As I gear up for my new year's comments, I will review some of my T Theory observations already detailed during January in other private publications, then look ahead to what T Theory sees in general for the primary goal of producing superior long term investment rate of returns, coupled of course, with minimum downside risk. These comments will most likely be posted early in the new month after I have completed my other obligations. A sample of my weekly research can be obtained at my Links Page above.
Generally speaking, my conclusions going forward into the new year are extensions of my archived year 2002 conclusions; namely that equities are still fundamentally overvalued, T Theory is still negative on equities after forecasting a major year 2000 peak, but tangible assets (such as Gold) may have attractive upside T Theory potential for the next 15 years. Otherwise short term Bonds offer the better conservative return for most of one's portfolio until either Contrary Opinion indicators show a completely sold out market (most reliably indicated when Investors Intelligence survey shows 55% plus of advisors they track are bearish) or Yale Prof Dr. Robert Shiller's Price to average 10 year S&P Earnings (charted below) reaches historically bargain valuation levels. Neither of these conditions have been reached since the Dow Industrial Mega-T # 8 forecast an early 1998 peak for the Dow Industrial blue chip stocks and it may be some time before these key indicators reach a fully defensible buy condition for blue chip equities. I will follow up these conclusions during the new year, but I would say the current early 2003 enthusiasm for equities is completely misplaced based on these criteria, so there is no need to rush into any near term rational for buying equities. I believe any current professed enthusiasm for equities are simply re-hashes of the false enthusiasm for equities presented during the years 2000, 2001 and 2002.
Also this year I am moving to a new publishing approach which I hope will permit me to move towards a more sophisticated and much wider ranging discussion of long term wealth building using basic T Theory concepts. This will include production of DVD's that use video media to bring the investment question in greater focus as I discuss some of the finer points raised by so-called "Super-Trader" Marty Schwartz in his book Pit Bull. This will become available late this year at nominal cost after I have gotten familiar with the new technology.
But my number one conclusion going forward, and therefore highest investment priority, is that traditional equities such as those found in the Standard and Poors 500 index of economically representative blue chip stocks remain dangerously high in price based on the important work by Yale Professor Dr. Robert Shiller which I detailed last year and can be reviewed in the archived discussions for those not familiar with his revealing approach to the fundamental Price to earnings Ratio as a figure of equity investment merit. During the year I will update his key equity indicators on a quarterly basis since earnings for the S&P really are only updated at 3 month intervals. The latest reading are graphically noted below in my more recent chart posting using data which is up to date as of December 31 2002. This plot shows the Shiller S&P 500 index price to average earnings over the last 10 years and I have noted the overvaluation extremes of 1906, 1929, 1966 and 2000. The most significant historical conclusion is that this more stable price to earnings ratio, which was a ridiculously high 44 times during the year 2000 speculative bubble, has only declined to a 22 price to earnings ratio as of Dec 31 2002, which is still unattractively high based on the last century's data.
Last week I was able to process the basic Shiller P/E Ratio vs S&P 500 data from 1880 into the more informative new format illustrated above. The data suggests that the next important bear market low is not likely until lower prices for the S&P 500 are seen. This chart plots the monthly S&P 500 index (in red) from the very early days, on a logarithmic basis so as to provide a better perspective of long term growth. However it is missing the dividend contributions. In recent years dividend returns have been so small that I don't see it as a problem going forward, nor does this deficiency influence the key conclusions that follow.
The lower blue plot shows Yale Professor Dr. Robert Shiller's refined calculation of the Standard and Porrs 500 Index Price to 10 year average Earnings Ratio. The scale at the left is only accurate for the Price to 10 year average earnings which got as high as 44 at the 2000 peak. There is no scale for the S&P 500 average and the first 10 years of P/E data is of course missing (zero) because the 10 year averaging process was not yet complete in my spreadsheet calculation. The interesting history for the S&P benchmark of blue chip stocks comes in the 15 years that follow the prior valuation peaks of 1906, 1929 and 1966. I am working hard on the interpretation of these post-bubble price scenarios in my Advanced Studies Project because I believe they offer the best guides for the future. The unusual common thread that runs through the three prior overvaluation peaks is the approximate 15 year period of descending peaks in the P/E plot noted by the green lines. These periods in my T Theory concept can be viewed as a "Value Build Up" process which is the counter part to my Oscillator concept the "Cash Build Up" period that defines the left side of all Ts.
As an example the Dow Jones Mega-T concept was very important to me in the 1970's because it forced me to consider the great upside potential that equities held back then, when few were looking to the equity market for gains in light of the disastrous results of the 15 year side in P/E Ratios from the 1960's peak in valuation to the 1982 low in valuation. It is clear now, with the more sophisticated Shiller interpretation of the P/E Ratio concept, that it is much easier to see that a 15 year period of persistently declining P/E Ratio or other relatively long period was probably needed in order to set the stage for the next great bull market. So the mystery of that bargain 1974 -1982 zone for equities is much easier to understand from this 120 year perspective.
For the longer term the big issue for those of us who are older is how to deploy our investable funds in the post 2000 " P/E Compression" environment which might last some 15 years, if this history is any guide. The simple answer is not to lose money in this difficult environment so as to have it all available when history finally provides the favorable juncture. As I see it, identifying the best investment opportunity will partly be based on fundamental valuation of equities using the Shiller P/E criteria and partly based on the value build up time considerations which, of course, is a T Theory concept.
Alternate T Theory Scenarios
While we are awaiting the resolution of the S&P 500 T Theory picture below I thought it worthwhile to speculate on the possible outcomes that are allowed by T Theory and have been demonstrated reliable projections for the past 200 years in my longest term work. See the Mega-T concepts posted online for details. The monthly chart below is up to date as of February 28 2003 and will get potentially significant new data if war erupts in the days ahead. There are three scenarios as noted in the chart; the continuation of the status quo (3 year erratic decline), a market collapse or a new bull market T formation.
Because T Theory has successfully viewed all bull markets since the 1800's as time symmetrical reaction to the momentum oscillator declines (cash build ups in the chart) we can analyze these possibilities in term of the momentum oscillators trading range between the red rising bottoms trend and the green declining tops. The next few months trend will of course determine the outcome.
Although any of the three scenarios are possible, the Shiller valuation data suggests the new bull market scenario is very unlikely based on the continuing over valuation of equities. The Selling Climax scenario represents the quickest resolution of the overvaluation but is a special case that only develops after investors have exhausted all the bullish alternatives. I will comment further as the data comes in.
Thanks for checking in, to be continued....