March 19, 2009
Robert Prechter, New York Times best-selling author and renowned market analyst, was recently asked to present his thoughts on the real estate market and the financial crisis to the Georgia Legislature. The following article has been adapted from the transcript. Elliott Wave International has made the full presentation available free, including the full transcript and 30-minute online video.
By Robert Prechter, CMT
I'd like to try to answer a question: 'Are we near a low in the stock decline?' Because in these times when stocks and real estate are declining together, they tend to bottom roughly together as well. So I want to take a minute and look at a valuation chart for the stock market.
What we have here on the 'X' axis is the bond yield/stock yield ratio for the S&P 400 companies. Sounds fancy, but all it means is that the further you go out to the right, the less companies are paying in dividends compared to what they are paying on their IOUs—on their bonds. On the 'Y' axis we have stock prices relative to book value. Book value is roughly equivalent to liquidation value, in other words, if you went and sold all the assets on the open market. When stocks get expensive, prices tend to rise relative to book value, and dividends tend to fall relative to the cost of borrowing. Why does that happen? At such times, people don't really care about dividends because they think they are going to get rich on capital gains. So dividend payout falls, and stocks get more expensive.
The small square boxes indicate year-end figures. The large box is a general area that has contained values for the stock market for most of the years of the 20th century. We had a few outliers: 1928 and August 1987, which preceded crashes in the stock market. And of course stocks were really cheap in the early '30s and again in 1941. If you are really astute, you have noticed something about this chart, which is that I've left off some of the data. It ends in 1990. What happened in the past two decades? Now I'm going to show you same chart but with the data from the last two decades on it. The March 2000 reading we call Pluto. Real estate wasn't so bad; I think it only got to about Neptune. But the stock market reached Pluto in March of 2000 in terms of the bond yield/stock yield ratio and the price multiple of the underlying values of companies. That's going to take quite awhile to retrace.
I've also plotted the reading for November 2008. The market has made quite a trek back toward normal valuations, but if you look at these multiples in terms of book value, we are at 4 times. It has to go down to 2 times to get back into the box, and we are getting there on the bond yield/stock yield ratio which means that the dividend payout is rising somewhat to catch up with borrowing costs. And because the S&P is down 45%, of course, the dividend payout as a percentage has gone up. But there is a problem there. If you're reading the newspapers, you know that companies have been cutting dividends. In fact, they've been cutting them at the fastest rate in half a century. So it is going to be difficult for values to get back to a normal valuation range. So the stock market has quite a bit lower to go in order to catch up with normal values, and this suggests that real estate may have the same sort of trend going on.
For more information, access Robert Prechter's full presentation to the Georgia Legislature, free from Elliott Wave International. It expands on the excerpt above with the full transcript, a 30- minute online video, and 12 additional charts and figures.
Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
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- @JimPunkrockford You're right, Prechter's view is all #deflation. I don't get 'hyper-inflation is deflationary' in book. Where in book? #
- @JimPunkrockford Two ways to get same result is what I get from that sentence; refer back to "ironically, the end result..." same paragraph. #
- @JimPunkrockford Found article which explains how there can be both: http://www.financialsense.com/fsu/editorials/amerman/2009/0212.html #
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In December 2008, our friend the famed financial analyst Robert Prechter, Jr., spoke before his state legislature. The House and Senate Economic Committee had invited him to give his unique outlook on real estate, financial markets and the economy and to share with them his ideas for what – if anything – a governing body should and shouldn’t do to make its state a more attractive place in which to live.
Since then, the video – complete with Prechter’s eye-opening charts – has been passed from friend to friend and has also reached some very influential people – perhaps even in your state government.
Prechter’s insights are anything but conventional; in truth, some could be considered downright radical. But, as Prechter says in the presentation you’re about to watch: Today’s environment is anything but typical. An atypical problem calls for atypical solutions.
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http://www.thedeflationtimes.com/elliott-wave.html - Get tomorrow's news today when you subscribe to Elliott Wave Theorist.
A couple of years ago we had all the experts insisting 'property values will always rise 10% per year' and 'the stock market is always a good long term investment'. It seemed anyone with a mortgage on their own home, let alone a property investor, was suddenly an expert in predicting the market. And those predictions were only one way, up. If anyone were to suggest otherwise you were looked at as if you had Spock ears and green teeth.
Today we are facing very different economic times than two years ago. The armchair experts are quieter, but the paid experts are still speaking loudly and their cries are taken up dutifully by the media. And what are these paid experts telling us now?
If you go to Google news and search for 'gold investing' you will see many headlines like these. From the UK Telegraph, 13th March 2009, 'The Gold Rush: Is It Too Late To Jump On The Bandwagon?', and from ft.com published 3rd March 2009 'Haven-sent Gains For Gold'. The experts are now predicting that gold is a safe investment during very rough economic times, that the value of gold will NEVER drop, it can only go up. Sound familiar?
Very few experts saw coming this major global economic crisis we are now in. So why does anyone listen to them still? Why would you? It's not like they have a good track record.
There is one organization that has correctly predicted this economic mess. Back in 2002 Robert Pretcher of Elliott Wave International published his book 'Conquer the Crash' warning of a major economic meltdown. Remember, this was published just before the current crisis began to unfold. So it was highly prophetic.
If you are thinking of investing in gold to avoid losing money on other markets, or seeking a safe haven for your wealth, shouldn't you search out the advice of experts with a good track record? Elliott Wave International currently have some very specific advice for gold investors, and it's not what the failed experts are saying. When it comes to protecting your wealth look to who's been right - Elliott Wave International.
http://www.thedeflationtimes.com/conquerthecrash.html - Elliott Wave Theorist, April 2008, "The signs of global credit contraction constitute the initial stage of a deflationary depression."