The Next Big Crash - Are You Prepared?

[Wildreamz]

Well, there is also a danger of looking at PE alone:

http://certainruin.blogspot.sg/2009/07/e...great.html

Temperament has a point, predicting where the market will go base on things like PE value is essentially pointless because earnings could be inflated right before a big crash.

Ironically, the best time to buy a stock might be when the PE ratio is high (or even negative), right after the crash because corporate earnings have fallen drastically.

[arriyana]

That is true. But looking at the article, it is posted in 2009. From 09 till 14, we know how the market played out.

Also, during a crash, the PE ratio is generally bottom low. Price usually react faster than corporate earnings (yearly or quarterly) basis.

[grubb]

Just want to point out that in the US, the ratio of corporate profits to GDP is now about 10%, whereas the norm is about 6%. Shiller PE is at 25x (versus 27x in Oct 07 and 43x in 2000. Norm is ~15x). If we were to believe that corporates cannot increase their share of GDP forever and will revert to their mean, then together with a compression of PE multiples we could be looking at a crash of 50%? TTM PE will not be useful in this case.

That's really exaggerated but I believe that earnings have more or less peaked and a correction is in order.

[arriyana]

Indeed. Correction seems to be in order. Question is will the correction spill over heavily to Asia market or Singapore will be gently sliced by it.

[felixleong]

Asia down 2%, STI closing in to 3000 level
at 12 times earnings I think STI would be a decent buy for long term investors
if it comes to 10 times earnings or less, just buy with all you have ^^

[arriyana]

I wonder how many investors are vested/capital already locked in the market. Anyone knows where such statistics could possibly be attained? Or even possible methodology to obtain such numbers.

[Big Toe]

U.S. market is a mixed bag.
While some of the earnings have peaked(or about to peak),
some are still in recovery mode, a long way to go.

Nothing interesting in SGX. Very few positives.
Overall flat to slightly negative.

Time to be very prudent in investing, most cash ought to stay at the sidelines.
Residential property is heading lower....much lower than what most people anticipate.
And it wont pick up in the next few years.(I think)

[Big Toe]

Also U.S. market traditionally goes up when interest rate rises.
(much like the cooling measures did little to deter property investors when first introduced.)
It is also in the process of credit expansion. Credit was almost frozen
and economy was at a standstill for the past couple of years.
It is slowly defrosting now but some share prices have probably run ahead of itself.

[specuvestor]

Also U.S. market traditionally goes up when interest rate rises.
(much like the cooling measures did little to deter property investors when first introduced.)

This is a very pervasive misconception in the industry. If this is true then US would have been a booming bull market during Volcker's times.

One way to check if a car's engine is running is to see if the engine is hot. But pouring hot water over the engine to make it hot does not mean the engine is running. That's where the economic theory perversion comes in.

Inflation is a symptom, not a cause. The fundamental idea is to increase expense (not savings), in terms of consumer expense or commercial capex, which is a function of increasing income. That is why monetary or fiscal solutions work, in varying degree to increase profits through lower business cost or higher revenue, depending on the time-frame and sustainability.

Simplistically, when consumption increases more than the supply of goods, inflation goes up. That is why US inflation remains benign with Chinese imports as a deflation counterbalance. Or when supply of money goes beyond the demand of money (which is a function of the consumption/capex increase) then inflation increases. They are correlated but not the same. There is certain truth in Japan trying to change the deflation paradigm to inflationary expectation to boost consumption, but only up to a point; extrapolating it further is snakeoil perversion.

Interest rate usually hike to reduce chances of economy overheating, or inflation going up uncontrollably. The underlying impact on economy and stock are not the same for these 2 different basis.

[Big Toe]

To each its own. It's a mixed bag really, valuation for Amazon is insane, but there is still value to be found.
When the car stalled, some pushing is needed to kick-start it. Once it is humming along and is going faster than expected,
brakes need to be applied(interest rate). Rising interest rate is normally a good sign, not a bad one, it is a signal that things are returning to normal.

Of course there's a chance that the economy does not improve much and hyperinflation kicks in. But at the moment, there are no signs of that happening(yet). All in, the market is a very dynamic place, just have to watch our steps. I am more worried about how the U.S. govt is going to pay its bills, if a country is spending above its means over a prolonged period of time. The people/economy usually suffers in the end. Inflation can be viewed as a positive in this respect as it erodes the value of the U.S. debt.