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Comstock Partners, Inc.
LIMBO LIMBO, HOW LOW CAN IT GO? (Original Text 3/25/01)
Update on Attachments 12/7/16
Most investment professionals believe the US stock market and economy will reverse direction and rise once the lower rates kick in and Bush gets his tax cut package through Congress. We have tried to explain in these comments why we believe that the stock market will not be bailed out this time by either the Fed or fiscal policy (tax cuts). The reason it will not work this time (while the Fed was successful in the past) is due to the severity of the NASDAQ's bubble finally bursting and the reverse wealth effect kicking in. At the peak, the NASDAQ stock valuation was over $6.7 trillion. We have just gone through almost $4 trillion of that over the past year. Once a financial bubble as large as this one finally breaks it is very hard to stimulate demand. The only financial bubbles that even compare to this one have been in 1929 and in Japan in 1989. In both cases, interest rates were driven down to almost zero without stimulating demand. Since the recent financial bubble was greater than either of the other two, the stimulation of demand will be even more difficult, and the stock market could go much lower. This brings us to the question that is repeated in the chant of the Limbo game or dance, "How low can you go?" We have tried to answer this question in the attachment to today's comment. With the help of the charts and statistics of Ned Davis Research, we went back over the past 75 years of history to look for periods of time, which most resembled today's condition(some stats were not available). As we stated before, the 1929 experience is probably the closest, but there were 9 clear bull markets that peaked and were followed by bear markets. In each of these 9 periods of time we identified 5 different stock market metrics----1. Price to Dividends 2. Price to Sales 3.Price to Cash Flow 4. Price to Book Value 5.Price to Earnings. We measured these metrics at the peak of the bull market and also identified where these same metrics troughed in the bear market that followed. In order to determine "How low this stock market can go", all you have to do is to determine if this is a normal bear market. If you do, you might want to use historical averages (the average of the troughs). If you are as bearish as we are, you might want to use the lowest historical troughs since we believe this is the greatest bubble of them all. Lastly, if you are bullish (a new paradigm thinker) pick the average of the prior market peaks, or even the highest market peak. The various indices used in this study will have to fall another 50% from here to reach any of the bear market troughs. Any way you want to look at it... you will be shocked at how low it can go.

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