How competitor discounts evolve during a business cycle

In a time like 2006, people like me will not do well.

Markets will rally, but generally led by cyclicals and lower quality companies who are reducing their discount to their premium competitors.

Markets effectively rally out of sentiment rather than due to a proportional increase in the underlying value of the assets and cash flows they generate.

It is interesting to research how discounts of cyclicals and weaker competitors change over the period of a business cycle. Does the EV/EBIT simply raise in the up cycle: hence higher valued premium competitors drive up the value of secondary competitors as the market rally continues rather than vice versa. And the opposite happens in a down market?

The question of course is trying to answer whether it is the same at the moment. Though we appreciate their is a catalyst for volume sales to increase due to the huge de stocking that occurred in 2008, we feel it is very difficult that earnings surpass those recorded in 2007 (or even volumes unless they are export driven), when credit was flowing in the levels it was then.

We sit and ponder.