Yesterday's Sell-Off Is Not Worrisome

This market is going to be climbing walls of worry for a long time. Sell-offs like yesterday will follow periods of rising prices, and that's only natural.

The important thing is that the fundamentals continue to point in a positive direction: swap spreads, credit spreads, and corporate bond yields are all down significantly from their recent all-time highs; implied volatility in bond and equity options is down significantly; energy prices are down hugely; most commodity prices are up from their recent lows; and all measures of money supply are rising at a breakneck pace and stand at all-time highs.

What's more, there has been a dramatic repricing of assets. Housing prices are down everywhere, and financing costs are down as well. Equities are historically cheap no matter how you calculate it. The rewards to taking risk have almost never been so high. The vast majority of the subprime and subprime-related losses have been recognized and absorbed.

Fiscal policy is going to turn out to be far less damaging to the economy than was feared just a few months ago. Obama has changed his mind on all sorts of issues. Things could be better, but they could have been far worse. Stay optimistic, stay bullish.

Comments

[morph366:]

As you suggest I shall stay bullish until I turn bearish

Jan 08 08:58 AM

[Raymond Mic...:]

Even if S&P 500 earnings (currently in the $45 ballpark) were to stabilize and grow at a long-term rate of, say, 6%-7% and the P/E multiple N years hence on those earnings ends up being 15 (a long-term median), the annualized returns we can expect from the index (including dividends) is only about 6%-7% (about half of that coming from dividends). Not spectacular, about average. Thus, it's stretching things a bit to argue that stocks are historically cheap. And if earnings don't stabilize (and there's a non-trivial probability of that happening), stocks could be considered a bit expensive. In light of the uncertainty, why would an investor not want more of a margin of safety before jumping headlong into stocks?

Jan 08 09:07 AM

[The Good Ne...:]

>>The important thing is that the fundamentals continue to point in a positive direction.

Indeed. Bravo CBP!

And the jobs data (just out) shows more hopeful signs. The bears will no doubt shrug off that data, but there it is staring them in the face. Two weeks in a row of 4-month moving averages strongly negative. Those bears whining about unemployment woes will now have to turn somewhere else for their mid-winter diet of negative indicators.

Jan 08 09:11 AM

[Steve in TN:]

What bothers me about going forward in this market are the large chorus of voices/gurus/forecaste... saying the market will go up to 10,000 to 11,500 on the DJIA in the first few months of the year and then fall sharply to test the Oct-Nov.. '08 bottom. This last fall will be the bottom of this bear market. Since everyone is saying the same thing, I guess it will happen (I'm saying the last sentence with a great deal of sarcasm).

Jan 08 09:28 AM

[investor88:]

Not worrisome sell off yesterday. Not everyone agrees.

Jan 08 10:03 AM

[stox2buy:]

The prime time of investment opportunities for the so called: TECHNOLOGY sector, namely computer/network/inter... personal devices and enterprise software(ERP) were long gone.

The next big thing coming is stem cell based regenerative medicine, this is a huge field as big as TECHNOLOGY if not bigger. From the hardware(tools) to treatments to drugs, this is the golden opportunity for those who do some study and digging, a lot have been going on yet a lot more will be happening as the new year unfolds especially in "adult stem cell" area.

Investment in tools, treatments or drugs now is like investment in TECHNOLOGY a decade ago in hardware, software and internet/mobile.

Investment in tools is the safest and the 1st to be rewarded, then treatments and then in drugs. Treatments and drugs will have the biggest winfall but they are further down the pipeline in terms of timing.

Disclosure: long tool stock (KOOL), lurk on a few stocks in treatment and drug with stem cell/regentive medicine flavor.

Jan 08 10:25 AM

[Moon Kil Woong:]

I agree that the sell off was muted. Everyone seems to be waiting for Friday whopee... Then there's January employment, February employment. I honestly don't see the reason to stay bullish. First off, most everyone but brokers and fund managers playing with clients money are bullish. Oh I left out some clueless analysts. It's funny how once you give people money that's not their own they suddenly become so perky.

I suppose that's the governments plan. The only thing is bankers tend to be super greedy sourpusses. They should have given it to college students.

Jan 08 11:00 AM

[rber:]

You forgot to mention one very important fundamental. That of the insolvent US consumer who is responsible for 70% of GDP.

Jan 08 11:02 AM

[Umm, yeah:]

'Rah, rah, rah.' says the Cheerleaders.

Hey, I hope you're right. Would love to see a big market turnaround.

Jan 08 12:16 PM

[Socialism c...:]

Bullish? On what basis? Did you see the payroll number from ADP? Have you looked at manufacturing?:

seekingalpha.com/artic...

How about the geopolitical events? In the above article, I will note my own post:

[quote]
"Then ask yourself, what happens to the economy if even one more big thing hits the fan???

1) Hamas vs. Israel -- ceasefire? or escalation with more participants?
[end quote]

That was just yesterday. Then this hits the fan today:

www.foxnews.com/story/...

Folks, do any of you not have the sense that there's just waaay too much going on out there? This is no time to be bullish. I'm going long guns, gold & canned goods. Call me a "bunker dweller" and laugh if you want -- people laughed at Peter Schiff a few years back too. Reread my post from yesterday. Look at what is going on around the world...and how many *big* risks are cropping everywhere.

EVERYTHING would have to fall into place for the market to have a chance at a positive year in 2009. This may sound like just sentiment-based bearishness...but it's not. It's based on recent economic data -- the fundies are not only not improving, they're getting dramatically worse. And geopolitical events are escalating.

Jan 08 01:01 PM

[waf76:]

the stock market will become less and less relevant as there is just too much government intervention to trust it wholeheartedly.....peo... will park their money elsewhere...Its like in China, the people are not heavily invested in the market...

Jan 08 01:12 PM

[the ilster:]

Stay Bullish? the largest credit bubble in human history just popped and you want to stay bullish? I suggest you read roubini he is right on the mark. This is a Bull trap!

Jan 08 09:34 PM

[Kunst:]

The eye of a hurricane is calm too. Then the other half of the storm hits.

Jan 10 02:30 AM

[Conan the B...:]

Everyone got on the January Effect bandwagon on Jan. 2nd. By Jan 9th, the wagon was in a circle.

Jan 11 06:05 AM