Your Economy (No Politics)

[Bullwinkle]

It's Not Different This Time
Market Views of Comstock Partners, Inc.
Thursday, May 19, 2005


Our bearish case for the market is relatively simple. Valuations are at the high end of the historical range. The tax decreases that helped jump-start the economy are now in the past. The Fed is continuing to raise rates. Cash-outs from mortgage refinancings are about 75% below the peak. Consumers have drawn down their savings rate from the historical 7-to-9% range to a level now approaching zero. Consumer debt relative to DP is at record levels. Sentiment on the market is still high as evidenced by the Investors Intelligence bull-bear survey, the relatively high percentage of institutional equity holdings, the proliferation of hedge funds and the low level of equity mutual fund cash as a percent of assets. In addition investors never really capitulated during the 2000-2002 bear market. The economy is already showing significant signs of deteriorating. Since our “Weight of the Evidence” comment last week, we have seen weak reports on industrial production, the Philadelphia Fed Index and the Conference Board leading indicators. All of these factors are symptomatic of a market that has little reason to rise and a lot of reasons to fall.

We have written in detail on each of the above items in previous comments (please see archives). Our Barron’s article called “A Simple Calculation”, explaining the correct usage of P/E ratios is printed elsewhere on this site. A large number of bulls tell us, that although we are logical, we are depending too much on history to make our case and are not considering that this time may be different. We do acknowledge the possibility that if this time really turns out to be different, we will be wrong.

But what reason is there to assume that things are different this time? After all, as everyone should know by now, the “this time is different” refrain has been prevalent at every major peak in every publicly-traded instrument throughout the globe. This is true whether it applies to stocks, currencies, gold, copper, silver or soybeans. Human nature has never changed, and, at market extremes, emotions overcome rationality with greed taking over at tops and fear at bottoms. In our view there is nothing in the current economic and financial situation that is different enough to cancel normal cyclical and secular patterns. The industrial revolution began to take off about 200 years ago and since that time we have seen the development of steamships, railroads, electricity, telegraph, telephone, automobiles, airplanes, air conditioning, plastics, and semiconductors as well as medical advances resulting in vast increases in human longevity. Current technological developments in computer power, telecommunications, genetics and biotechnology, while astounding in many ways, are a continuation of past developments rather than a new departure. It seems to us that if things are really different this time the burden of proof is on those espousing that view, and they have not even come close to making a convincing case.

http://www.comstockfunds.com/index.cfm/act/newsletter.cfm/CFID/3100225/CFTOKEN/15616716/category/Mar...