Q Ratio Signals ‘Horrific’ Market Bottom, CLSA Says

[RedEarth]

via Krugman.... and nakedcapitalism

Dec. 10 (Bloomberg) -- A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.

The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, shows the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the index this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to 400 by 2014, Napier said.

“The Q has come down to its average, however it’s not always stopped at the average,” said Napier, Institutional Investor’s top-ranked Asia strategist from 1997-1999. “It has tended to go significantly below that in long bear markets.”

Shares have fallen this year as the worst financial crisis since the Great Depression caused almost $1 trillion of bank losses and dragged the world’s largest economies into recessions. The MSCI World Index has tumbled 44 percent in 2008, set for the biggest annual decline in its four-decade history.

The S&P 500 increased 0.1 percent to 889.28 as of 2:08 p.m. today in New York, erasing a 2.2 percent rally.

Bear-Market Scholar

Napier, who teaches at Edinburgh Business School and advised clients to buy oil in 2002 before it tripled, based his S&P 500 forecast on the Q ratio for U.S. equities as well as the 10-year cyclically adjusted price-to-earnings ratio, another measure of long-term value.

Before the trough in 2014, investors are likely to see a so- called bear market rally for the next two years as central bank actions delay the onset of deflation, Napier said.

“In the long run, stocks will become even cheaper,” said Brian Shepardson, who helps manage $1.9 billion at Xenia, Ohio- based James Investment Research. The firm’s James Balanced Golden Rainbow Fund beat 98 percent of similar funds this year. “There’s a likelihood of some type of rally and further pullback surpassing the lows we’ve already set.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKNSK0gYlqB0&refer=home#

Krugman.....

http://krugman.blogs.nytimes.com/2008/12/10/q/

nakedcapitalism.....

http://www.nakedcapitalism.com/2008/12/tobins-q-ratio-says-equity-bottom-much.html

[county worker]

1. It seems to me that as the spread between the haves and the have nots grew,

the haves had a lot of cash to invest. Deregulation made it east to increase values of stocks. Just like the increase in the price of housing, the cost of stocks increased well over the asset value of the corporations whose stocks were being traded.

At some time the chickens have to come home to roost.

[Narkos]

2. Is anyone dumping their stocks now? n/t

[CoffeeCat]

3. A year ago, I begged my husband...

...to get our 401k funds out of the stock market.

He respectfully disagreed with my opinion, but he allowed me to do whatever I wanted
with our bank-account funds.

So, I've been simmering on low boil for a year.

Yesterday, my husband said, "Look at the Dow, up quite a bit. If we had gotten out several
weeks ago, we would have lost big time on this gain."

I reminded my husband that I predicted a rally and a few upticks, before the entire thing
falls into the shitter. I'm predicting end of Jan 09 - mid-Feb 09--as the housing situations
worsens, unemployment rises, retail across the board implodes and deflation sets in.

Today...Finally, my husband agreed that we're taking all 401k funds out of the stock
market.

We're doing it tomorrow. We've lost 17 percent which isn't as bad as it could have been.
I just don't want to stand around watching us lose nearly everything.

It's been a long year... :)

[Narkos]

4. Yeah, I've been thinking the same thing

2009 is going to be a crappy year. You probably made a wise choice.