The news today about Bank of America (bailout) and Citigroup (restructuring) has both names indicated higher along with the broader market but this entire episode continues to fascinate. The short term implication is probably positive (said with not much conviction) but the longer term implication is...well...what exactly is it?
Regardless of what you thought about Fannie and Freddie they were vital cogs in the machine and now they are gone (not really gone but much different than they were). The biggest banks from two years ago have failed one way or another. The biggest investment banks have either failed or technically are no longer investment banks. This has forced the government to have a large role in fixing things--or more correctly trying to fix things.
If it is correct to say that the US financial system has collapsed (I will let others decide if that description is correct) we should perhaps count ourselves lucky that stocks have not dropped more. Obviously some folks are calling for a much larger decline still to come. I do not think there will be new lows that are meaningful but of course any opinion like that can be wrong. I still believe in a large bear market rally to come and a run down toward the lows after that (maybe the run up to 931 was the rally--smaller than I would have thought-- but I don't think so).
One other reason why I don't think we go dramatically lower than the lows already in is that the shock factor is now gone. Asset prices have plummeted, institutions have failed or been bailed out, foreclosures have gone way up as has unemployment. If the shock factor is gone then there likely would be less of an emotional response which in turn would mean the lows for equities are in even if we churn around the lows for a while to come.
Or not. What do you think?
38 comments:
Still waiting for your response to the WSJ Swenson article.
do I owe you something or otherwise have some sort of obligation to you that you can leave a comment like that?
Sorry I came across like that. Earlier in the week you said you needed a couple of days to gather your thoughts on the subject. To me, it goes to the core of investing and I respect your opinion. Just don't want to miss what you have to say on the matter.
I agree with you about the shock value being gone.
I think the next leg down will be driven by lousy fundamentals--poor earnings for at least the next couple of quarters, no guidance/visibility (Intel), reduced dividends, and the never-ending parade of bad news on home values, unemployment, retail sales, etc.
I'm hopeful about a stimulus plan, but not optimistic that it will make a meaningful difference in fundamentals for quite some time.
I haven't the foggiest idea where all that will take us in terms of numbers, but I still feel more comfortable with lots of cash (that's relative) since I think we'll get a better opportunity to re-equitize later in the year.
I'm not sure if the shock value has completely run it's course. You never know what might come up. No one expected the Madoff ponzi scheme. Perhaps more scandal will arise (ie. some scandal with Buffet). Although not likely, you just never know.
true that about Madoff but the only stock market effect is one of perception. as he owned no stocks there is zero fundamental relationship. the other stuff is what does the do to the fundamentals but not the ponzi.
The Swenson article said nothing exceptional. It's been said 100 times since September.
As a side note, I sometimes wonder if the reason bloggers like Mish now keep saying things like S&P 500 is that things like "economic collapse" or "mortgage crisis" no longer have any shock value and therefore don't generate pageviews and clickthroughs.
Mish may be a bad example; I'm not up to date on his predictions from earlier year and last year. Or maybe I'm just too cynical. Hahah.
i don't know if it is a page view thing (although in the case of Roubini I really doubt it) but I have been critical of some of the descriptive words used by some folks. how should we define collapse?
I think the rally is still to come. There is even a chance it will be bigger than you think.
The economy or system has not collapsed. Yes some entities have collapsed, but the system has held up so far.
That does not mean it will or will not collapse in the future.
Hahah, look, investopedia defines economic collapse!
I'd probably define it as "it doesn't work anymore." So, Lehman has collapsed. Citigroup has not. Hell, I guess Iceland is still "working" but I'd have thought I'd define them as "collapsed." Hmmmm.
10 or 20 years ago, who'd have even discussed this? But last year for instance (it was last year, wasn't it...) I made my wife pull her accounts out of Etrade when they had issues. Now we're sitting here with checking and savings at Citibank. I don't fear their collapse, but simply having your money locked up for 2 weeks would be a bit problematic for a single earner with 2 kids.
It's hilarious how I see risk everywhere now.
Wouldn't a "U.S." financial system collapse be the government failing to meet its debt obligations? Potato, potato, I suppose.
[humor attempt]
Hey Roger, still waiting for that 50 bucks you owe me. :0
(I figured if we could make demands 'round here, might as well make it worth something).
[/humor attempt]
will you take it in ISK?
Just an opinion. I believe, come Jan 21 and the new administration, the main stream media will start looking for positives to report, as Obama is their man by a wide margin and they want him to succeed. If that happens, it is entirely possible the stock market may benefit.
No, 50 USD or 50 trillion ZWD, please.
Roger:
Do you have any preference for VEU over EFA or vice versa?
Mike
i've been bashing EFA for years now. broad based products are a lousy way to access foreign, IMO, because much gets blended away and the correlation is much higher than with country products. plus, do you want that much in UK and Japan equities?
If BoFa dividends are cut to .01, will the preferred's keep paying those lofty percentages?
Roger:
Would you be OK with sharing which country-specific ETFs I might want to consider? Thank you.
Mike
that is a no no but if you've been reading this blog for a while you know which countries I prefer. in most instances i use common stock as opposed to the coutnry fund. for anyone not comfortable with a common stock from a given country then i think a country fund would be the next best thing after looking under the hood.
If you have a philosophy of broad based index investing, why would you change course based on the comments of 1 guy on the internet? now you're gonna have to guess which countries you want and which countries you don't want.
I think we will hang around this general area, pending no big events. I give it another three months before a big correction. there is still hope Obama will save us. When hope fades look out below.
Hi Roger and Readers:
I believe the following letter from Krugman to Obama likely provides a blue print of what we can expect as a society over the next 4 years and is worth a read, though it is long....If anyone who reads it is inclined to venture a guess as to what the investment ramifications are, I think it would make for a very interesting discussion! Andrew L.
http://www.rollingstone.com/politics/story/25456948/what_obama_must_do
Roger, I know in anticipation of higher agricultural commodity prices you are keen on DBA. As a similar theme, do you have any thoughts on fertilizer stocks as an asset class? Today TRA is in takeover talks (I own it!)The group as a whole has been crushed. To me, and I'm no expert, I think there are some compelling values (MOS, POT, SQM, CF).
Max
compelling values? probably but the fertilizer names are more like commodity stocks than Monsanto which I have disclosed owning many time before. I can't say the distinction is not a shade of gray but if i owned a fertilzer stock I would not want to be too heavy then in regular mining stocks.
is there a link for that oscae rogers picture?
you should be able to click on it get a link from blogger but the actual picture came from my watching the video on Hulu, pausing it, using alt/prtsc to capture the pause, pasted into paint and then saved on my hard drive
I meant is this a new video, thanks
no
Roger,
in response to the question of a market bottom, I thought this article by Hulbert was interesting... I tend to believe the worse is yet to come, but as you say, no one knows..
-Dave
http://www.marketwatch.com/news/story/Thoughts-whether-Thursday-a-successful/story.aspx?guid={13666CDC-7163-4BE0-8971-2AA64552A56A}
One thesis that Karl Marx advocated was that in a capitalistic society, the leading capitalists would lead the mass population into accumulating an enormous amout of debt, in turn, the banks holding this debt would eventually be taken over by the government. This would lead to a system where all planning would be done at the central level.
My god, could Marx have been correct in his theory?
Marx's general theory was not correct ...for humans: As E.O. Wilson, the ant zoologist, once quipped: communism is a great theory but failed because it was applied to the wrong species. That aside there are gradations of bureaucracy or "central planning," whatever one wishes to make of a term that has become almost too loaded to be meaningful, and doubtless we'll see more of whatever some of us mean by it.
But Marx did detect and describe some notable weaknesses in capitalism including a tendency to growing income gaps and overuse of leverage; mind you, Marx is no Hymen Minsky (and vice versa), but did make some shrewd observations regarding the abuse of credit and the possibility capitalism might ruin itself with no need for a push from outside.
Personally I'll be convinced that some real sense is being made of the current mess when I see heterodox economists such as Minsky taken seriously by policy makers because what I mainly see now is a series of quarrels between purists -- Neoclassical, monetarist and Austrian, and Keynesians -- bashing it out with a resulting policy mish-mash that increasingly strikes me as unlikely to succeed.
As to the market, predictions are difficult, particularly about the future (pace Berra) so I'll only observe that the market is not over-valued on a normalized earnings basis but also does not seem to be pricing in the possibility of a much longer than normal recession; e.g, two years or more. JMO FWIW
Hey Roger
The NASDAQ OMX Group has come out with a new index, based on companies that have recieved a $Billion or more handouts.
If there is a matching ETF,how much should we allocate to this asset class in our portfolios?
OG
The group should hire some mind readers. they could implement Bill Gross' maxim (I think it was Gross): Buy what the government buys before the government buys it.
Roger,
I'm inclined to agree with you, in that there might be a bit more of the bear rally to run.
Fwiw, I'm think the market is willing to give the new administration and their "stimulus plan" a chance, but when it becomes apparent its NOT going to be a "silver bullet", combined with the on-going disemination of bad economic news, we'll see that re-test of lows.
Speaking of the Great and Powerful Oz, er, Bill Gross, how about his words of wisdom today that the credit crunch for banks may be for the most part past us?
http://uk.reuters.com/article/bondsNews/idUKN1630733820090116
DE
I think a credible argument can be made that the true bottom is NOT in for the following reasons:
1. Historically, if one looks at the most sever bear markets over the past 100 years (1929-1932, 1973-74 and 2000-2003) all of them took 2-3 years before final resolution. This bear market is at least as severe as all of the aforementioned ones and it has given us the single worst year in the past century. Additionally, the banking and financial systems are in worse shape than all but the 1929-1932 collapse. Therefore, I believe it is unlikely that this bear market has put in a durable bottom in the space of 12-13 months. Rather, I believe this year will be the second year of the bear market with the final low occurring in Fall 2009.
2. It is less about emotional reaction and shock value to bad news than it is to persistent overestimation of earnings for the S&P 500. The estimates are still too high and will (imho) continue to be ratcheted down. If one believes John Hussmans's comments about what an average P/E for the markets should be (P/E = 10 to 11) then it is not unreasonable to believe that the Dow 6500 and S&P 600-650 are the levels that reflect what many believe are the true S&P 500 earnings for 2009.
3. After the Obama euphoria wears off it is conceivable that persistent economic malaise in the housing and financial sectors, despite the massive stimulus and any new actions Obama and his administration will undertake, may turn investor psychology more negative than it currently is, resulting in an absence of buyers.
The real crash will occur in Aug or Oct 2010 - 2 years from now.
The market will bottom at about 80% off the highs.
Yes there will be a very big suckers rally of a lifetime.
Will California Bankruptcy hurt stock?
How about BofA?
How about when oil goes down to $5 per barrel?
How about when the US devalues the US dollar?
How about when the truth of GOP corruption with Wall Street and Big Oil starts to come out?
How about when $300 billion in option arm loans go under in 2011?
Hmmm, that last poster sounds a lot like Mish... naaah. He "abhores" anonymous postings.
R in NY
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