Dave Rosenberg, the chief economist at Gluskin Sheff & Associates, has been saying all along that the stock market is highly overvalued.
“We have a market that is highly overvalued,” Rosenberg said today in an interview on Bloomberg Radio. “We have more sellers than buyers. 2010 will be a reversal from what we saw in 2009, when there was overwhelming complacency.”
... The stock measure has surged 62 percent since March 9, driving its price-earnings ratio using the past year of profit to as high as 25 last month, the highest level since 2002, according to data compiled by Bloomberg.
“We’re going to have enough economic disappointment this year,” said Rosenberg, the former chief North American economist at New York-based Merrill Lynch & Co., the brokerage bought by Bank of America Corp. a year ago.
Various estimates I've seen place that overvaluation at anywhere from 25 to 40%. Why is this? One reason was a strong belief in a "V-shaped" recovery, so the market was "pricing in" something like 7+% GDP growth during the rebound. There was much talk about the P/E ratio and Robert Shiller's 10 year average, used to control for volatility. (Stocks go up and stocks go down.) But you didn't have to be a rocket scientist, or even an economist, to see that the market has been rising like a balloon filled with hot air since the March low.
So where's the recovery? There isn't one. Where would it come from? The Housing Market, which has often driven rebounds during "Business Cycle" recessions in the past, is a shambles, unemployment is likely to go up from here—despite what phony government statistics say—and stay very high for years to come, etc. Savings are up, consumption is down. Bernanke was able to stave off an extended period of out & out deflation, but has not been able to get enough inflation going to get people to part with their money. And lots of them don't have any money anyway.
Yes, the market goes up and the market goes down, but in the end, its valuation will be tied to the state of the Real Economy. And the state of the Real Economy is not good.
Maybe not this week, and maybe not this month, but some time down the road—I think it will be sooner rather than later—the market will "correct." Technical analysis is voodoo as far as I'm concerned, but one glance at Doug Short's chart tells me that beginning last October, the S & P 500 has been wobbly. It's like a spinning top slowing down. Near the end, the top wobbles like crazy, and then finally it just falls over. The latest "pullback" was larger than any other since March, 2009. The bear market rally may be over now. As 2010 progresses, it will become more and more obvious that a strong "V-shaped" recovery was only a figment of somebody's imagination. Not even the fabled & mysterious Plunge Protection Team will be able to keep the ballon inflated this time.
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