Back when the S&P 500 was much higher, I announced my target for this index was 1000. From my July 15, 2008 post Shooting the Messenger:
I see the S&P 500 dropping to 1000 by the end of the year. The P/E ratio is still too high as corporate profits are declining. I plan on staying short until this target is reached. At which point, Ill lock some gains and move to fixed income.
Then Hanky Bernanke put a ban on shorting financials and I knew from history this meant a false bottom would be set into the market. This idiotic action caused me to lower my target to 900 on September 28, 2008. From the post Can I Have Another Piece of Chocolate Cake?:
The bailout may provide a little bounce, but it wont hold. The deleveraging of the largest credit expansion in history will continue. My target for the S&P 500 was 1000. Now Im lowering it to 900. If your 401K is in equities, either move your money to fixed income or get ready for a punch in the nose.
Last Friday my price target for the S&P 500 hit. The market closed at 899. I tried to exit half my short positions, but I didn’t read the Grizzly Short prospectus and was two hours late putting in the sell order. Lesson learned.
Since Friday I’ve seen even more shenanigans going on with bailouts. None of the bailout steps I’ve seen taken will bring an open and honest accounting standard. There is no trust, nor should there be. My original target for the S&P 500 was based completely on earnings. I felt and still do that P/E ratios are still too high, especially as the economy slows. My estimates were not based upon a credit crisis caused and fueled by continued dishonest accounting.
Bernanke and Paulson seem not to grasp an important fact about the success of America. One of the main reasons America is successful is because we protect the interests of the investors through open and honest accounting standards. It is never perfect, but when a problem surfaces, we fix it and fix it first. This attracts the capital needed to grow our economy and help America prosper. There is big problem in the credit markets and until there is transparency it is only going to get worse.
I am not holding a single share of stock until this nonsense stops. It’s like playing Monopoly with a 4 year old. This is not a safe climate for investing. We are no different than Venezuela at this point as we nationalize banks, Freddie, Fannie and AIG. You want to invest your retirement in this environment? Not me. Why try and bottom guess this market? Fixed income is the safest place to be.
I now need two new S&P 500 targets. A honest target and a shenanigans target.
The honest target assumes all the games stop and bad banks are closed and healthy banks are allowed to pick their bones clean. The sooner America comes to its senses on this, the sooner the recovery can begin. And if we show leadership before Europe and Asia does, then we can attract global investment first.
Sovereign Speculator ran the numbers in the post Stocks are very expensive. Mr. Market is still in denial.
Looking at past episodes, the odds are strong that Mr. Market pays less than $12 per share for 2008 earnings by the end of 2009: an index value of 588 using our 08 estimate.
Using Elliott Wave analysis, Mish from Global Economic Trend Analysis comes in with a similar number.
The target of 600 is an estimate based on an approximate retrace of 62% of the peak of Wave B (.38 * 1576 = 599).
What are my new S&P 500 targets? My honest target is now 800 and my shenanigans target is 600. And note that this target is not when I go long. It is the target on when I’ll move out of my short positions and fully into fixed income. Until the 20 Week Moving Average exceeds the 50 Week Moving Average by 1% and we have honesty again, I will not go long.