How far down will the equity markets go?

My estimate is 10-20% from their mid-Oct highs. They are already down 7%, and I think between rising inflation and more toxicity in the financial sector, there should be some selling over the next couple of months.

Jim Cramer does not seem to agree, nor does Eddy Elfenbein:

1. The stock market is cheap. Most of the stocks I follow are in low or mid-teen multiples or at a price-to-earnings ratio vs. high growth rate that I regard as being just flat-out cheap, particularly when you consider a 4% 10-year Treasury. Retail at 10 times earnings? Lots of high-growth tech stocks at mid-teen multiples? It makes no sense to me.

2. Takeovers and going-privates could come back. On a large scale we saw BHP Billiton (BHP) make a move today for Rio Tinto (RTP). On a smaller scale there's money to go private, witness Restoration Hardware (RSTO).

3. There are some very strong bull markets out there. Health care cost containment, agriculture, oil and oil services, infrastructure, tech and aerospace defense. There are a lot of sectors that work.

4. Interest rates. The financials are so dire that the Fed will have to cut twice by year-end or give us another half-point cut, which will flush a huge amount of money from the sidelines and embolden banks to start lending again.