Thursday, May 14, 2009

Dow 4,000 yet again

The Mogambo Guru is off on one of his comedy riffs again, and reiterating his devotion to gold, but here's a statistic he quotes midway:

“the price-to-earnings ratio for the Dow Jones Industrial Index is now a hefty 43.1! It should be, historically, less than 20!”

Do the math, as they say. In fact, I'll do it for you now: take the Dow at close the night before Mogambo ranted (8,469.11) and multiply by 20/43.1. Result: 3,929.98.

I gues the question is, is the current low level of company earnings a temporary matter caused by recent dislocations, or is it set to continue as the economic climate darkens?

Plus, as we all know, the market can stay irrational longer than you can stay solvent. But I still think that, adjusted for what now seems inevitable high inflation, we're going to see Dow 4,000 sometime, as I graphed back in December:


Mark Wadsworth said...

I think if you are doing a chart like that it has to be logarithmic. And haven't we seen the double-top to end all double-tops over the last ten years in UK and US?

Sackerson said...

Don't understand why logarithmic, Mark, it's already adjusted for CPI. Not that I'm up to doing it yet, anyway. Wolfie has previously agreed 4k also. Double-top - is that a pattern indication big drops?

Sackerson said...

... apparently so ( But Lansing says "The pattern is complete when prices decline below the lowest low in the formation. The lowest low is called the confirmation point" - where would that be, exactly?

James Higham said...

You were devoted to gold once, Sackers.

Mark Wadsworth said...

The lowest low on that one appears to be at about 300, so we're past it already.

Logarithmic because a jump from 50 to 100 is the same as a jump from 200 to 400, but on your chart, things seem pretty dull for half a century and then they appear to go mad, which isn't really the case.

Sackerson said...

James - I started (in my tiny way) when it was less than half what it is now. Think I was right. But now it's not a question of speculating in then-undervalued gold, but hedging against currency collapse.

Mark - the Dow, adjusted for CPI as shown, tells the story. Not dull for half a century, rather variable - but then became absolutely bonkers.