Fundamental Valuation: How Low Could We Go? 61 comments
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An interesting recent article asks the question, "How much is this market worth?" It turns out that, over the last 30 years, the S&P 500 Index has averaged about 2.4 times the combined book values of the component stocks. At the market peak in 2000, we traded at almost 5 times book value. In 1982, we actually dipped below book value.
Periods of overvaluation and undervaluation can persist for a considerable time. We were over 3 times book value from 1997 through 2002. We were below 1.2 times book value for much of the late 1970s through 1982.
At an estimated book value of 615, we're trading around 1.5 times book value, not quite the level noted by Ned Davis as "undervalued". Should the current market and economic weakness prove as troublesome as the late 1980s -- a conclusion surely implied by those who call this the worst economic period since the Great Depression -- a move below book value would certainly be in order before we could say stocks are a screaming bargain. That could be a meaningful decline, given that book values themselves can move lower as assets held by companies (real estate, receivables, etc.) are valued downward.
Back in the Great Depression, as Jason Zwieg notes, stocks sold for less than their cash and marketable securities. Should the ratio of stock price to cash and marketable securities in the current market return to the level of 10 that we saw in the late 1970s and early 1980s, he notes, that would take us to about 600 on the S&P 500 Index -- back toward estimated book value. If we overshoot to the ratio of the market low in 1982, however, the S&P 500 Index would be closer to 400.
Interestingly, this fits with the recent analysis of market valuation based on Tobin's Q. Based upon the replacement cost for assets of the S&P 500 companies, the index should be trading around 910 -- roughly where it stands now. At historic market lows since 1920, however, indexes have tended to trade closer to somewhat above half their replacement cost.
If we look at this market from a trading vantage point, it is hard to escape the sense that we're tremendously oversold and due for a rally. In the short to intermediate term, that would not be surprising. If, however, we focus on fundamental valuations and historical norms, we're not at all at historically highly undervalued levels. There is a disconnect right now between how severe we say the economic problems are and how we think markets will move from here: most investors I talk with say the problems are quite severe and they say, with more than a little hope, that they think the worst of the market decline is behind us.
If this is indeed the worst economic crisis since the Depression, we will likely see book value in the major averages before we make a long-term bottom. That is not an extreme prediction of doom; it represents a level of valuation we've seen within the last 30 years. I don't see average investors and investment advisors thinking through or planning for this possibility -- and that could lead to sorry retirements for a number of baby boomers.
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This article has 61 comments:
if they do, a complete meltdown due to utter loss of confidence can happen
Housing took us down and housing will lead us to recovery. There is no other game in America these days but housing. We don't import houses, yet.
Aslo of note is that the credit markets are pricing in severe economic weakness. There is a mismatch between what they are saying to us, with some AAA corporates trading 600-700 basis points over treasuries.
To me that is already saying 550 - 600 is pretty certain. It takes time for a giant whale the global equity markets to get to their trough valuations during this adjustment. perhaps another year or two of downward action to do so.
just my thoughts,
jmorace
So, perhaps a little perspective on things might help. When I started out, it was considered wild speculation to buy a stock with a PE above 8 and a P/S ratio above 1. Those valuations belonged to only the very best companies available. You'd be hard pressed to find anything selling at those ratios today.
Things have certainly changed and I've made a lot of money because they have over the years. But the question at hand deals with how low the market can go, and less forthrightly, are we there yet?
Well, let's take for example, a widely-traded and particularly unspectacular stock like Yahoo (YHOO). It produces nothing proprietary that another company could not do as well or as cheaply. In fact, it offers no real "product" per se at all. It pays no dividend, and it completely dependent on advertising from companies that will almost certainly cut their budgets in any coming slump.
Yet, despite it's current price being far less than half of what it sold for in the last 52 weeks (-56.5%), it still carries a PE near 18, a forward PE over 24, a P/S of 2.5, and a book value that values the company at below its current cost at $8.4. There's more if you look, but those are the highlights. finance.yahoo.com/q/ks...
I could do this all day with most exchange traded companies, including REITS (who says the real estate market is in bad shape?), consumer computer companies that make products that people can and will live without when given the choice of food on the table, gas in the car, roof over their head, or the coolest cell phone on the market.
So, can the market go lower? Of course it can. Can it stay lower for a very long time? Certainly. It has. It did. And furthermore, it's long overdue for a long, long sleepy time.
As long is everyone is quoting old chestnuts about "buying when blood is running in the streets," remember another old chestnut: "When nearly everyone bets one way, go the other." Right now, the so-called "smart" money is telling everyone that we must be near a bottom and should be loading up on stocks. And that includes Warren Buffet. I'd call it a market bottom too, if I could invest in Preferred Shares paying a 10% dividend, along with the right to options at current prices, at some point in the future when the stock is likely to be higher. That's a sweetheart deal we'll never see. So Buffet has a motive for seeing you throw in with him. Only you won't get his deal or his return.
Good luck to all.
To all those selling everything: ok, good, what's your plan now? I guess you all give up on retirement? Treasury bonds at 3%, not going to get you really far you know. And if the world is coming to an end, well I guess corporate bonds ain't so hot either. What's the plan? Everybody pile into gold? Well that ain't working that hot so far, and if you really want to actively participate in killing the economy, then pulling all your money ou of it to put it into a stale asset like gold certainly is the quickest way to di it. Good job there.
and especially nice info re historical s&p valuations; and mentioning that the book value itself may still decline, along with the book to value ratio
all in all very nice article
thanks!
Muizie
Patience...Don't be afraid of the truth...we could get a snapback rally or we could go lower. That is an accurate analysis of the market we are in. If you want to play this current market...play the volatility... buy the dips and sell the rips or go double long and double short and exit on price extremes. For me that's too much of a casino tactic.
Wait for price movement...money will go somewhere. Even in a year like this, many people have made money...example ...long commodities for first part of 08 and short market second half. .Right now I'm 100% in cash ...not out of fear...all Asset class's are getting crushed right now...that's just a fact. Currently cash is king...that will change at some point in the future. I will continue to monitor price movements and wait for an opening.
You could have made enough money (long commodities) for the first part of 08...sold on downward price movement, and then sat tight for the rest of the year. An investor doesn't have to be doing something all the time.
Maybe inflation will come back and commodities will start to rise again, driven by Asia recovering sooner than we do or inflation. Maybe China will be the place to be. Maybe precious metals will sky rocket.
The baby boomers will have to retire...money will have to go somewhere. Follow the money but don't overstay your welcome. Buy and Hold doesn't seem to be in vogue right now.
Good luck and hang in there.
It's easy to understand your frustration. But stating a fact is simply that, nothing more or less. The market is what it is at any given moment. The plain truth of it, is that if it weren't for the fact that people allocate money to automatic monthly deductions to 401K and similar plans with little thought to where it goes and how it's invested, this market likely would have tanked years ago. Most mutual funds are required by their charters to be almost fully invested in the asset class it specializes in, and to have a given amount invested in that group of stocks at any point in time, which causes them to buy more in low price times and less in higher priced times. Barring massive redemption requests from investors, it amounts to dollar cost averaging on a much more massive scale than we can manage individually.
The problem now, as you correctly identify, is that there are massive redemptions by investors and the asset class is falling of its own weight. The beast feeds on itself and no one knows when or at what point it will stop. You are also correct to assume that at some point the bleeding will stop and people will discover that no bank is paying them enough to even keep up with the rate of inflation. You are losing money even in the best CD's at the safest banks. So, once things settle down again, people will creep out of their little cubby holes and tell their asset manager to put them back into the market.
One thing you might remember, is that the value of stocks, despite the various ways we use to measure their value (PE, P/S, P/B, etc) are only worth what we think they are worth. They have no real intrinsic value outside the value of their plant and equipment at an auction. That was why I used Yahoo as an example of just one stock that people still believed held some value, even in the face of quite a bit of evidence to the contrary. It's worth what investors say it's worth.
It's great when you buy Apple before anyone else feels they are worth something more. But it also works against you when people panic. When they want out, there's little you can do to convince them that the company has intrinsic value. It's only worth what their fears and dreams say it's worth. It's always been that way. Has the value of GE, GM, IBM, Apple, AT&T, or any other company whose price has been cut in half or more in about a month, actually occurred because that company is no longer worth what it was only a few weeks ago? Of course not. It's only that investors have lost the belief, if perhaps only temporarily, that the future is limitless.
We live in a world that is interconnected. The housing mess brought on the banking mess, the banking mess brought on the lending crisis, the lending mess brought on the foreclosure or rescue of other messes and on and on. Then the government stepped in and really screwed the pooch.
The mortgage appointment I made only a week ago has seen the mortgage rate rise about 7/8's of a point. Why? Because the government nationalized Fannie Mae and Freddie Mac and now the market is selling their bonds at fire sale prices because no one believes in them anymore. Bond prices go in the opposite direction of bond yields and so, the interest rate has risen like a rocket in response to the Law of Unintended Consequences. The government tried to help save the mess it started in the first place, and only made things worse.
If you think this is the end of the mess, then I would have to disagree. We haven't even heard much from the rest of the world yet. There's more and worse to come and it is simply a case of, "Sometimes you eat the bear, and sometimes he eats you." The poster who advised you that sometimes the best thing to do is to do nothing, is completely on target. This market tanking, for anyone paying attention, was pretty easy to see coming. If you listened, you could hear the desperation in their voices, every time a talking head or congressperson told you the system was completely solvent. You know what? When something is really working well, there's never any need to reassure people that it's working well. When you see Nancy Pelosi, Harry Reid, George Bush, Barney Frank, Ben Bernake, et al, posing for pictures together with the caption saying essentially, "Hi! We're from the government and we're here to help!" Hold onto your wallet.
The good news? This too shall pass.
Best of luck.
The historical valuation data on earnings gives a similar prognosis for market valuations.
The way I see it, we are in a secular bear market for valuations, within which we can have oversold bounces and cyclical rallies. But the trend for valuations is probably lower.
Historically secular bear markets have lasted 12-15 years and have correlated with secular bull markets in commodities.
In the 70s, the market bottomed in late 1974; valuations did not bottom until summer of 1982. In the 30s, the market bottomed in '32; but valuations didn't bottom until '42. In between, the S&P rallied almost four-fold between 1932 and 1937 without coming anywhere close to the 1929 high. It sold off sharply from 37 to 42, but bottomed at a level almost twice the '32 low, even as valuations undercut.
If recent government initiatives are successful in stemming panic and preventing a deflationary spiral, then the indices can rally pretty sharply from these valuations. But once we anniversary the massive unwinding of financial company leverage, and once the consumer starts to comp positive, the hangover of a massive government debt burden will ultimately be inflationary...hence, another selloff and lower lows on valuations if not absolute stock prices.
Buy and Hold investors are likely to face a continuing valuation headwind for years to come.
A very key point this article misses is that is the market trades sideways from here and the companies continue to muddle along (making a profit, but little growth) then book values will continue to rise in the coming years.
So....
Using 73-74 and 1982 as metrics....you have 8 years from now (2016)that book values will creep higher (assuming companies stay profitable) and with flat stock prices, then you might have a market with the S & P at around current prices AND also below book value.
Taking that 615 # now as book value the author states and granting an increase of 5% a year in book value (10-12 P/e + dividend would do that) then the 615 becomes over 900 in 2016.
Book value is an accounting term with a vague economic meaning. S&P 500 component mix is very different now from what it was 25 years ago, with many more software and services companies that are normally valued at many times their book value, also do not forget the effect of Fair Value and mark to market accounting rules that depress book values.
Comparing historical book values is not the right way to compare the fair valuation of the companies. You also ignore much lower treasury yields today than they were in the 70s and 80s.
Historical comparisons should be done with an understanding of the changes in the playing field. Remember, 300 years ago a plot of land in Manhattan was only worth as much as the crops you could grow on it. Even with the housing crisis, I don't think real estate prices will ever fall to those levels.
Arnold Van Den Berg who has an amazing investment record on par with Buffett discussed the market's replacement value in OID a few years back. It's a worthwhile read.
Growth in book value is probably a better indicator at corporate and aggregate levels.
The K-wave will bottom in 2015 as well.
The Mortgage reset mess will bottom around 2013
The P/E may bottom around 5-7 around 2015
The E part of P/E is about to cliff dive with the economy. The earnings will go down another 50% (my educated guess)
This would imply another 75% SP500 hair cut, from where we are NOW - down to 250 level.
Based on this, I would say the SP500 will bottom out in the 300-600 range.
This is going to be a long war, with a lot of blood running the streets. We just entered the second half of the Bear.
We are not Warren Buffets - I wish I had his money and smarts.
Do you want to loose money - listen to Jim Cramer.
On Oct 18 05:35 PM TraderGreg wrote:
> The K-wave will bottom in 2015 as well.
> The Mortgage reset mess will bottom around 2013
S&P 500 Div yield in the early 80's was ~6% and long bonds yielded ~14%. Now S&P Div yields at present is ~ 3% and long bonds yield ~ 4%. The market is arguably cheaper now by this measure than the 80's.
Also P/E ratio's are approaching (at 11.1) - implying a earning yeild of 9%. Even if earnings fall by 10% - this is 100%+ risk premium over a long bond.
The market is clearly irrational now and cannot separate fear from bear.
What if it's not the market that's cheap but Treasuries that are expensive?
The market may appear to have hit bottom, but only relative to the extraordinarily high valuations achieved since the mid-90's due to the fact that mutual funds have to buy stocks as people plow money in. People have had to keep plowing money in because their employers stopped offering fixed-benefit plans, and they could not get a return that matched inflation from bonds or CD's, so it all went into mutual funds, and so on to stocks. In a way, the 401K laws and the artificially low interest rates made mutual funds issued by private companies a de-facto replacement for sound money issued by the government.
The result has been stock market overvaluation by any rational measure, as anyone can see by just looking at a long-term chart of the Dow or S&P 500. Simply extrapolating those charts on a log curve along their historic 60-year trendline would put us at about 6000 for Dow and about 800 for the S&P. I can't tell whether we shall get that low, undershoot, or go straight up from here; but I can say that I will not be surprised by whatever happens as we are entering a totally new phase in our economy.
It has always been said of gold, that its price never changes. Ever. What changes is the currency and emotion surrounding the commodity. A theoretical ounce of gold would buy an equivalent amount of goods a thousand years ago as it buys today if there were equivalents--A good donkey then, an iPod now. Gold is a reflection of the world around it, not the other way around. If you can accept that premise, you will see that there is no "real" price of gold relative to any artificially created commodity such as treasuries or dollars or euros or anything else created by man to take the place of something with real intrinsic value, such as gold or silver. That's partly why gold rises as tensions and uncertainty rise. Treasuries merely reflect people's belief at that moment in time, and in the government that issues them. Otherwise they are as worthless as any other piece of paper with ink printing on them.
There is, however, a simple and overlooked solution to this "credit crisis." That is to make the interest on all savings tax-free. Doing so would encourage saving by raising the effective yield each bank pays. By law, banks can lend out $10 for every dollar they take in in savings. They can do this over and over again each time that same dollar is borrowed and then deposited again. That's one major reason why some mortgage lenders have found themselves leveraged 30:1. This simple and very basic solution would encourage savings, flood the banks with money to lend, thereby lowering interest rates and freeing up the credit crunch that the government created by encouraging debt and discouraging savings. With banks flush with cash and looking for places to invest it, they could again invest in homes, small and large business, business creation, community improvement, infrastructure, etc. And it can do it without confiscating wealth or redistributing it.
America today has about the lowest savings rate of any industrialized nation. No one tells you what you must do with your money, but our government does have a huge say via laws, rules and regulations, in how or what monetary behavior it encourages or discourages. A Roth IRA is a one prime example of what people do with their money when they are not taxed on their retirement savings. Unfortunately, it also encourages investments in mutual funds run by people who can rarely beat even the S&P averages.
Conversely, allowing you to sell your house tax free every two years constitutes the other end of the spectrum. That particular tax code encourages people to bet and speculate on real estate, selling often in the hope that their home price will appreciate in the next two or three years for them to sell and pocket the profit. Encouraging debt is how the mortgage mess happened. The government took an asset that older people used to almost never count as a financial tool (it was just their home--cheaper than renting, interest being tax deductible, and a sort of forced savings). But it was never really what they thought of as an "investment." When they changed the law, they changed the outlook and the rules of the game (much to the country's long-term detriment, in my view).
Anyway, that's my point of view. It too, is worth the bandwidth it's written on.
Thanks for your kind words, prudentinvestor. Best of luck to all.
It's my opinion that the reason the government has never taken this most obvious step, considering that they are constantly complaining about how little Americans save, is because it would remove money from asset classes favored by those that benefit from other asset classes--those in power and those with lots of wealth.
There were no PCs then. No internet. Communism had not yet fallen, and we were in a Cold War. No China and India opening up and growing rapidly. Is medical technology better now or then? Were there cell phones? Automatic garage door openers?
Yes, things are ugly now, and will be for a while. I am no bullish polyanna. But there is no reason that we have to go to 400 on the S & P just because PEs used to be 8 or that stocks once sold for book value.
It is also true that things happen much faster now than then. The 40% drop we have seen in the past year might have taken five or ten years back then. For that matter, every day presents as many trading opportunities as you would typically get in a month, or three, or a year!
Gloom and doom does no one any good, especially after already taking a 40% hit. And black box magic formulas are more what has gotten the market INTO this trouble than what will help get out.
It's also very true that things move a lot faster now. But that cuts both ways. You could be back to 14,000 on the Dow in the next two weeks. I'd be the last one to say it can't happen. But neither can anyone say that it will. That's why it's called "a market" and not a "sure thing." I'd only suggest that, because it is a market, then it must, by definition, have it's good times and bad times. Otherwise, it is some kind of creation I have never heard of. Ask the people who bought homes two years ago, if the housing "market" was a sure thing or if it has its ups and downs. Ask them how long it will be before they break even. That's not doom and gloom. That's reality. Plain and simple. No one is trying to burst anyone else's bubble, but simply saying that the 40% drop we just experienced might have taken ten years in the 80's, does not negate the fact that it couldn't take ten years to get those numbers back up, computers or automatic garage door openers aside.
Change is the only constant. No Cold War? Okay, then how about a couple of hot wars in Iraq and Afghanistan eating hundreds of billions of dollars like we invented the printing press? You don't see any upside or downsides to that? Because I don't see the point of the argument. Change isn't always good. Ask any dinosaur. Or the guy who used to deliver ice to your grandparents. Or the casket maker if war is good business.
Good luck. I think I've worn out my welcome.
invictus rose writes:
"There is, however, a simple and overlooked solution to this "credit crisis." That is to make the interest on all savings tax-free.
It's my opinion that the reason the government has never taken this most obvious step, considering that they are constantly complaining about how little Americans save, is because it would remove money from asset classes favored by those that benefit from other asset classes--those in power and those with lots of wealth."
____________
to expand on this thought, the government is not only looking out for the captains of industry in its dysfunctional economic policies, it is looking out for itself as well. savings would reduce consumption, which would hurt tax revenues. less tax revenue means less money to finance wars, weapons programs, social programs, foreign aid, etc. etc. that would upset our applecart as "leader of the free world." can't have that can we, never mind the fact that it's long lost its meaning as well as its relevance.
the so-called "pro growth agenda" of the u.s. government is mislabeled. it is not pro-growth, it is pro-consumption. a true pro growth agenda would recognize that consumption financed by excessive levels of debt is not a lasting formula to prosperity.
many hedge funds and ETFs use leverage to goose returns, i.e. borrowing cheaply to invest in assets that grow at a rate greater than their cost of debt. the united states consumer, with the encouragement of its own government, does the same thing...achieving the standard of living he can't afford on his own with cheaply borrowed money made available to anyone who wants it. the u.s. isn't the richest country on earth...its just the most overlevered.
when was the last time you ever heard a government economist, treasury secretary, federal reserve chairman or President tell the american consumer to quit spending and stop borrowing? not only has it never happened, it won't happen. indeed, in the midst of the current collapse of our financial system, today's badly overleveraged consumer is being exhorted to borrow and spend more on his way to the poorhouse. the very financial institutions who were, and still are, so overleveraged they are functionally insolvent are being told they should lend the $700 billion of capital injected by the feds, capital ratios be damned.
wall street cheers these government efforts to keep the ponzi scheme going and asks for more. the underpricing of risk that led to intolerable levels of leverage is the disease that brought our country to its knees but that doesn't faze them. it wants rate cuts on top of bailout money and there is no doubt in my mind they will get everything they want.
as for the article, i agree with the substance of the author's comments. the modern generation of investors, professional or otherwise, have no idea what constitutes undervaluation. we're not even close. yardsticks of valuation like treasury yields and earnings yields are utterly irrelevant in this environment. earnings are declining and treasuries are the beneficiary of a public afraid to even have funds in a money market account.
the rules of the game are changing and i suspect the market hasn't fully discounted the lasting effects this will have.
For Chronic Traders: If we flat line for a time, & you chart well, look for Money Flow going into an equity before pushing the buy button. (I do believe that we need a 12 step program for chronic traders. Many have been making all their income from trading for so many yrs it is going to be very hard to sit still & watch.) Volatility is $$, but this is a NUKE to the System & quite unlike anything before. Someone said: Unless you are an experienced trader, don't...I completely agree, Bears Like Greed. As Fear is so much Sweeter. I won't even do the short ETF's right now, covered last wk. There is the Very Real Possibility they may have to close the Global Mkt's...Therefore they Won't Open until this is stabilized. Not a time for new longs or shorts. It's too late to do a Barbell Hedge as well unless we see further erosion. The mkt's closed around the time of the start of WWI for 2 Mos. Err on the side of Capital Preservation.
People who trade all the time or just look for Value can find some in the emerging mkts in staples. Some Global Mkts are down 60%, its the little guy that gets the 2-3 bangers & patients is a requirement as well as DD. I look under rocks. Some Businesses are just necessary & stable. The Credit is a Real Problem if they have No Free Cash Flow & a Great Deal of Debt...This seems to be a time of: Do People Need This? More So, Check the Balance Sheet!
The damage is done, but thanks to our swift acting Gov, it will be an extremely slow decent, and recovery. A horrible recession is the best scenario.
You can check on these the Conference Board's 10 components by yourself:
1. jobless claims
2. stock prices
3. building permits
4. consumer expectations
5. the yield curve
6. supplier delivery times
7. factory hours.
8.new orders for consumer goods
9 bookings for capital equipment
10. the money supply adjusted for inflation
A lot of analysts and economists have posted their forecasts recently. Here I give some scenarios analysis based on how deep this recession will go.
Scenarios as follows:
2 quarters to go in recession
3 quarters to go in recession
4 qaurters to go
5 quarters to go until the end of 2009
2nd demension is how severe this recession will become:
very severe: shed 15% per quarter
moderate: shed 10% per quarter
not severe: shed only by 5%
I posted this 15% because in retrospect, S&P 500 has shed by almost 50%, from 1545 on Nov 1st 2007 to currently 940, which almost equals to 1545*(1-15%)^4 = 940, assuming past development in recession front over the past 4 quarters has been very severe.
Then you can list the outcomes according to each scenario. Because of time, I only list a couple of typcal scenarios as follows:
1. Next 5 quarters as very severe, shedding by 15% a quarters until Dec 31, 2009, then
S&P 500 will go very deep to its bottom at 940*(1-15%)^5= 417
2. Moderate for next 3 quarters until June of 2009, shedding by 10% per quarter, then
S&P 500 will go pretty deep to its bottom at 940*(1-10%)^3= 685
3. Close to bottom now: this lukewarm recession will only last for the next 2 quarters and the stock market will base here for the next year or so. But currently the market will go down a little bit deeper by 5% a quarter, then
S&P 500 will go under continuously to its bottom at 940*(1-5%)^2= 848.
Based on the expected value, I assign a possibility to each of the above three situation as 50% to 417, 30% to 685 and 20% to 848, then the real bottome for S&P, most likely, will be 50%*417+30%*685+20%*84...
Based on this analysis, current 940 sure has not been a bottom, and the real bottome may still be 38% lower based on Friday's clost at 940.
Sorry, I know I said I'm outta here, but I can't let this go unchallenged. You are perfectly correct in assuming that money will seek a level of return better than "sitting in cash," because cash in "not a good investment." However, I'd take issue with a couple of assumptions you've made.
As I said in an earlier post, you, along with so many others, make the assumption that money can't be lost simply because there is so much of it seeking a higher return. That is just not true. Your seeming belief that there is a finite amount of money chasing a finite amount of return, is just plain wrong. If it were true, some people would have been getting 41% richer while an equal amount of other people were getting 41% poorer as the market sank. Read this link for a better explanation than I could give: www.commercialappeal.c.../
The money that has been lost in the stock market so far, is lost. Period. No one else got it. It's not that someone else got rich because others got poor. It is not a zero sum game. The "money" never existed in the first place, because it was never actually money at all. Instead, it was the perception that a given asset was worth a given price at a given place in time. Absent the perception, the asset fell, and the "money" backing the higher price, went into the abyss. It's gone. Period.
Also, the stock market is not the only asset class that people can invest in. They could start a small business, buy a home, buy gold or other commodities, put money in CD's, or any number of things that don't directly relate to buying shares of stock.
It's getting a little tiresome hearing the same old song about people getting out of the market being somehow wrong because they are just making the problem worse, as if protecting your assets, your family, your retirement, and your hard-earned money is somehow unpatriotic or something similar. We are somehow "making matters worse."
In fact, it is just the opposite. It is the free expression of doubt, disbelief, and horror at the way our government, our financial establishment, our banks, our regulators, et al, took us all for granted and spent our money like drunken sailors and now want us to bail them out of the mess they made, when they would never do the same for us. Sometimes one must take a little pain in order to avoid a lot of it later on. These latest government actions only prolong the inevitable. What idiot could ever think that borrowing more money solves a debt problem? We might be able to save our way out of it, but I don't think it's possible to borrow from ourselves, in order to make the debt good. That's like taking a dollar bill from your right pocket and putting it into your left and making some big deal about the transfer of money.
This is the first time in my life that I can remember idiocy, deceit, bad management, corruption, poor policy, bad law and ever other kind of bad thing, being rescued, rewarded and put , not just on a par with those of us who have always tried to do the right thing, but put above us as a class.
Bad businesses are supposed to fail. Bad loans are supposed to be punished. Bad decisions are not supposed to be rewarded. Bad laws and policies are not supposed to be continued and extended. Bad banks should fail. It is not the law of the jungle. It is the law of good business. It is the aim of America. Socialism failed exactly because it failed to reward good behavior and subsidized outmoded, outdated and irrelevant industry. Even China is practicing capitalism in the marketplace. That's why we owe them so much money. They're actually doing a better job at practicing capitalism than we are here at home.
Not to beat a dead horse, but what if the government decided that that fictional guy who delivered ice to your grandparents was in a business of "national importance," and was worthy of government assistance and subsidies so he could stay in business? Only the wealthy and ruling class would have refrigerators and ice would be a subsidized asset class. But your iceman, just like today's modern farmer who gets paid NOT to grow crops, would still be in the same business and the country would be worse off for the help we gave the iceman.
You may, of course, believe anything you wish. But I would suggest that it is financial suicide to believe that simply because so many people WANT a return on their money, that the market is somehow obliged to give it to them. Nothing could be further from the truth.
Best of luck.
The argument that money sitting on the sidelines can't or won't stay there forever simply because there is no other choice for it, suggests that you believe that it will therefore force the market to either make up for past losses or never lose it again. That argument holds no water. It is fallacious in the extreme.
The 4th quarter may turn out to be the somewhat positive as the 700 billion dollars stability package is fully implemented providing 5trillion dollars stimulus(40% of the GDP).
The economy is in the process of the major rebound as is the market.
It is the market psychosis that creates paranoia and paralyses the ability for objective market decision.
All of the wisdom expressed in this article should have been mentioned two years or so ago.
Now it is irrelevant and out of date observation .
Once economy feels the impact of the "plan",the momentum that will follow ,will expand the GDP growth to 5% by the 2nd half of 2009.
Key difference between the action in 1929 and now ,should be mentioned.
In 1929 the FED had raised the FF to 6% level in order to address the stock market"speculative activity"-they surely did.
This time around the coordinated effort of the FED ,Treasury ,Congress and Administration are addressing promptly the issue of economic deceleration-this will result in unprecedented recovery.
The only thing we need to fear is fear itself.
For the record ,I did discuss the risks we are experiencing today in an interview with Mark Gilbert (Bloomberg ,London)in June of 2005.
I have alerted the investment universe about the impending Armageddon on September18,2007 in an interview with Brian Sullivan(Bloomberg TV) during the FED time.
Now I am bullish on the U.S economy and the market as the issues are being addressed aggressively.
The U.S dollar and the dollar denominated assets ,will prove out to be the ultimate haven in this global economic cycle.
I'm totally bullish, why? because people like you all out crying wolf is the best indicator, nothing can be worse than that....
something loathsome.
In general though, you'd have to know your time horizon for buying and selling, the location of the property (especially its proximity to water o some other desirable location), what constitutes a decent profit in your mind even before you buy, what occupies the surrounding property, zoning laws, neighbors and neighborhoods, deed restrictions, utilities to the property, whether it is within the city limits, cost of developing the property for anyone who buys it from you, proximity to utilities and whether they are above ground or below, septic or city sewer, whether upscale or downscale developments are on the planning board nearby, taxes, and a lot more I'm leaving out. Generally speaking, I think I read that real estate has historically, over time, returned about 10% a year. I don't know if that applies to raw land or not.
Personally, I think that it's a bit premature in the cycle to buy land for investment purchases. I'd think the next year will see prices go lower still and make sellers more willing to make better deals. Many areas of the country have hardly been affected at all by the downturn in real estate, despite what you read in the papers. You'd have to judge your own area to know about that. Also, you should be aware that some real estate interest rates are rising, if you intend to finance the purchase, which will cut into your total profit.
As for the poster who wondered whether those of us on the cautious side of this discussion, were out of the market in Oct. 2007. I can only speak for myself and say that I was definitely out. I know you won't believe that, but I've spent 26 years reading, learning, getting my butt kicked and learning to watch for clear signals when caution is called for. The nationalization of Fannie Mae and Freddie Mac was a hanging curve just waiting to be hit out of the park. Once that conclusion was reached, it was almost too simple to extropolate from that point on, what would happen to the stock market, real estate prices, interest rates, and almost everything else that is taking place at the moment. The only real surprise, is that the people at the helm seemed so shocked at what was so clearly obvious to anyone paying half-attention to the market (both real estate and stocks).
You can tell me I'm full of baloney. It won't change the facts. I actually gave up on boards like this a long time ago because, in the end, people always believe what makes them feel good, instead of looking at things objectively.
For instance, being bullish simply because I am not, is actually not as foolish as it may sound to some. There are many contrarian theories that would support your belief. The trouble you face at the moment is that, not only is there no consensus of where the market is going, but there is no overwhelming concensus one way or the other about how this so-called "bailout" will affect the market. In fact, if there is a concensus at all, judging by the talking heads on tv, it's that this entire market crash has been one giant buying opportunity.
But the point really is, that a bailout of this magnitude has never been tried before, so anyone who tells you positively that they can predict its outcome, is pretty much full of it. And contrarian theories only work when the sentiment is almost all one way and almost none the other way. You're not a contrarian if you are simply in the majority. You'd have to be in the overwhelming majority for the theory to work. Those opportunities only come around a few times in an entire lifetime.
Right now, there is an more an absence of sentiment than any firm one in either direction. People are taking money out of the market, not as a way of demonstrating that they are bearish necessarily, but because they simply don't know what else to do. No one wants to be the last one to the fire exit in a fire. I think that interpreting caution as bearishness is a mistake. Few of us think the market won't come back, or the U.S.A. is going away, or that problems won't get solved eventually. The question you have to ask yourself is this, "Do you want your money at risk while they work out the kinks?"
So far, most of the solutions seem rather ad hoc from where I sit, changing day to day, moment to moment with little in the way of a real, long-range plan. Besides, the simple truth, is that they are doing exactly what they should not be doing, as I tried to explain in a different post. So, who wants to bet on the outcome? It could work, I guess. They're certainly throwing enough money at the problems. "Never fight the Fed," they say. In this case, betting against the market is like fighting the combined monetary might of all the central banks. It's actually a bit scary to be on my side of the bet. But they've put the fox in charge of the henhouse, and frankly, I feel pretty good in insured CD's and MMF's. I'm losing money to inflation. But better that, then losing it to the idiots in charge.
As to the question of whether a person should sell their stocks now if they have already taken that 41% hit, then the answer is a resounding "NO." Why bother? In for a penny, in for a pound. It's completely correct to believe that you might as well hang in there if you've already taken a beating. Once you sell, the losses are locked in. Staying in stocks at least gives you the opportunity to come back.
But saying that doesn't mean that everyone stood there like a deer caught in headlights when the train came roaring down the tracks. My brother-in-law has hundreds of thousands of dollars in his 401K plan and yet he pretty much has refused to spend any time learning about the market and what makes the whole thing tick. I find that incomprehensible. It's easier and whole lot less work for him to fax me his statement and ask me what I think he ought to do. He's probably spent more time learning how his jet skis work, than he's spent learning how not to lose his entire nest egg.
From my experience, judging by the actions of family and friends, my brother-in-law is not that much different than most people. About once or twice a year, they glance at their 401K statement, make a guess or two about which direction they think the market is headed, change their mutual fund allocation based on nothing more than what they heard at the water cooler, and then go about their business.
What is surprising is that you think it's just so much baloney when someone says that they watch this stuff closely and, once you get your butt kicked a time or two, it's not so difficult to figure it out. But the market and mutual funds thrive because people are either too lazy or too disinterested to spend the time it takes to learn some basic lessons about stock market investing.
So most 401K investors cross their fingers, pray for the best, and try their darndest to believe that they know as much as others who've dedicated a good portion of their lives to learning something more about investing, beyond how to sign a form putting them in a mutual fund. Then, if and when the market turns against them, they complain because the person they abrogated their responsibilities to, didn't know any more than they did.
Best of luck to all.
This isn't even a mkt to short right now on the ETF's! As you said: "Betting Against All the Central Bankers." Don't fight the FED. This Worries Me. If the shorts are reluctant to short in a Real Bear Mkt this somewhat alarming. It will make Rally's that much harder to achieve. I really wish they would halt all Global Mkt's until they have some of this in perspective. The perception may be much worse than the reality, or Unwinding these things behind the ticker may be much better for all. I still disagree about the "Plan," a total system failure would have caused more pain/chaos on Main St. There is a logical reason to call Time Out.
The catch the falling knife crowd are picking up a bit in the buying but the Margin Calls are still coming as well as distributions. What part of: The Charts have fallen apart for now & the ViX is hitting New Highs doesn't hit home?
If the Global Mkt's were closed short term, this would give the Counter Parties time to settle. The Wealth Destruction does not need to continue if this was done. I was Very Successful this time about getting most out early. Yet, the ambivelant or chronic traders were caught. Some in my sphere have taken death blows. Yet many others are sitting in cash, CD's & Gold.
I would short, if this Crash was not so un-precidented. That Logic would dictate a closure of the mkt's until they can sort this out...In closing, your conclusion about the mishandling, etc...Of Everything is Sadly Correct as well.
IF we had to implode, I wish it would have happened in the middle of an Administration rather than the end of one. There is no possible future call @ this time, as we have no clue how the next Administration is going to continue this process.
You're right--kinda, sorta.
1. You just forgot to deduct the rate of inflation at the time to find out what your "real" rate of return was on that 15% GIC you quote, which ended up yielding 4.17%. That's a decent return, but nothing like you're trying to make it appear. Also, the only reason they were paying those rates at all, was because 1982 was the worst year of recession we'd had in modern times. We'd also come off of several years of double digit inflation and the rates you mentioned were available because they were treating yields with the expectation that inflation was here to stay for awhile. Note on the following chart that, while inflation sank like a stone after Paul Volker intentionally brought on a recession by raising Fed rates. The following year of 1983 brought an even lower real yield to GIC's, even though the rate of inflation was cut in half. Here's the link to the information: www.assante.com/adviso...
2. You may also have forgotten that people DID buy stocks in 1982. In fact, August of 1982 was exactly the moment when the current bull market started with an explosion in prices that hasn't stopped yet, and which brought us to these still amazing heights of today, even discounting the recent crash. NYSE trading day volumes prior to that, were measured in the single digit millions. There was no automatic monthly contributions into retirement plans and funds around to artificially prop up prices on stocks, as we have today. There was no government intervention artificially manipulating which assets got favored treatment, and no bank was all that large. In fact, one of the reasons that they justified deregulating the banking industry was because America's banks weren't very large when compared to the rest of the world and therefore, unable to compete (at least that's what the argument was). I think the largest American bank at the time was only about 36th in the world at the time. The Glass-Steagall Act was repealed in 1999 and set the stage for the banking system we have today. More on Glass-Steagall: www.investopedia.com/a...
3. It was the fact that, while inflation had been roaring during the later part of the 1970's and early 1980's, tripling the price of nearly everything, the stock market remained stagnant and moribund, trading within an incredibly narrow range for at least a decade. But it was precisely because at some point the stock market needed to adjust itself to the reality of the effects of years of inflation, that the market was able to take off in August of that year. The Dow was below 800 in April of 1982. Merely adjusting it for the rate of inflation at the time, brought it's true value, without raising the PE of any stock, to about 2,400. Getting into the market at that time was as close to a sure thing as we've ever had up to that point.
If you can find it in a library, check out the book, "The Roaring 80's On Wall Street," which was published well before the market took off in mid-1982 and predicted almost exactly what occurred in the stock market.
4. It helps to quote things in context.
with respect to your observation that SPX trades at 1.5x book value but traded below book value during the great depression its also worth pointing out for purposes of scenario stressing that the Nikkei is currently trading just below book value, i personally think the nikkei is a much more interesting long than SPX but thats another big discussion...
Stocks earnings are definetely impaired...
jimrogers-investments....
"So, can the market go lower? Of course it can. Can it stay lower for a very long time? Certainly. It has. It did. And furthermore, it's long overdue for a long, long sleepy time."
long overdue? It's already been asleep for over a decade (no change in the last decade)...