Controlling Factors

- Endless money forms the sinews of war

- Cicero

No need to remind you that the printing of dollars lowers its value (read inflation). When cheap money does not spur an economy, the next step is dangerous for all of us, war. Still another reason to End the Fed!

Anyway, this week Sebastian is offering to help you realize what you may already know, but forgetting its impact. There are three aspects that control the direction of the market. They are all in harmony. They all indicate that prices will fall.

C.A.P.E.

It stands for a cyclically adjusted price-to-earnings ratio. To put in laymen's terms, I will use this example. You are thinking about buying a used car. You follow advertised prices and for sale by owners. You have a fairly good idea what you expect to pay. Suddenly, you notice that these used vehicles are surging in price. You put off your purchase because you know value. The stock market is like the increase in used cars. It is now expensive. In fact, by historically comparing prices of the market, the present CAPE is greater than the market value in 1929. Not good. A low CAPE is good for the market and a high CAPE is not. The price is now high.

P/S

This stands for price to sale. Today, the ratio is 2.4. This is high. How high, you ask? When the market burst during the .com period, the ratio was 2.3.

Interest Rates

From a historical point, they have just returned to normal. From what the Federal Reserve has done to our thinking and economy in recent times, rates are high. I could get technical and relate this to the lost value in the dollar, but we are living with what we now have to work with. Higher interest rates make money expensive. When money is cheap with low interest rates, stock prices are supported. Higher rates dampen prices that form a resistance level in the market. This is where we are today. These three factors are all negative for the market. It is going lower.   Peace.