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    Default 'Q Ratio' offers dire projections

    (snip)"Dec. 10 (Bloomberg) -- A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.

    The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, shows the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the index this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to 400 by 2014, Napier said.

    “The Q has come down to its average, however it’s not always stopped at the average,” said Napier, Institutional Investor’s top-ranked Asia strategist from 1997-1999. “It has tended to go significantly below that in long bear markets.”

    Shares have fallen this year as the worst financial crisis since the Great Depression caused almost $1 trillion of bank losses and dragged the world’s largest economies into recessions. The MSCI World Index has tumbled 44 percent in 2008, set for the biggest annual decline in its four-decade history.

    The S&P 500 increased 0.8 percent to 895.31 as of 9:54 a.m. in New York as investors speculated lawmakers will approve a $15 billion bailout to keep automakers afloat.

    Bear-Market Scholar

    Napier, who teaches at Edinburgh Business School and advised clients to buy oil in 2002 before it tripled, based his S&P 500 forecast on the Q ratio for U.S. equities as well as the 10-year cyclically adjusted price-to-earnings ratio, another measure of long-term value.

    Before the trough in 2014, investors are likely to see a so- called bear market rally for the next two years as central bank actions delay the onset of deflation, Napier said.

    “In the long run, stocks will become even cheaper,” said Brian Shepardson, who helps manage $1.9 billion at Xenia, Ohio- based James Investment Research. The firm’s James Balanced Golden Rainbow Fund beat 98 percent of similar funds this year. “There’s a likelihood of some type of rally and further pullback surpassing the lows we’ve already set.”

    The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market, said Napier, 44, the author of “Anatomy of the Bear,” a study of how business cycles change course. The Q ratio for U.S. equities has fluctuated between 0.3 and 3 in the past 130 years.

    When the gauge is more than one, it indicates the market is overvaluing company assets, while a Q ratio of less than one signifies shares are undervalued because it is cheaper to buy companies than to build them from the ground up. "(snip)

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    Default Re: 'Q Ratio' offers dire projections

    How does a scenario of dollar devaluation play into this? According to this research, the stocks will bottom in 2014. Does it mean dollar will be getting stronger till 2014 while the stocks are falling?
    Or will the dollar get devalued much sooner than 2014, let's say in 2009, and the cost of all necessities will skyrocket while stocks will continue the downfall?

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    Default Re: 'Q Ratio' offers dire projections

    the 'tin foil hat' crowd would point out that your result will depend on US gov't policy decisions regarding gov't spending levels versus taxation levels versus issuing new bond debt versus simply printing money.

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