What’s that Churning Sound

Today we area going to address two topics. The second will be what the numbers tell us about where the economy is headed.

But first, I want to go back to a letter I wrote a few weeks ago. In it, I suggested you get out of the stock market, as the data I am looking at suggests the market is due for a serious drop. That did generate a few negative responses, though not as many as I would have thought. Most were thoughtful comments.

But last week, after a discussion with my good friend Gary Halbert of ProFutures, I realized I need to do a better job of giving you my rationale. Making such a serious statement needs more thoughtful analysis than I did in that letter. I sometimes forget that you might not be taking notes on my pearls of wisdom, so I should have reviewed the reasons for the call. I have touched on most of these points over the last year, so I will not go into great detail, but let me line up the dominoes and see which way you want to push them. I will also make a case as to why I could be wrong.

1. I constantly write about Price to Earning Ratios. Today, the S&P 500 is at a P/E ratio of 28. That is almost twice the historical average. The NASDAQ numbers make the S&P 500 look sane. The Nasdaq 100 index has a market-cap weighted price-to-earnings ratio of 102, based on projected 2001 earnings (source: TheStreet.com.) And those projected earnings are unlikely to be there, in the opinion of many analysts, including myself.

I read…