Dow 1,000 Is Not a Silly Idea

I spoke to my friend Ian Gordon recently to get more insights into his brief comments before my radio show. As it turns out, Ian wrote a paper to explain why Dow 1000 or lower is not an absurd idea. His belief that Friday November 13th will prove to be the top for this B wave up is based on W.D. Gann’s cycle work. However, his rationale for such a huge decline in the market was most fascinating. I have to share some of those ideas with you now.

Most logical to me are the valuation metrics Ian put forth. Check this out.

I. The S&P 500 selling at a PE ratio of 144 times! Absolutely ridiculous!

Notice the range of PE ratios until Greenspan started hyper inflating the money supply when various problems fell upon the global economic scene during the 1990s. The upper range of PE ratios was between about 22 and 7 or 8 on the low side. As you can see, the “mean” valuation up until Mr. Greenspan began to irrationally inflate the money supply (and hence stocks) was around 13.5 times. As Ian pointed out, given current S&P earnings, the S&P would have to fall by more than 90% from its current level of 1,093.48, to 100! This provides part of the rationale for what Dr. McHugh is predicting may be a “cataclysmic nation changing event.” Dr. McHugh calls this a Grand Super Cycle, while the Great Depression was a “Super Cycle.” And in my radio show with Robert Prechter, he confirmed he is in agreement with Dr. McHugh. In his view we are indeed in a Grand Super Cycle.

II. Paltry dividend yields signal a market top, not a bottom.

Dividend yields at market bottoms usually pay in the 6% to 7% range. Now they are paying around 1%. Given current dividend payments, the S&P 500 would have to fall to 375, or 66% from its current level, to achieve that dividend payout.

III. 66% of dividends are being paid on borrowed money!! Also absurd!

If that isn’t bad enough, about 66% of current dividends are not from current earnings, which means these companies are either borrowing money or dipping into the cash reserves to maintain dividends so as to retain higher stock prices and perpetuate the big lie that Keynesian economics can work and that everything we ever need in our lives can be taken care of by Government. But wait a minute. Who is Government? Where does Government get its wealth? Doesn’t it tax the private sector, or print money, which is just another hidden tax on the private sector?

Please forgive the editorializing and just focus on the reality of the moment. These companies are broke and our nation is broke! When this fact finally enters the conscious mind of Americans, all hell is going to break out in these markets and in our economy. The message I get from this is that the stock market is heading much, much lower.

Ian’s article about Why Dow 1,000 is not a silly idea will be posted on his website at www.LongWaveAnalyst.ca. You should make a habit of visiting Ian’s sight because there are is so much valuable information there that can help you understand deflationary dynamics that are in play and are part of the ebb and flow of history regardless of attempts to fool mother nature by policy makers.

Jay Taylor
Gold Investor