another bubble run, page-104

this whole top of the market thing .. been thinking about it today while out and about

my thoughts were ... there is no doubt whatsoever we are near the top .. but how far is left to get to the top no one is really quite sure, but we are close, all the signs are there.

but i must ask and i don't have access to this data currently ... does anyone know the average asx200 PE that the ASX was trading on in the 6 months prior to the 87 crash ... and same for the DOW, what was it trading on?

reason i ask is ... i'm not convinced that PE's have to be at 'outrageous' levels for a crash to happen. certainly we know they don't have to be for a correction.

my reckoning is ... if a crash is a fall of say 25-50% of the market index, and if PE's are at an average of say 30 ... a crash like that would only take us down to a PE of approx 10 .... which is really only just under par value.

for example .. if a sp is at $50 per share and that is a PE of 30 due to EPS being $1.66. a fall of 50% of the sp would take it to a price of $25, which would result in a PE of 15. the inference here is that, price multiples do not have to be excessively large like they were in the dotcom boom in which there were PE's in the 100's for the market to severely fall.

Sandune commented last night that the china exchange has an average PE of 38, so even if the market fell by 50%, it'd still have a PE of around 20 which is still considered a bit pricey. Valuations really won't be 'low' until they get down around the 8-10 PE level.

just some food for thought. keep in mind also, companies may be reporting great earnings now .. but will that continue .. if there are earnings downgrades, suddenly the current price of the stock become very expensive and with interest rates being so high and all sorts of indicators showing a slowdown, this will have no choice but to filter through to company earnings. if earnings come down but prices do not the PE instantly skyrockets.

i don't know what the average index PE was back in 87 or 97 or for any other crash, but i have a sneaky suspicion we are not far from it. I done random check of PE's on the ASX 200 a couple weeks ago .... the only one under 15 was BHP ... while some are up near 30 and 40.

apologies also for concentrating so much on PE's as i know there are MANY other ways to value a stock and MANY other variables to consider, however my stance has always been that, despite a company being worth the discounted rate of all future cashflows, the REALITY is that no one actually knows what those cashflows will actually be. forecasts are merely a best estimate based on previous performance. whereas the PE is an actual price value based on actual financial performance so its a real valuation. thats why i tend to use it. obviously if the economy is looking shaky, lower PE will be assigned, bringing prices down.

obviously I am bearish at the moment even though we're in the biggest bull run the history of economics and business has ever seen. on the other hand, we are close to the top, and as commented in some financial circles ... money entering the market now may very well turn out to be 'dumb money'