Dow 11,000

Because I am in general a financial "party pooper," bringing in and highlighting facts, that "no, I'm sorry Suburban Sue, your house is not worth that much and you shouldn't have taken out that HUGE home equity loan to pay for your child's "masters in communications" degree," it is therefore behooved upon me to point out yet another sad fact for those who are woefully financially ignorant (which is most of the population).

I know you're all giggity giggity about the Dow breaking 11,000. But sadly, nobody paid attention to that all important economic lesson - CASH FLOWS DRIVE MARKET PRICES.

You see, prices can go up and down all they want, whether they are actually worth that price depends on the cash profits those assets generation. So yes, you can be very happy the Dow is up to 11,000, but did corporate earnings go up by a proportional amount?

Well, here's your answer;


You see, the PE ratio of the US stock market (as measured by Prof. Robert Shiller) compares the price of a stock to its earnings. Historically this has averaged around a ratio of 15 - 15 dollars in stock price for every dollar in earnings. And after the stock market crashed due to the housing market, stocks were ever so briefly "accurately valued." Meaning they weren't a steal or a great buy, nor were they overpriced.

Of course, that lasted about as long as sanity usually lasts in the financial markets and stock prices once again rallied, driving the PE ratio up to 22.10.

What does this mean for you the average investor? Well, for those of you who religiously invest in your 401k or 403b, you better pay very close attention to the prices you're paying for those stocks and mutual funds. For younger investors, I don't even know why you would invest in a stock market when not only it's overvalued, but it's progressively likely your "Roth" IRA or 401k plan will simply be nationalized and taken over by the government (much like they did in Argentina) to fund unfundable entitlement programs.

But I know, I know, I'm shouting into a hurricane. Why ruin everybody's good time?

Let's just party because an index broke an arbitrary number like 11,000.