Fair value for US equities may be around 8,500 on Dow Jones based on historical PE yield + risk premia, but there will most likely be trade through that point. Seeing short term dips to 5-6,000 though extreme would not be improbable. Hopefully such levels would be extreme trading events and not sustained like the damage we are seeing in the credit markets.
3 groups currently affect share trading, Wall Street, Main Street and unfortunately K Street. I won't comment on the current nationalization of banks, mortgages and who knows what going forward.
The selling of equities will most likely continue as there could be a multiplier effect of two constituencies, Wall Street and Main Street moving out of equities. Capitulation hasn't been reached, almost to a person at the VIC conference last week there was excitement at buying opportunities. A little too much consensus for my blood. Sounds early.
The equity sales situation is a multiplier effect, managers may move to cash as main street moves to cash, this has a multiplier effect in that the manager moves a percentage of equity to cash, while the individual on main street does the same thing. Here is a spreadsheet to play with the main variables. The data is dated from last year in terms of Equity funds from the ICI factbook.
The assumptions below are that nervous "professional managers" move 15% of equity investment to cash as a "momentum "fear move and that Main street moves 25% of their money out of equities. The very crude assumption leads to $1 trillion is sold in equities based on old levels (caveat emptor). Again these are fluid numbers meant to highlight the multiplier impact of both groups response not detail real money flow. Value investors should counteract this money flood as things get cheaper. Let hope the SWFs and central bank holders of US debt sit on the fence.
The median fund holder in the US has the following traits:
- 50% own homes
- 49 years of age
- 45% are saving for emergencies
- 46% are college educated
- They have held their shares for a median period of 6 years
Spreadsheet tool available here.
