Is the stock market going to tank?

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Originally Posted by Benny Profane

http://www.forbes.com/global/2009/11...t-amnesia.html


A good sig:


"When the ducks quack, you feed them."

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I found this snippet to be interesting...

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The biggest Bernanke bubble of all: the stock market, which has surged 56% since its March low. That at least is the message from one respected measure of value--a cyclically adjusted price/earnings ratio, or the s&p 500 divided by the average inflation-adjusted earnings of the index over ten years. Stocks now are trading at 22 times their decade-average earnings, according to Smithers & Co. in London. The average multiple going back 128 years is 16

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Would think DOW 8,600-8,700 would be a more realistic level. But all that cheap money lying around is just too irresistable to leave alone.

http://www.nytimes.com/2009/12/06/bu...1&ref=business

SANMINA-SCI, the supplier of electronics services, is loaded with debt and in each of the last eightyears has lost money. Its shares have risen more than 600 percent since the stock market rally began on March 9.

Wal-Mart Stores, the discount retailer, has lots of cash on its balance sheet, has very little debt and has consistently turned a profit. Since March 9, its shares have gained just 14 percent.

The disparate treatment meted out to these two companies by the stock market highlights an unusual and, in some ways, worrisome phenomenon: to an extent not seen in decades, shares of companies with weak balance sheets have been soaring, generally outperforming firms with stronger fundamentals.

In part, this is a consequence of the terrible pummeling given to riskier assets of all kinds during the worst months of the financial crisis. Shares of companies that were deemed to be weakest were hit the hardest. It’s only natural that they would bounce back the most at the first hint that financial disaster had been averted.

But the performance gap between the weak and the strong has rarely been as pronounced as it has been since March’s market lows. The extreme outperformance of the more speculative stocks could make them vulnerable to another market shock.

The Nikkei has rallied 14% in a week. Up big again tonight.. Often, it is a currency move that triggers a big change in relative values. I have a feeling that there is going to be a 1985 Plaza Accord type agreement by the G20 on currency rates specifically directed to realign Yen/Yuan/Dollar. In 1985currency crosses were way out of whack after a prolonged recession and we're close to that now. My opinion is this will be bullish for US blue chip stocks and might be the catalyst for another leg up. There is definately a macro undercurrent with regard to currency, gold, and interest rates. The US Fed is going to need help from the Asian countries to exit stimulus and stabilize growth. jmo..

www.pimco.com

WHG gets pretty heated in his market commentary

I would never argue with Mr. Gross and have placed a tremendous amount of trust in him doing what is right with my cash. That said...

Slow growth, low interest rates, and high unemployment are good for high quality mulitnational corps. The productivity gains could lead to S&P 500 earnings over $100 in a couple years. At 15x that puts the S&P easily at 1500.

Here's a snippet from "The Hays Report" and while he is a permabull there is much basis in history:

"Using history as our guide, on those occasions when the bottom of the trend channel were penetrated, history tells us that by August 2011, that the S&P 500 earnings should be pretty close to returning to that median trend line. That would mean in 20 months that the S&P 500’s 12-month forward earnings will be around $109. At today’s level of the S&P 500 at 1115, it would mean a P/E ratio of 10.1. I do subscribe to the theory that in most historical cases the rule of 18-22 works as an excellent approximate of what you can expect. I personally do not expect inflation to occur for many years in today’s world of technology and global productivity enhancers, but assume even a 3-4% inflation (way too high in my estimation) would mean a P/E ratio of 14-18 minimum. 14 times $109.58 is 1534, and 18 times $109.58 is 1972. Neither one of those numbers would be that bad….especially when you are getting peanuts on those money market fund rates."

i think gross is telling the us government that he won't be buying what they are selling when rates can only go one way from zero - up - and pimco ain't gonna be the one holding the price risk bag on treasuries, especially anything further out on the curve than than 2 yrs.

4matic - $100 earnings on the S&P absolutely hinges on what hays forecast for financial earnings. to wit, it must be an astronomical # and he must be mega-bullish on the sector; almost implicitly implies citi back to the $20's.

p.s. if there is no inflation, eventually the materials bubble either pops or deflates and the shine comes off (especially) the S&P mining and materials companies. you can't have it both ways - low inflation expectations and frothy earnings from reflation plays. something will tend to give.

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Originally Posted by mtnwriter

you can't have it both ways - low inflation expectations and frothy earnings from reflation plays. something will tend to give.

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I thought having it both ways was the point of bailouts? :D

Everyone knows the endgame is inflation, because there is simply nothing else that can be done with our debt besides default. There's too much of it.

Right now, the price of reflation plays like the PMs is due to people not wanting to miss the bus -- prices are based on future expectations, not current situations, or unprofitable companies would all have a share price of $0.

So, IMO, what's being fought over is basically how far in the future reflation will happen.

The interesting thing with commodities is you're trying to overlay potential demand curves over potential reflation curves, and one affects the other and it gets very, very complicated. I have no useful advice here.

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Originally Posted by Spats

The interesting thing with commodities is you're trying to overlay potential demand curves over potential reflation curves, and one affects the other and it gets very, very complicated. I have no useful advice here.

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Can the steam be let out of this gold bubble before reflation occurs? From all accounts we have heard here, inflation will happen- it wont be all at once- but sometime in the future (2+ years). Can gold rally for another 2 years?

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Originally Posted by Brock Landers

Can the steam be let out of this gold bubble before reflation occurs? From all accounts we have heard here, inflation will happen- it wont be all at once- but sometime in the future (2+ years). Can gold rally for another 2 years?

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i could be completely gargling scotch but i'm pretty certain you've got some of the variables and prevailing macro themes cross-contaminated.

the gold and inflation macro theme is primarily one of the devaluation of the USD due to QE, printing of money, and the resultant diaspora as a store of value from the dollar into gold. a cross current for gold is that in an inflationary environment, gold holds its store of value vs. fiat currencies (especially those in a potential debt trap i.e. the USD).

the reflation trade is primarily a commodity driven trade that envisions emerging economies needing basic materials to build infrastucture, homes, computers, etc, etc. over the coming decades. these economies were hit hard in the downturn but will quickly rebound if reflated (so the concept goes).

No youre right, Im just thinking of gold used as an inflation hedge as well as a place of safety with the USD dropping.

Is it just being played as the store of value versus USD, or are inflation fears fueling this too?

Reflation itself will be happening- I dont think that the economies in those emerging-type nations were hit as hard as in developed nations. These emerging and frontier economies are said to be what leads the world out of the mess. Both from a supplying the US, China, Europe stance, and from a development point of view. Australia and Brazil, commodity rich areas, are fueling all the growth in China for example.

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Originally Posted by Brock Landers

No youre right, Im just thinking of gold used as an inflation hedge as well as a place of safety with the USD dropping.

Is it just being played as the store of value versus USD, or are inflation fears fueling this too?

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gold is a mercurial asset because buyers can be as diverse as montana survivalist kooks being whipped into a frenzy watching glenn beck to hedge fund managers eying a macro trend to major govvies a la india & china buying instead of (more) dollars.

in short, i think there are many buyers buying for their own varied reasons. but the more the US prints money & creates record deficits, the more there is lack of faith in fiat currencies in general and belief in inflation, the more gold is perceived to be attractive.

less than copper and basic materials if emerging economies actually do begin to gentrify. if the inflationary environment is more benign, gold will probably stall. if shit goes south again, i'd think the dollar and treasuries start to look real good again.

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Originally Posted by mtnwriter

gold is a mercurial asset because buyers can be as diverse as montana survivalist kooks being whipped into a frenzy watching glenn beck to hedge fund managers eying a macro trend to major govvies a la india & china buying instead of (more) dollars.

in short, i think there are many buyers buying for their own varied reasons. but the more the US prints money & creates record deficits, the more there is lack of faith in fiat currencies in general and belief in inflation, the more gold is perceived to be attractive.

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At some point the Fed is going to have to raise rates. The debt that is already on the books to foreign gov'ts is in the trillions of dollars. Who wants to buy that USD debt now? China doesn't seem interested, nor Japan, or any Euro country. If the U.S. gov't wants to do more T-bill sales, they are going to have to up the rate to entice buyers.

its not bills, but bonds that may blow out the yield curve. most bond investors aren't as afraid of playing in the 2 yr. pool but it gets very murky past there and it is decidedly not safe to go back in the water! no doubt the fed will either need to monetize the debt a la japan or raise rates to entice investors to wade into the deep end.

want to see an equity rally come to a halt? watch a bid/cover for a 10 yr. auction go at less than 1.5:1 or fail & the bond mkt. vigilantes demand 6-10% yields on 10 yr. paper!

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Originally Posted by 4matic

"Using history as our guide, on those occasions when the bottom of the trend channel were penetrated, history tells us that by August 2011, that the S&P 500 earnings should be pretty close to returning to that median trend line. That would mean in 20 months that the S&P 500’s 12-month forward earnings will be around $109. At today’s level of the S&P 500 at 1115, it would mean a P/E ratio of 10.1. I do subscribe to the theory that in most historical cases the rule of 18-22 works as an excellent approximate of what you can expect. I personally do not expect inflation to occur for many years in today’s world of technology and global productivity enhancers, but assume even a 3-4% inflation (way too high in my estimation) would mean a P/E ratio of 14-18 minimum. 14 times $109.58 is 1534, and 18 times $109.58 is 1972. Neither one of those numbers would be that bad….especially when you are getting peanuts on those money market fund rates."

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The problem I have right now with the belief that we will be steered by the historical mean is that there is a real possibility that the march of history has changed significantly and most don't even know it. A lot of signs point to the fact that we are in a long secular bear market that began around 2000, and may be here for some time. It is a new world, after all, and there are exchanges all over it, especially Asia, and a LOT of people are not very happy with our debt management and our banking industry that has just walked through the fire with balls intact. The Geithner e-mail revelations today may just be another spike in our financial coffin. China is vigorously trying to come out of this as free from our influence as possible, which, of course, won't be much, but, still, our reputation and standing as a beacon of capitalism is seriously tarnished, and, hey, they have all our debt. I read a nice piece today arguing that the only thing that can save us now is our higher education system that still attracts the best and brightest from all over the world. http://www.theatlantic.com/doc/print...erican-decline Chinese universities can't even compare.
When their equity bubble pops, and, yes, it's a bubble, http://www.nytimes.com/2010/01/08/bu...l?ref=business I'm back to investing almost as much in emerging markets as America. They are the future.

Conspiracy theorists - check this out:



Marketwatch
Jan. 5, 2010, 5:47 p.m. EST
TrimTabs suggests government manipulated stocks
Analysts say government's financial rescues have fueled conspiracy theories

By Nick Godt, MarketWatch
NEW YORK (MarketWatch) -- The unusual circumstances that led the U.S. market to rally powerfully in 2009 might be explained by secret government moves to buy stocks, according to Charles Biderman, the founder and chief executive of TrimTabs, a research firm that tracks liquidity flows in the market.

"We cannot identify the source of the new money that pushed stock prices up so far so fast," Biderman said in a statement Tuesday.


The source of approximately $600 billion net new cash necessary to lift the market's overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds.

"We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?"

The Federal Reserve or the Treasury, Biderman said, could have easily manipulated the stock market by purchasing $60 to $70 billion worth of futures of the S&P 500 Index (INDEX:SPX) on a monthly basis.

Conspiracy theories on the rise?

Market analysts, however, were quick to debunk the theory. Yes, the government had a heavy hand in rescuing the financial system and the economy as the system started collapsing in late 2008 and throughout 2009. But the huge boosts of liquidity through the system found their way to stocks by the usual means, they said.

"The idea that this is magic is nonsense," said Barry Ritholtz, market strategist at Fusion IQ and a market veteran. "This was a normal behavior in a recessionary bear market. We saw the Dow plunge 5,000 points in 6 months, which had never happened before and created a dramatically oversold market."

Yes, the Federal Reserve slashed interest rates to near zero and Congress allowed banks to keep their bad loans off their books, allowing them to pretend they were solvent, he said.

But "you can't short stocks when the Fed is at zero," Ritholtz said. "Our own institutional clients came on board" as did other big institutional investors, he said.

Conspiracy theories about the so-called "plunge protection team," or PPT, have been on the rise ever since the U.S. government started to bail out financial institutions in late 2008 under the administration of then-President George W. Bush, according to Dan Greenhaus, market strategist at Miller Tabak.

The PPT is a nickname given by some to a group established by President Ronald Reagan in 1988 after the 1987 stock crash to coordinate governmental response to market meltdowns.

Noting that the Fed has been buying Treasurys and mortgage-backed securities to keep interest rates low and support the economy, even firms such as Sprott Asset Management have started to accuse the U.S. government of running a Ponzi scheme.

"There's a lot of backlash against the government right now and the hate for the Fed has gone into overdrive" in some corners, Greenhaus said. "The fact that the government stepped into the abyss [angered] a lot of people, and the fact that things are better a year later flies in the face of some long-held beliefs about free markets."

As to the scale and power of the 2009 rally, it actually trailed previous recoveries from bear markets, according to research from Miller Tabak.

"While the absolute percentage gain off the recent lows has been more powerful than anything since the Depression era, there is no denying that historical rallies in the equity market have recouped a greater percentage of the declines from the highs," Greenhaus wrote in a note.

The stock market, as measured by the S&P 500, plunged nearly 57% from its 2007 highs until it reached lows in March of 2009.

But even after rallying 58% in the seven months after the March lows, the market remained 31.5% off of its 2007 highs. That's nearly the same amount recovered during the market rally of 2003, as the market began to recover from the bursting of the tech bubble.

In other instances, such as 1975, 1962 and 1938, the market had actually recovered a much bigger portion of its losses seven months after hitting lows. And in 1983, it was actually 7.3% above its previous highs.

NFP tomorrow, lots of differing opinions out there....should be exciting.


sorry I didn't copy/paste an article that you weren't going to read anyway.

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Originally Posted by mtnwriter

its not bills, but bonds that may blow out the yield curve. most bond investors aren't as afraid of playing in the 2 yr. pool but it gets very murky past there and it is decidedly not safe to go back in the water! no doubt the fed will either need to monetize the debt a la japan or raise rates to entice investors to wade into the deep end.

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yield curve is already pretty steep, but its got to flatten probably sometime in mid 2010 as short/int rates go up. Monetizing it all/most at once is going to trigger massive inflation and I think thats exactly what BB is looking to avoid (which is good).

I just dont see much future interest in that deep end either though, unless rates go up considerably. Same thing is happening in UK, however the opposite is happening in Germany- the German govt legislated a balanced budget by 2016, which should keep rates down there and might be a nice future currency trade option

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Originally Posted by Brock Landers

yield curve is already pretty steep, but its got to flatten probably sometime in mid 2010 as short/int rates go up.

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Good chance the curve steepens much further this year as short rates should remain low. This helps bank earnings and if Corporate debt rates continue to move lower that also helps corporate earnings. Both are bullish for equity.

After this last push in technology, rotation is to large cap, value oriented stocks that pay dividends and have a chance at raising their dividends.

Technically, a sharp rise to 1250 SP00 would not surprise me but my gut tells me we probably make highs for the year in the first quarter.

is the fed going to keep rates at 0 for much longer though? 6 months?

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Originally Posted by Brock Landers

is the fed going to keep rates at 0 for much longer though? 6 months?

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Probobly, does it really matter if they go to .50? I don't believe inflation is a risk because I don't believe Milton Friedman's quanitity theory on money supply because it has never born out.

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Originally Posted by 4matic

I don't believe inflation is a risk because I don't believe Milton Friedman's quanitity theory on money supply because it has never born out.

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It isn't really Friedman's theory, rather goes back as far as Copernicus (or even earlier). There are also plenty of examples where inflation can be directly attributed to an increase in money supply going back as far as the Roman Empire. The timing and size of the price changes created by changes in the money supply is difficult to quantify and forecast in modern economies, but that a relationship exists is hardly debatable.

The anti pundit employment thing was something to watch today (Sorry, Workers under 30! Goodbye, White Men Over 50!), but this was much more telling in our "Credit Crunch Times":

http://www.nytimes.com/2010/01/09/bu...my/09econ.html

"The Federal Reserve said on Friday that total borrowing dropped by $17.5 billion in November, a much bigger decline than the $5 billion decrease expected by economists."

I've just had a revelation. I've been wondering where to go in '10 after hiding in safety for all of '09, so I grab a great book by John Bogle, "Common Sense on Mutual Funds", updated edition to the end of '09, [ame="http://www.amazon.com/Common-Sense-Mutual-Funds-Anniversary/dp/0470138130/ref=sr_1_2?ie=UTF8&s=books&qid=1263528093&sr=1-2"]Amazon.com: Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition (9780470138137): John C. Bogle, David F. Swensen: Books[/ame] and, of all things, I realize that the best choice is a Vanguard target retirement fund, which is comprised of stock and bond index funds, very low cost. You literally can't beat it. He argues over and over again that a low cost index fund always beats managed funds and trading over the long run, with tons of historical data. He's a wise old man, and, I'm afraid, when he and Volcker and Buffet pass away, which will be soon, the world will be a much less civil place, and much dumber.

So, that's it. It's such a load off my back. Have fun, and good luck. I'll be back to rant about the sins of Wall Street, but I have seen the light. Adios.

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Originally Posted by Benny Profane

I've just had a revelation. I've been wondering where to go in '10 after hiding in safety for all of '09, so I grab a great book by John Bogle, "Common Sense on Mutual Funds", updated edition to the end of '09, Amazon.com: Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition (9780470138137): John C. Bogle, David F. Swensen: Books and, of all things, I realize that the best choice is a Vanguard target retirement fund, which is comprised of stock and bond index funds, very low cost. You literally can't beat it. He argues over and over again that a low cost index fund always beats managed funds and trading over the long run, with tons of historical data. He's a wise old man, and, I'm afraid, when he and Volcker and Buffet pass away, which will be soon, the world will be a much less civil place, and much dumber.

So, that's it. It's such a load off my back. Have fun, and good luck. I'll be back to rant about the sins of Wall Street, but I have seen the light. Adios.

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Now watch the market bomb.