Standard & Poor’s Index price/earnings reached its most expensive level in seven years relative to earnings.

While the market has recently risen earnings have declined and stocks are now the most expensive they have been in seven years based on earnings. We told you that weeks ago and the media is just reporting it.

See:
http://www.martincapital.com/chart-pgs/Pg_per.htm


Market forces May 12,

US stocks retreated yesterday. New shares will continue to flood the market dropping prices as Capital One Financial Corp., U.S. Bancorp and BB&T Corp. sell shares to repay government bailout funds. Ford plans to sell 300 million common shares to raise capital also. They all want to sell before the bear market crashes again.

The latest estimate of the deficit has it coming in at $1.84 trillion, representing a massive 13% of gross domestic product in the current 2009 fiscal year that ends on Sept. 30. Two dollars is being spent by big government for every dollar it taxes. The administration intends to raise taxes but plans to run $7 Billion in deficits or six times as much as President Bush went into the red in his two terms.

The lows in a bear market are usually associated with substantial negative developments in earnings, the economy, or in world events. They become capriciously variable and damaging to the long-term psychology and discipline of many investors. The failure of even the best advisors encourages investors to question the viability of the market economy itself. Consequently the fear and uncertainty causes massive withdrawal of many smaller investors. Those bear market lows are typically followed by powerful bear market rallies, which then sweep away the short sellers pulverizing even the most shrewd investors in time for fresh declines. That cycle of decline, followed by hope, followed by disillusionment, leads to aversion of quarterly statements, and ultimately leads to complete abandonment of the stock market by a large percentage of investors.

The final decline of a bear market tends to be a massive investor abandonment based on a conclusion that stocks are simply bad investments. Abandonment is beyond the stages of fear and panic and is rooted in despair and disillusionment. Investors abandon stocks at the end of a bear market because stock and investment pop stars such as Jim Cramer and Larry Kudlow repeatedly prove themselves to be unreliable and disappointing. Half of the American investors abandoned stocks in the 1970s but they were followed by a fresh generation that has relied more on mutual funds. But the funds are now failing to perform as well.

Bear market lows can become enormously more and more oversold before recovering. Then the vigorous bear market rallies off of those lows further frustrate smaller investors because they don’t own the junk and high risk stocks that tend to be the meat and potatoes of bear market rallies. And then at the very top of the bear rally in junk, Jim Cramer says something like “the depression is over, the economy is improving, and this is a bull market not a bear rally” so that many investors buy in again at the market's top only to face yet another steep decline and a deep sense of personal failure an betrayal by all bullish market advisors. According to Warren Buffet this current bear market should be over within five years so he is buying as fast as investors continue to give him their money. He was down 38% for the year and he admits we are still in a bear market.



Market Outlook

Emerging-market stocks fell the most in two weeks after disappointing sales dragged down technology shares and lower oil reduced the earnings prospects for energy companies. The oilfield equipment industry cost increase from rising debt payments and falling oil prices has led to a quarterly profit slump.

Last night's Asian results were mixed. China is up 1.4%, Hong Kong is up 0.4%, and Japan's market was down 1.6%.

European markets are down in the range of -0.7% to +0.2% mid way through their day.

US futures indicate the markets will start flat today as corporations sell shares to raise capital and as stocks are now the most expensive they have been in seven years. Our advice is to cherry pick back into the market as the market declines 10% to 15% from recent highs.