500 turn at 675; the idea there was that the bottom in response to the peak in 2001 hadn’t come in properly, but one way or the other, someone had to take their medicine.

But come to think of it, it makes sense that “stimulus” affected the companies that make money out of leverage more than those that, as Karl correctly points out, live by making things (and services) people want to buy, and can’t make a “profit” just by hiring a smarter accountant.

I hadn’t thought of that.

In fact I never thought about the NASDAQ either, so I had a look, this is the chart I came up with:

Background:

Briefly, the Orange Line (OMV) Other-Than-Market-Value is my estimate of what the indexes should have been (left hand scale for the S&P 5-00 and right hand scale for the NASDAQ), if the market was not in what International Valuation Standards and George Soros calls “disequilibrium”.

How I got to that line is I did a valuation using International Valuation Standards.

How you do that is you pick up a copy of the Standards and follow the procedures, it’s a bit like painting by numbers, theoretically two independent valuers ought to get to the same result, although as far as I know I’m the only person who did a valuation of the stock market using IVS.

There are other ways to work out that line; Andrew Smithers uses Tobin’s “q” and Professor Shiller uses P/E ratios, both call the line “Fair Value” (nothing to do with the accountancy definition of Fair Value”). Ben Bernanke has taken to calling it  “fundamental value”, although since he claims that he doesn’t have a clue how to work out what it is (I believe him), that’s a bit academic.

The line I get using IVS is different from the line you get using Tobin’s “q” and P/E ratios. Which is right – well who knows?

Personally I like to use a recognised valuation standard whenever I do a valuation (those other methods are not in line with any recognized valuation standard that I ever heard of).

 Apart from the fact that I did use IVS, the only other evidence that I can produce to suggest my line is the “right” line, is that based on that line you can get to a logic which (a) in January predicted the turn at 675 (which happened in March) (b) said there would be a strong rally afterwards (there was), and (c) in May it predicted that the DOW would keep on going up at least until it hit 10,000 without a “serious reversal” (it did).

Anyway, that’s the line I use.

Discussion

By that calculation at the peak of the bubble in 2000 the NASDAQ was about 4x OMV and the S&P 500 was about 2x OMV

According to the Seven Immutable Laws of Bubbles that means the bottom of the trough should have come in about ¼ of OMV for the NASDAQ and ½ OMV for the S&P 500.

http://www.marketoracle.co.uk/Article12114.html

That’s about 323 for the NASDAQ (that’s the red dot on the chart) and about 495 for the S&P 500 (that’s the blue dot on the chart).

They didn’t, the NASDAQ turned out losing 50% of what it “should” have lost (according to my calculation) if the Fed hadn’t stepped in and used taxpayer money (current and future), to save the skins of all the malinvestment  Ponzi Scheme merchants, and about 20% for the S&P 500.

S&P 500

What happened next was that the S&P 500 (according to my numbers) more or less tracked OMV until 2008, until the house of cards finally came crashing down around everyone’s heads and even the Government of the Most Powerful Nation on Earth was unable to rig the marketplace so that the malinvestments of the past didn’t start to implode, and the 50% of the peak in 2000 came in, like clockwork, exactly as the model predicted.

The moral of that story is that once malinvestments have been made, (thanks to a bubble), you can’t start again until all of those have been washed out of the system.

Funny how Allan Greenspan was happy to stand by whilst the bubble was forming, saying that the “market can look after itself”, and that he couldn’t recognize a bubble even if someone hit him over the head with a copy of International Valuation Standards, but when the whole thing exploded, well he started meddling with the market.

There are TWO things you can do wrong with Bubbles if you are a regulator:

1: Let them happen in the first place (if you know how to do a valuation it’s not hard to recognise them).

2: If you did let them happen, than panic and rush around using taxpayer money (and the money of their grandchildren), to pay off everyone who made a lousy investment and try and sweep the pain under the carpet.

Alan Greenspan made TWO mistakes, not one.

The net result was that a downturn of about seven years whilst the lunacy got “cleaned up”, just got extended to 14 years (i.e. seven years from now is how long this analysis estimates before the S&P 500 will naturally lie at OMV).

That’s why I’m saying that if the S&P 500 comes up to any more than 80% of OMV (right now that’s 80% of 1,500 = 1,250), it’s highly likely there will be a 20% or so reversal (i.e. down to about 1,000).

NASDAQ

To my way of thinking the NASDAQ looks different.

First it got in 50% of where it should have gone (rather than 25% in the case of the S&P 500), second from 2002 to 2008 it bumbled along about 10% to 20% below OMV.

So that’s seven years “on the bench” which is enough time for the malinvestments leading up to 2000 to be shaken out. So for me, it would have been no surprise that in early 2008 the NASDAQ crept up to OMV (I wasn’t actually looking at it but that’s by-the-by).

If (then) I’d been asked to take a bet on what would have happened next I would have said that the NASDAQ was in good shape; and I would have been wrong (I wasn’t asked and I didn’t take the bet).

I’m mulling that over right now. My inclination is to say that the NASDAQ got hit just because the whole market got hit, not because there was a lot of malinvestment or mispricing; like it got hammered unfairly, “in sympathy”.

If that’s right, then the NASDAQ-100 “ought” to creep up to 2,250 to 2,500 in the next year to 18 months, whilst the S&P 500 basically goes (on average) sideways.

That makes some sort of sense, as Karl Denninger was saying, companies on the NASDAQ make things and they provide services, and so they don’t rely half as much on financial tricks and leverage to produce “earnings”.

And until securitization re-starts (unlikely in 2010, and perhaps not even in 2011), anyone who relies on leverage or financial tomfoolery to hit their earnings targets, are going to be left in the dust.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in