It’s 2000 & 2007 All Over Again

By Comstock Funds

“I have to get into this market; otherwise it’s just dragging on me” (A portfolio manager quoted in the Wall Street Journal just prior to the March 2000 peak in the S&P 500.)

“ long as the music is playing, you’ve got to get up and dance. We’re still dancing.” (Citigroup CEO Chuck Prince in July 2007) You know how that turned out.

It’s that time again.  The Dow surpassed its all-time high and the S&P 500 is not that far from the tops of 1553 on March 24, 2000 and 1576 on October 9, 2007.  Just as in 2000 and 2007, the economic, valuation and political background does not support the budding euphoria.

The economy has been limping along at about a 2% growth rate despite the near-zero percent Fed Funds yield and huge amounts of Fed bond purchases.  At the same time fiscal policy has become a significant headwind.  The agreement to avert the fiscal cliff could slice about 1% off GDP with the sequester reducing it by another 0.5%.  A 1.5% hit to a GDP that was only growing at about 2% leaves the economy on awfully thin ice, and very close to recession.  Consumers are still in the process of deleveraging their debt, and with wages climbing so slowly, are in no position to go on a spending spree anytime soon.  Businesses, sensing a lack of consumer demand, and worried about the dysfunction in Washington, are not likely to step up capital expenditures to any great degree.  Unlike the stock market, they are building up their cash in anticipation of the next crisis.

The market has climbed on the basis of an almost childlike faith in the Fed as well as record corporate profits.  As we have previously stated the Fed has not been successful in channeling money into the real economy.  Moreover, corporate earnings growth has come to halt and is threatening to turn down.  In fact, third quarter S&P 500 operating earnings declined from a year earlier, and fourth quarter reports seem to be falling short as well with the vast majority of companies having already reported.  Two quarters of declining year-to-year earnings growth has been seen only in recessionary environments.  Earnings for the full year were up a miniscule 0.6% from 2011.

Although earnings estimates have been coming down analysts are still forecasting an increase of 14.7% for 2013 and another 12.8% for 2014.  This outcome is highly unlikely, and will probably disappoint on the downside, particularly in view of the decline in fourth quarter productivity.  In April 2012 the consensus forecast for 2012 operating earnings was $104.89, and ended up at $96.99.  Even the prediction for 2013 has been reduced to $111.28 from $118.85.  If anything, the downward revisions appear to be accelerating.  Fourth quarter earnings turned out to be 13% lower than forecasts made as late as September. To make matters worse, profit margins are at historical peaks, and whenever this has happened margins have reverted to the mean.

Rosy forward-looking earnings forecasts that come crashing down are nothing new for the market.  These forecasts are almost always wrong, and most often on the high side.  In mid-2000 the forecast of forward operating earnings was $64 and eventually came in at $38. At year-end 2007 the consensus estimate for 2008 was $89 and remained there until the end of May.  Even at the end of October, only two months from year-end, the estimate was $72.  The actual number came in at $46 just a few months later. The estimate for 2009 was even more laughable at $110 in May 2008.  At year-end it was still $99, but eventually ended up at only $57.

Given all of the problems with using forward operating earnings as a measure of market valuation, it’s amazing that it continues in such widespread use.  Currently, a large number of analysts are using the 2013 operating earnings forecast of $113 in estimating the P/E ratio at 13.7, which they regard as reasonable or even slightly undervalued. History, however, indicates that such euphoric forecasts at turning points are often hugely overestimated.  When the actual earnings are reported it becomes apparent that the P/E ratio was far higher than it appeared at the time.

We also note that for the purposes of this comment we have gone along with the “Street’s” predominant use of operating earnings.  As long-time readers know, we prefer the use of trailing cyclically-smoothed reported (GAAP) earnings, which gives a truer picture of valuation.  On this basis the P/E ratio is about 19, which would be highly overvalued for any time before the series of bubbles that started in the late 1990s.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.


Comstock Partners, Inc. analyzes economic and financial conditions from a long-term macro-economic perspective and makes adjustments based on cyclical and shorter-term considerations. In pursuit of its goals, the firm invests in various asset classes including domestic and foreign stocks, bonds, currencies and derivatives including indices and options

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  1. The difference is in 2000 and 2007, the Fed had taken their for off the easing pedal before the crash. This time they have their foot to the firewall.

  2. Cullen, you might be like the lead buffalo in a stampede that first senses the trail goes over a cliff. I think the market will continue to push forward another 5-8%, just on herd mentality. Then, the slaughter begins… again.

  3. I currently have 22% of my 401k stashed in a money market fund. I started moving money over a month or so ago. I have to admit, this can’t lose market is making me regret my decision to take a conservative stance. The market could go up another 20% by the end of the year!! I need to put my money back into equities!!

    And that panic mentality, more than anything else, convinces me that I need to hold firm. I can’t be the only person having regrets right now. And I know that as soon as everyone piles into equities, the market will experience a correction.

    What I’m uncertain about is: will the correction be temporary, or will it be the third and hopefully final crash in the secular bear market? I don’t know much about market history, but it seems unlikely the market will drop 40% without a recession. If we’re still in a secular bear, maybe the next major drop is still 2-4 years away.

    Enough rambling. Comstock makes good points in my opinion. For now, I’ll continue to treat my 401k as a savings account, rather than an investment account. And that means protection my principal when the market looks uncertain.

  4. “Given all of the problems with using forward operating earnings as a measure of market valuation, it’s amazing that it continues in such widespread use.”

    Salespeople always use the most favorable comparison to sell their product.

  5. Mr. Market is looking at the incredible amount of money that is sloshing around in the world and Ben’s promise to keep it coming for as long as it takes, our countries unmatched ability to innovate and create, increasing consumer spending on big ticket items like houses and cars, and the really big game changer, the coming explosion of cheap and plentiful energy.

    While its true that a lot of people are getting left behind, and thats sad, its also capitalism. The system is not perfect by any stretch of the imagination, but it is still the envy of the world. If people are not open to learning new skills they are in for a really hard time.

    I’m a pessimist by nature, but what I see in the big issues for this country makes me wonder if we are not on the verge of a huge period of expansion and prosperity in the near future. The market is a forward looking animal and I think that is what is is also seeing.

    Its gonna be fun, and hey, its only money—

  6. Hi Boomer,
    I am very much like you, a little pessimistic when it comes to good news but have finally gotten out of myself and paid attention to what is happening with the markets.

    I am also in the energy industry (oil) and I can definitely concur with your assessment about our energy future. And I am not just talking Oil and Gas. The amount of innovation in solar and bio-fuels is going to change things a lot. That and VW’s 313 MPG car will change ALL assumptions about where we are heading. Things are going to turn not just for the better but for the great!

  7. Boomer, all that “liquidity” that the central banks are flooding the globe with is to prevent a deflationary collapse, and isn’t in any way going to lead to any “boom.”

    It is leading, however, to MASSIVE INVESTMENT MISSALLOCATIONS by those who can tap that liquidity at very low rates (such as large banks and financial institutions), which is causing an across the board inflating of asset bubbles in a record number of asset classes (since there’s a record amount of fiat currency borrowed at near zero cost in nominal terms and negative borrowing cots in real terms trying to bid for assets).

    It’s always “different this time” until it’s not, at which point everyone either predicted “or could’ve/should’ve seen it coming.”

    Liquidity DOES NOT constitute wealth.

    The “investment” of the product of easy and loose monetary policy has led and will continue to lead to the biggest bubbles and implosions in the history books.

    This is exactly the same as every other period of loose monetary policy, whether late 1920’s, or 1990s, and it will lead to exactly the same outcome.


  8. Wrong for the past 13 years? Really?

    Did you known that the DJIA was at 12,000 in 1999 in NOMINAL terms, and that the 14,300 it’s at today is approximately 40% lower in REAL terms than that 12,000 mark it achieved in 1999?

    In other words, did you know the DJIA would have to be at 43,700 in nominal terms today if you had invested in it and hoped to have kept up with the cost of a single gallon of gasoline based on your real returns?

    Happy investing.

  9. When there is no yield elsewhere, where do you put your cash to retain value in real terms!?

    That seems to me why the market is so bloated. It carries the best yield. Valuations are irrelevant for now.

  10. Did you know that there are some extremely, incredibly smart investors, many of whom run and have ran very large asset management firms, who have not only stated but implemented an “all cash” strategy (they’ve gone so far as to close down and return all funds back to their limited partner investors), when markets were so broken by interventionist policies of central banks and political turmoil?

    These people actually have won over the long run by retreating from a battle field littered with the corpses of those who were “invested” in “markets,” both on the long and short side, found safe sanctuary, and waited until the real market re-asserted itself, and lived to fight another day unlike many of the deceased brethren.

  11. Comstock Fund’s NAV on 3/1/2000 was $2.34, 3/8/2013 NAV $1.26

    I am too lazy to do the NOMINAL & REAL calculations, but I don’t need to, to know that these guys have been wealth destroyers.

  12. Comstock track record is mediocre at best. They just asset gatherers and beta investors.

  13. Mediocre would be putting it kindly. They are down 46% since the market top in 2000.

  14. So they’ve pretty much outperformed the Dow Jones Industrial Average?

    $1 invested in the DJIA at the market top in 2000 equals a real .47 cents based on Friday’s DJIA closing high (and this does NOT include the effects of survivorship bias, fees or inefficient tax costs of “investing” in the index, NOR does it take into account OPPORTUNITY COST).

    Thanks for clarifying that.

  15. So they’ve pretty much outperformed the Dow Jones Industrial Average?

    $1 invested in the DJIA at the market top in 2000 equals a real .47 cents based on Friday’s DJIA closing high (and this does NOT include the effects of survivorship bias, fees or inefficient tax costs of “investing” in the index, NOR does it take into account OPPORTUNITY COST).

    Thanks for clarifying that.

  16. Since 3/2000
    Comstock -46%
    DJIA +42%

    Since 10/2007 last market top
    Comstock -39%
    DJIA +2%

    Why do we care what Comstock has to say?

    Just the facts

  17. Why do you INSIST ON USING NOMINAL AND NOT REAL NUMBERS when claiming to report the Dow Jones performance?

    (I know why, but I just want to call you out on your epic intellectual dishonestly so everyone else can witness it).

  18. So subtract 3% per year from each of the results and Comstock looks even worse.

  19. Like the comfortable consistency of an old dog at your feet, Comstock Funds (recently joined by Lakshman Achuthan) becomes the whipping boy for the exceptionally long once or twice a decade at market tops. I consider them perma-bears but forget they even exist until the old hound get up off of the porch to crap in the yard.

  20. Corporate earnings started contracting. In Q3 2012 they were $24 compared to $25.29 in Q3 2011 and in Q4 2012 they are so far at $23.14 compared to $23.73 a year before. This is no surprise given that domestic investment remained stagnant at the end of the year while the deficit mostly likely shrank. Even as profits contract, the market can continue going up because of multiple expansion but I am not sure that buying market index ETFs like SPY or DIA would work as neatly as in the last four years. Stock picking will become increasingly important. Yield will also become more important.

  21. I understand the frustration over posting some content from people who seem overly bearish or overly bullish, but it’s nice to provide alternative perspectives especially when we’re in an environment where it seems like nothing can go wrong. Just trying to provide a broad set of views. That’s all. Sorry if people don’t always find them helpful….lord knows if I wrote every post many of them would be losers….

  22. That’s how I feel. 2008/2009 was too much for my weak heart… I stayed in until I got my money back. I know I have to get back in again, but it’s hard to be in a rush about it… despite the recent movements. At least for me.

    BTW, I’m in a “captial preservation” fund (I think it’s called), which is a LOT better than a money market, but still not that great. It basically matches inflation (like about 2 to 2.5% a year), but keeps a $1/share value like a money market. Supposedly these are ONLY available through 401Ks (I can’t find the equivalent for an IRA… though I wish I could!). You might look into that if you want to park your money in something better than a MM, while you “dollar cost average” it back into the market.

  23. You must just love the Market Monetarists then… they fancy themselves as Milton Friedman libertarians… but have been screaming from the rooftops that money has been WAY too tight!… and that the Great Recession is all the fault of Bernanke and the Fed keeping money too tight at a critical time. I get the impression that the MMers think that using their NGDP targeting scheme essentially makes our market more like the pure barter system it was always meant to be…. but that means loosening monetary policy in a big way (at least up until recently). Once GDP get’s close to 5% a year, then they’d tighten it again I think (I believe that’s the idea behind targeting NGDP growth at 5%).

  24. Oh yeah, … MMers don’t believe in “bubbles” because the efficient market hypothesis is ALWAYS correct, and thus bubbles can’t exist. Hahaha… it’s funny to me that Austrians are always complaining about Krugman, but it seems to me their natural enemies are their fellow libertarians in the MM crowd!

  25. Cullen,
    It seems that on the whole, many investors have become so cynical that they cannot accept the possibility of positive outcomes. It drives them crazy.
    If there are enough of them, it is also bullish.

  26. Here’s a great example of MMer thinking (this one is from Scott Sumner, describing what went wrong to cause the recession in Cananda… you guessed it!… overly “tight” money!):

    “But the BOC then made it worse; they reduced AD to keep inflation from rising above 2%. Here’s where the other source of confusion comes in. Most people have trouble envisioning that the BOC ran a tight money policy. After all, they cut interest rates!! If you don’t know the fallacy of that assumption by now then GET THE HELL OUT OF MY BLOG.” — Scott Sumner


  27. The funny thing is, they might be right that “money is too tight” because banks are the issuers of money and they haven’t been issuing any money at all. So we’ve been forced to have the govt turn on the spigot to redistribute existing money in a time of high unemployment and issue NFA as bonds. That’s helped, but it hasn’t gotten the real money issuers to turn on the spigots to a large degree.

    Of course, MM has no idea how banking actually works so they don’t actually know any of this to begin with, but it’s funny that they might be KIND OF right without knowing why.

  28. Right ! Felix Zulauf, one of the most successfull investors of the last 30 years confirmed in a recent interview that he is all cash and that he made money waiting for the right moment to be all in. Hey, you will not loose money if you are cash for a few months or an year. Catching for yelds is number one error !

  29. Although I think a few of them do understand how banks create money, but suppose that the Fed, if its efforts are great enough, can still have the desired effects. For example David Glasner and maybe Nick Rowe might be in this category.

  30. I find the plethora of doomsday articles since the new Dow high to be down right comical. I can’t believe Cullen would post such obvious drivel.

    There is such a thing as fundamentals.

    In 2000 and 2007 the economy was at or just past peaking.

    Does anyone think we are at a peak economically today?

    The Dow broke its high….so what?! It doesn’t mean anything more than the Dow breaking 14,000 or 10,000 or 20,000.

    In “real” terms, the Dow and S&P have a way to go before they break their 2007 highs and a much longer way to go to break their 2000 highs.

    This is such a non-story…

  31. it’s even worse than that actually, because your calculations don’t include dividend reinvestment.

  32. A large part of the public equity investing crowd is getting older and at or near retirement. They are not going to risk another 50% collapse even if it means missing big gains. I can’t blame them. I see this with my own client base. As they get older, I am reducing their equity exposure regardless of whether the geniuses think it is over or under valued. The paltry returns of short-term bonds mixed with strong dividend paying stocks will have to suffice.

  33. “In 2000 and 2007 the economy was at or just past peaking. Does anyone think we are at a peak economically today?”


    With ZIRP and QE to infinity, the best the global economy can do is low growth. Taxes are going up, services/entitlements are going down. Retirement benefits are being cut or pushed further out (agewise).

    I have no way of knowing. None of us do. We could just as easily be at the beginning of a multi-decade bull. Nobody knows. But it IS quite possible that we ARE witnessing the peak of the current cycle. One should not rule out that possibility. Just because we currently are not at levels of previous economic peaks (in various terms), doesn’t mean it can’t be a peak. Peaks are relative – not absolute.

  34. Morningstar has them designated as a bear market fund ala an inverse ETF type of thing, so it would make sense the performance is awful in an upmarket.

    That said they have a 10 year return of -12% annualized so whatever the intellect of their letters I dont see why anyone is following the comments. Hussman similar, they are good at intellectual masturbation at this point but their investing records both are weak.

    p.s. someone asked how they have so many assets. I think its asset chasing – they made >50% in 2008. I am sure its legacy money from that period without having following them for a long time – frankly I didnt know they had a fund until I saw todays comment stream.

  35. Is Comstock forecasting in this piece or marketing? This is what many want to hear, and someone will sell it to them. Seriously, always start with the trend.

  36. I have a couple of articles prepared to submit to Cullen. Upon further review of the comment board, I may just hold off. This comment board got downright vicious! I may stop at Walgreens to buy one of those singing get-well hallmark cards to mail away to Comstock.

  37. I am glad Cullen posts a variety of perspectives. In theory, it can help minimize the natural confirmation bias that occurs in our normal reading. I like that he posts articles that come from various people with backgrounds in academia, macro investment, technical analysis, etc.

    Where some people catch more flack from the readers if they are inflexible. That is, seemingly permanently bearish (Comstock) or permanently bullish. More specifically, if they seem to be consistently wrong, they tend to lose credibility with many readers.

    Comstock in particular, using their retail DRCVX, shows negative returns via my screen for EACH of the following time periods:
    15 years, 10 years, 5 years, 3 years and 1 year. Something simple like a Vanguard 500 index fund (VFINX) has positive returns for each of the same time periods.

    Hussman’s Strategic Growth (HSGFX) is almost as bad (no 15 year number, slight positive for 10 year, negative for rest). His Strat Total Return (HSTRX) is better. Again, no 15 year number but positive 10, 5 and 3 year with a negative 1 year. He has varied or nuanced his positions over time so I personally cut him a little more slack. :) I still wouldn’t buy his fund.

  38. Comstock has a terrible performance as a fund, but as forecasters, like any broken clock, they should be right once every 6 to 7 years !