Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 22-May-2009
Laszlo Birinyi provides insight on his fantasy price/earnings computations

Web Log - May, 2009

Laszlo Birinyi provides insight on his fantasy price/earnings computations

These are the figures published by the Wall Street Journal.

A month ago, in "Wall Street Journal and Birinyi Associates are lying about P/E ratios," I described how WSJ was publishing price/earnings ratio figures provided by Birinyi Associates, and that these figures were simply fantasies unsupported by anyone else, including the "official" analyst estimates in the Standard & Poors earnings spreadsheet.

I quoted the Birinyi Associates web site, which begins with, "Our approach is to understand the psychology and the history of the market."

Well, Laszlo Birinyi was interviewed on Bloomberg tv on Wednesday, and this is what he said (my transcription):

"I'm more optimistic on the economy than most people, because of the surge in the last couple of weeks.

If you look at the comments [by analysts], I'm not sure whether they're expecting inflation or deflation. It always goes back and forth.

My solution is to look at the markets, and not to be concerned with peripheral issues, because they drive you crazy.

Laszlo Birinyi, Birinyi Assocates - president <font face=Arial size=-2>(Source: Bloomberg)</font>
Laszlo Birinyi, Birinyi Assocates - president (Source: Bloomberg)

The markets have been acting pretty well. And they were acting pretty well on Monday when we got a big surprise. The markets are much more confident about the outlook than anybody else is.

I've done better listening to the markets than listening to the [analyst] comments. ...

Money flows tell me that people want to keep buying. About 70% of the gains in this rally have occurred in the last hour of trading every day. That tells me that people want to get back in, and when the market starts to do a little better then they rush back in. That's why we've been seeing these strong afternoon rallies. So I think there's still an awful lot of money that needs to be deployed into stocks, and the alternatives are not too exciting. ...

There are technical measures you can use, but the problem is that people use technical measures for predicting things, instead of understanding things.

When you take your blood pressure, whether it's high or low, it doesn't necessarily tell you anything about your health going out six months. We use a variety of indicators such as moving averages to sort of give us some help. But if you don't try to do more with them than they're meant to do, then you won't get in trouble. Where people have problems is when they try to predict what's going to happen with the levels, and so forth.

So we have found, for example, that the spread between the 50 day moving average and the stock price is a pretty good indicator. So we're focusing more on technical and market approaches than we are on fundamentals.

The VIX is very mixed [in value as a technical indicator]. It hasn't had a very good record recently, and we've found that it gives off too many false signals, and furthermore we're more interested in individual stocks. This is a market where you have to pick stocks. So these macro items are as big in our process as they might have been five years ago. ...

We're confident we're in a bull market, and when you look at the historical perspective, we think this market will go to 1500 or 1700 on the S&P over the next 2-3 years. It's not going to be a straight line, and it's not necessarily a prediction that I wouldn't want to update on occassion, but for some sort of a parameter or game plan going forward, that works. ...

[Unemployment figures are not useful as technical indicators.] These numbers change so much. We used to have just the government unemployment. Now we have ADP unemployment, and sometimes those numbers are in contrast. ...

[Retail sales figures are not useful as technical indicators.] It was interesting in the last week to see the market reacted very negatively to retail sales numbers. But those retail sales numbers came out of the government, and they're very much in contrast to retal sales numbers that came out of the companies, out of the stores. There's a big difference there, and I suspect that what you're going to see is that the retail sales on the government side are going to improve dramatically next month, because the company's aren't performing anywhere near those deficiencies or defects."

This has got to be one of the most bizarre things I've ever seen. If it weren't for the fact that this guy's fantasy price/earnings computations are republished by the Wall Street Journal, what he just said would be rejected as the rantings of a nut.

Let's summarize some of salient points he made:

This is the damnedest thing, and it represents the epitome of the craziness that we're seeing today.

At its core is the view that stocks have no fundamental or intrinsic values. Their values are simply determined by whatever investors will pay.

He says that the market is going to continue to surge to S&P 1500-1700 in the next 2-3 years (roughly equivalent to Dow 15000-17000). Why not 20,000? Why not 100,000? Why not 1,000,000?

As I've written many times in the last seven years, most recently last week, stocks do have a fundamental intrisic value, determined by reported corporate earnings. (See "How to compute the 'real value' of the stock market.")

The current surge is a "bear market rally." The stock market fell 90% from 1929 to 1932, and in that period there were several rallies that were larger than the current one. So the current rally is not exceptional or unusual, and it does not indicate in any way that a bottom has been reached.

People like Birinyi are leading the way to what I've frequently described as "The Principle of Maximum Ruin," which means that the maximum number of people are going to be ruined in the maximum amount possible. That's what happened in 1929, and that's what's happening today.

I've quoted this passage from John Kenneth Galbraith's 1954 book The Great Crash - 1929 many times, but you can't read it too often. It describes how the "Principle of Maximum Ruin" played out in 1929:

"A common feature of all these earlier troubles [previous panics] was that having happened they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune.

The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. ... The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or fourth of the purchase price in the next twenty-four months. ... The ruthlessness of [the stock market was] remarkable." (p. 108)

Anyone who listens to Birinyi and people like him are going to learn for themselves how ruthless the stock market is, just as people did after the 1929 crash.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (22-May-2009) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Web Log Pages

Current Web Log

Web Log Summary - 2016
Web Log Summary - 2015
Web Log Summary - 2014
Web Log Summary - 2013
Web Log Summary - 2012
Web Log Summary - 2011
Web Log Summary - 2010
Web Log Summary - 2009
Web Log Summary - 2008
Web Log Summary - 2007
Web Log Summary - 2006
Web Log Summary - 2005
Web Log Summary - 2004

Web Log - December, 2016
Web Log - November, 2016
Web Log - October, 2016
Web Log - September, 2016
Web Log - August, 2016
Web Log - July, 2016
Web Log - June, 2016
Web Log - May, 2016
Web Log - April, 2016
Web Log - March, 2016
Web Log - February, 2016
Web Log - January, 2016
Web Log - December, 2015
Web Log - November, 2015
Web Log - October, 2015
Web Log - September, 2015
Web Log - August, 2015
Web Log - July, 2015
Web Log - June, 2015
Web Log - May, 2015
Web Log - April, 2015
Web Log - March, 2015
Web Log - February, 2015
Web Log - January, 2015
Web Log - December, 2014
Web Log - November, 2014
Web Log - October, 2014
Web Log - September, 2014
Web Log - August, 2014
Web Log - July, 2014
Web Log - June, 2014
Web Log - May, 2014
Web Log - April, 2014
Web Log - March, 2014
Web Log - February, 2014
Web Log - January, 2014
Web Log - December, 2013
Web Log - November, 2013
Web Log - October, 2013
Web Log - September, 2013
Web Log - August, 2013
Web Log - July, 2013
Web Log - June, 2013
Web Log - May, 2013
Web Log - April, 2013
Web Log - March, 2013
Web Log - February, 2013
Web Log - January, 2013
Web Log - December, 2012
Web Log - November, 2012
Web Log - October, 2012
Web Log - September, 2012
Web Log - August, 2012
Web Log - July, 2012
Web Log - June, 2012
Web Log - May, 2012
Web Log - April, 2012
Web Log - March, 2012
Web Log - February, 2012
Web Log - January, 2012
Web Log - December, 2011
Web Log - November, 2011
Web Log - October, 2011
Web Log - September, 2011
Web Log - August, 2011
Web Log - July, 2011
Web Log - June, 2011
Web Log - May, 2011
Web Log - April, 2011
Web Log - March, 2011
Web Log - February, 2011
Web Log - January, 2011
Web Log - December, 2010
Web Log - November, 2010
Web Log - October, 2010
Web Log - September, 2010
Web Log - August, 2010
Web Log - July, 2010
Web Log - June, 2010
Web Log - May, 2010
Web Log - April, 2010
Web Log - March, 2010
Web Log - February, 2010
Web Log - January, 2010
Web Log - December, 2009
Web Log - November, 2009
Web Log - October, 2009
Web Log - September, 2009
Web Log - August, 2009
Web Log - July, 2009
Web Log - June, 2009
Web Log - May, 2009
Web Log - April, 2009
Web Log - March, 2009
Web Log - February, 2009
Web Log - January, 2009
Web Log - December, 2008
Web Log - November, 2008
Web Log - October, 2008
Web Log - September, 2008
Web Log - August, 2008
Web Log - July, 2008
Web Log - June, 2008
Web Log - May, 2008
Web Log - April, 2008
Web Log - March, 2008
Web Log - February, 2008
Web Log - January, 2008
Web Log - December, 2007
Web Log - November, 2007
Web Log - October, 2007
Web Log - September, 2007
Web Log - August, 2007
Web Log - July, 2007
Web Log - June, 2007
Web Log - May, 2007
Web Log - April, 2007
Web Log - March, 2007
Web Log - February, 2007
Web Log - January, 2007
Web Log - December, 2006
Web Log - November, 2006
Web Log - October, 2006
Web Log - September, 2006
Web Log - August, 2006
Web Log - July, 2006
Web Log - June, 2006
Web Log - May, 2006
Web Log - April, 2006
Web Log - March, 2006
Web Log - February, 2006
Web Log - January, 2006
Web Log - December, 2005
Web Log - November, 2005
Web Log - October, 2005
Web Log - September, 2005
Web Log - August, 2005
Web Log - July, 2005
Web Log - June, 2005
Web Log - May, 2005
Web Log - April, 2005
Web Log - March, 2005
Web Log - February, 2005
Web Log - January, 2005
Web Log - December, 2004
Web Log - November, 2004
Web Log - October, 2004
Web Log - September, 2004
Web Log - August, 2004
Web Log - July, 2004
Web Log - June, 2004

Copyright © 2002-2016 by John J. Xenakis.