Is the Market Going Lower? Silly Question! 46 comments
Mark McQueen
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As I walked down a cold Bay Street yesterday, the source of the stock market’s weakness finally dawned on me: It was too high for the times. That’s not to say that the market was mispriced when the Dow Jones 30 was at 14,000 — it’s just that the market is having a hard time catching up to the current state of the economy.
You know the old broker’s saw, “the market looks out 6 or 9 months”? Let’s accept for a moment that that’s true. Why is that only for rallies? Why doesn’t that axiom also work on the downside?
I think we’ve just found out how true that is in good times AND bad. 18 months ago I was being teased by some brokerage and portfolio manager friends for saying on BNN Television (see prior post “BNN interview on global credit crunch” August 9-07) that “the punters should hide” in this market. One PM (whose name starts with an “I”) sent me a particularly pointed and teasing note, and I wondered if I might have stepped outside my boundaries of expertise.
And then a portfolio CEO thought another prediction (that the Dow would fall from 10,000 to less than 8,000 last Fall - see prior post “Globe & Mail coverage on stock market turmoil” October 6-08) was so crazy that he bet me dinner that I was out to lunch. In a matter of days he tugged on his forelock as we broke through 8,000.
It is time that we all started listening to ourselves. Even if what we are hearing isn’t stuff we like.
The one-two punch of recession and bank fears has pushed the Dow Jones Index from 14,000 to 12,000 to 10,000 to 8,000. Of course the TARP wouldn’t fix the stock market (see prior post “TARP passes, but brace yourself for the second shoe to drop” Oct 3-08). And the 90% of any government Stimulus Bill won’t be spent until at least 2010. No short term fix there.
Why was 7,000 impossible to break? We might hope that things will get better quickly, that any big market rallies are a sign of a “bottom” — but that isn’t possible. Investors know that it takes years to build wealth: from 1990 to 1995 the Dow rose from 2,700 to 4,150. Over the next five years it went up another 6,600 points to break 10.9k.
The speed with which the market has returned to 1997 levels should surprise no one, at least in hindsight: is the economy better off now than it was then? I don’t think so. Are our business powerhouses more solid than ‘97? In many cases (U.K. banks, U.S. automotive {see prior post “Buckle up - the wheels have come off” August 13-07}, Canadian Forestry, etc.) “no way” is the only answer.
General Electric’s (GE:NYSE) dividend cut is the perfect forward-looking indication of what is going on in the global economy. There can only be three reasons why GE’s management and Board of Directors are not comfortable with maintaining the dividend: 1) forecast earnings won’t cover the quarterly dividend payments, 2) retain cash to bolster balance sheet and maintain credit rating, 3) bad optics given GE has accessed the FDIC’s Temporary Liquidity Guarantee Program.
In the first two cases, the GE team concluded that the economy wasn’t going to get better quickly. This undermines the positive noises we are hearing from Bank of Canada Governor Mark Carney and BMO Economist Doug Porter, unless you believe Canada can break out from the G-8 pack solo. The only recent silver lining is that BMO Bank of Montreal’s (BMO:TSX, NYSE) Board of Directors just declared the full 10.4% implied dividend this morning, even though some journalists were convinced it would be cut (see prior post “BMO insurance deal confirms dividend safety” January 13-09); one can be positive or negative about maintaining a 70 cent divi depending upon whether you focus on their $1.09 in adjusted cash earnings/share or the 39 cents/share/quarter net income.
Speak to any private equity or venture capital fund manager about their own portfolio: Almost no one is hiring new employees, many are trimming, and ~85% of their portfolio companies missed their 2008 financial forecasts. Big companies are looking everywhere for inventive sources of capital: Rogers Communications ((RCI.A:TSX)) and brewer InBev ((ABI:EBR)) are telling their suppliers that they’ll pay invoices in 180 day - in essence, using them as thousands of mini banks, on an interest-free basis. “Micro-finance” has a whole new definition.
The sell-off yesterday might have been tied to the US$60 billion loss at AIG (AIG), but I think it went deeper. AIG’s announcement was just the latest evidence that the economy and the banking system are not as healthy as they were in the mid-90s, so why should the market be trading any higher than it was back then? I know that the global workforce is larger (maybe even more productive as well), and that U.S. GDP in 2007 was US$13.8B versus US$8.3B in 1997. But who believes that S&P 500 earnings will grow 21% in 2009, other than the equity research analysts (see prior post “U.S. Bank stock analysts still too rosy about 2009” February 26-09)? Fewer people than when that post was written, as we are off another 500 points since Thursday.
But from a sentiment standpoint, how does one trade the worst economic crisis in 75 years? You don’t. You hide. The major layoffs just started 12 weeks ago. Until they are over, the market can’t hope for a change in the economy and begin to “look out 6 or 9 months” for something sustainably positive.
Let the crazy mega portfolio managers trade Citibank (C:NYSE) all day long. That’s how they are getting their kicks right now: 1 billion shares traded again yesterday, or ~20% of Citibank’s market cap.
But that’s not a game for the rest of us. And don’t think for a moment that I’m patting myself on the back — I’ve largely stayed the course, and have made the mistake of ignoring my own gut.
Disclosure: I own BMO.
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This article has 46 comments:
For now, the government is trying it's best to lower everybody's expectation. This is an old game played in Wall Street in order for any relief rally to gain sustainable momentum that can morph a relief rally into a bull run.
However, with the current excessive pessimism further fueled by negative government intervention of higher taxes for investors and higher transaction fees for traders; the government may inadvertently push the stock markets down to levels by which disdain and despair replaces low expectations and thus prevent any possible sustainable rallies in the next few years or decades ahead. The very thing the government wanted to prevent which is a complete catastrophic collapse of the stock market and hence the economy it supports could become the very exact result of this negative government intervention to the stock markets.
Hanseng and Senzhen Indexes in China went into what I call a death spiral (as opposed to panic selling or vertical sell-off of US indexes) from April to Oct 2008 and was only arrested when the Chinese govt finally announced a 50% reduction in capital gains tax or divident tax (I forgot which tax). This government's positive stock market intervention resulted with more than 30% recovery of their stock markets and made Hangseng and Senzhen indexes the best performing markets from Oct 2008 to the present while the US stock markets are busy printing new record lows to date.
Now the US government is doing exactly the opposite of what makes a successful market intervention by proposing to raise trading fees and raising investor taxes in the future.
Who is going to blink first in this war between the government regulators against investors and traders? Who is or are going to be the final casualties of this developing war among titans?
Will this be the final brick that is going the break the camel's backbone?
GE ratings will get downgraded by ratings agency shortly imo
I have listened to my own gut and stayed out since November of 2007.
No one can predict the future, but we can at least try to minimize the damage. It is called "risk management". For me the risk of loosing was a lot higher than winning. So simply, I decided to play defense for a while. I will be returning, when the economic climate shifts. Two or three things need to happen (in my opinion): 1. The Banks need to come clean. 2.We need to fix the way politicians get elected, so they would serve the interest of the American People, and not the special interest groups. 3. We need to fix the foreclosure crisis. But that's a tall order!
--this is self-contradictorythe market as anticipatory goes up 6-9 months before the unemployment rate falling, viz. the economy improving
The author of the article below argues that the markets historical gain is 8%, yet during the 90's it gained 15%, on average. A believer in this theory told him some unforseen negative event was on the way. So far this decade we have gained on average, about 5.5%. If you believe in this theory there are unforseen positive events in the cards. By the way, if you spent less time on chilly Bay St. and more out here in Vancouver, you might feel more positive. And you'd have a better hockey team to watch! Just kidding Mark, keep up the good work...
Here is the link to the story:
bizzlo.com/search.php?...
that means for her job as a counselor she will be compensated the equivalent of about $111.00 per hour.
are children are shouldered with the burden from the government criminals that vote themselves these pensions.
here's an article
www.bloomberg.com/apps...
I've sold half of my shares at $15 instead of $19 as I wished, and am buying gold and silver with the proceeds.
My advice is to find out where anyone giving you advice gets their information and learn how they weigh all available information into their decision making process.
Most people seem to ignore the fact that the financial media will only flourish during bull markets (think "summertime and the livin' is easy") so they'll do everything they can to calm the masses and hurry in the next bull run. Meanwhile their clients have bought all the way down and are left with their pants around their ankles.
Bottom line is that if you have a few hours a week to spend researching the market you are capable of managing your own money.
On Mar 03 07:47 PM Lars39 wrote:
> Someone told me over a year ago to get out of the market completely,
> and do it NOW. My advisors(?) said no. Major regrets now for not
> selling then, but almost all "experts" were saying it was ok, and
> markets go through cycles, it will come back. I just hope there
> is something left when it comes back. Big difference between being
> 30 and waiting vs being 65 plus and waiting for a recovery.
Of course, we have had monetary inflation that should increase the of stocks since then; our average of 3% inflation should have taken the S&P from 700 to about 940.
However, in 1997, we also had this historic institution called a "Wall Street investment bank" - in fact, there were several. Also, we had a balanced budget and were not spending any money on wars. Our baby boomers were younger, and much of the rest of the world was in better economic shape. Our national debt did not equal our GDP and appetite for our government bonds was strong. Our consumers had less debt, and GE, AIG, GM, Chrysler, and the state of California were not all facing bankruptcy. Our state pensions were not underfunded by 1 trillion dollars. The US government was debating federal ownership of Amtrak, not every major bank. Bill Clinton had recently declared that "the era of big government is over" and had a fiscally conservative house and senate, while now we have a Democratic government and a president who intends to "spread the wealth around". We did have, unbeknownst to us, Enron and Worldcom (and yes, even Bernie Madoff).
So if a 1997 economy should now be worth S&P 940, what is our current economy worth? It seems to me that 700 isn't exactly "cheap" - but talk to me at S&P 500. Of course, by then I'll be too busy collecting firewood and hoarding canned food to chat.
On Mar 03 04:45 PM xsellside wrote:
> A market meltdown like this begs the question, "should anyone EVER
> have a strategic asset allocation of 80% in stocks or more?" Traditional
> risk assessments of ability and willingness to take risk put many
> people in these allocations, but not one of these ‘questionnaires”
> really prepares an investor for this type of market.
Dalliance in other ideas is not recognizing the magnitude of this crisis.
In both cases, whatever path you choose, you should reform the financial sector so this can't occur again. They did with Glass-Stegall and in our stupidity we removed the barrier for banks to get quick and easy profit at the cost of ultimately deadly long term loss.
Any wiff of inflation will drive the system bananas. Stay cool and collected and hold onto what few bucks your have because they will buy more going forward. Get the Apple Cart painted and be ready to go out in the street or door to door...were going back to the 30's...MarvinMBA
* Evaporation of consumer spending -> Bankruptcy of retail chains -> commercial real estate bust - this is just starting
* 1 trillion to 1.5 trillion Alt-A & Option Arm resets beginning late '09 and lasting through '12. Bigger than subprime.
I think real estate is going to fall much farther than people had thought was possible.
Basically, it looks to me like the US is bankrupt - almost completely - and we have little manufacturing. The govt is going to try a rescue op with spending - it won't work but might provoke heavy inflation.
I don't see DOW 4000 as out of the question. The Nikkei dropped 80% and that was with a *very* successful country who had money to lend. We don't. This won't end until we have a decent manufacturing base again - this might take years.
Great country, but this is going to be a very tough correction. I hate to say this, but you might want to add the word "great" to depression.
If we stop being so dramatic about the pain, and more optimistic about the relief, more optimistic about the successes, it might generate more hope, which is what keeps us going during the hard times.
On Mar 03 10:47 PM Deepv wrote:
> Also, are the retained earnings accumulated from 1997 to today worth
> nothing? S&P has $300/share net cash and interest rates are near
> zero. Seems overdone unless we are in a genuine depression.
I see an ocean of young bright minds coming of age. I see a land filled with opportunities and resources just waiting to be realized and employed. I see technology and science expanded to the very limits of knowledge and beyond. I see hope at every corner of darkness, and the light of promise at the center of our being.
Will someone else join me? Is there balm in Gilead? Are there adults in the world who will eschew their fears and lead us into a Nation of Greatness?
"Lead, follow, or get out of the way!" declared Lee Iococca years ago when Chrysler faced a dark hour. It is one of the greatest lines in history in the vernacular of leadership.
Get out of the way, naysayers. People who lead with their hearts and guts are coming down the path.
It is true that psychology plays a part. More direct influence may be felt, however, from people with actual power who explicitly announce their intention to see that the economic stimulus package fails.
Everybody knows what's going to happen next...
Bull$hit! Nobody knows!
...except maybe Leonard Cohen:
"
Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
Thats how it goes
Everybody knows
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died
Everybody talking to their pockets
Everybody wants a box of chocolates
And a long stem rose
Everybody knows
.
.
.
Everybody knows the deal is rotten
Old black joes still pickin cotton
For your ribbons and bows
And everybody knows
And everybody knows that the plague is coming
Everybody knows that its moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
.
.
.
Oh everybody knows, everybody knows
That's how it goes
Everybody knows.
I'm a single working mother over 50, just finished a BS in Business (only took me 30 years), now in grad school. I've researched and followed my investments--with input from brokers and others--all my adult life. Admittedly, I have a simplistic, naive approach to it all, but even we mere mortals should still try to pay attention and learn what we can.
In mid-2007, the market didn't make sense to me (when did it ever, really?). It seemed the center could not hold with everything happening at home and in the world. I followed my gut and sold off equities, bought CDs and municipals (plus a small amount in an index fund--oh well), paid my capital gains tax, and hunkered down for a wait. Call it premonition, or maybe I was channeling my depression-era grandma. But what goes up must come down, and it seemed to be right around the bend. (Sorry for the geometrically-mixed metaphor.)
You could say I've been lucky, but I think it just made sense to do what I did. I did not buy when my broker said to buy. My portfolio has increased in value every month since then. Yes, the index fund is down 9% from inception to date, but I'll leave it alone and wait it out. My kids' college funds are more than intact, having increased in value every quarter since they were born. I'm sitting on what real estate I have and will buy a little more this summer. I've managed to more than tread water, but I am not ready to get back in...not quite yet. Stay tuned.
Call me a simpleton, a lightweight--I don't care. I've tried not to act impulsively, to diversify and invest for the long haul. But I'm still ahead of most everyone I know including my (former) fund managers, my broker, my ex-husband, and Wall Street. Follow your gut and back it up with research and common sense. When in doubt (when aren't we?), err on the side of conservatism. I sleep okay at night.
I'll hold off buying for now. After all, what if prices decline further?! I could lose money, right?!
Meanwhile, the weather continues to get warmer and warmer, which in my estimation, will reduce demand for down jackets even further. You'd have to be a sucker to buy a down jacket in this market! We're nowhere near the bottom.
I might buy that down Jacket in September or October of 2009 if the down jacket market stabilizes by then. For now, price volatility makes it too risky an investment.
I wrote a reply earlier that discussed the Roman Way. Sounds like you have rediscovered an ancient remedy for those who oppose the rule of law.
Here she is: seekingalpha.com/user/...
Cheers,
Pacman1947
On Mar 03 04:57 PM cash wrote:
> Market takes no prisoners. Innocent people have lost jobs, and savings.
> Neither should we take prisoners. All these banks would have broken
> a tonne of laws selling dubious mortgages. Investogate, get the guillotines
> sharpened and chop their heads off - in public. Future generations
> will thank us.
On Mar 04 08:55 AM pacman1947 wrote:
> Mark McQueen's offering has intriguing ideas about the future, and
> educated guesses about the outcome, and deserves credit for the display
> of a viewpoint. I have, too, and I'm just as guilty of following
> my heart instead of my head. I've done it many times in 40 years
> of investing. Like Trump, I've lost as many times as I've won, and
> can't complain. I don't look back, I look ahead.
>
> I see an ocean of young bright minds coming of age. I see a land
> filled with opportunities and resources just waiting to be realized
> and employed. I see technology and science expanded to the very limits
> of knowledge and beyond. I see hope at every corner of darkness,
> and the light of promise at the center of our being.
>
> Will someone else join me? Is there balm in Gilead? Are there adults
> in the world who will eschew their fears and lead us into a Nation
> of Greatness?
>
> "Lead, follow, or get out of the way!" declared Lee Iococca years
> ago when Chrysler faced a dark hour. It is one of the greatest lines
> in history in the vernacular of leadership.
>
> Get out of the way, naysayers. People who lead with their hearts
> and guts are coming down the path.
On Mar 03 08:38 PM The AntiCramer wrote:
> Most financial advisors haven't seen a market like this in their
> lives. To make matters worst most people are simply too lazy to think
> critically about a situation.
>
> My advice is to find out where anyone giving you advice gets their
> information and learn how they weigh all available information into
> their decision making process.
>
> Most people seem to ignore the fact that the financial media will
> only flourish during bull markets (think "summertime and the livin'
> is easy") so they'll do everything they can to calm the masses and
> hurry in the next bull run. Meanwhile their clients have bought all
> the way down and are left with their pants around their ankles.
>
>
> Bottom line is that if you have a few hours a week to spend researching
> the market you are capable of managing your own money.
"I can’t tell, with any reasonable accuracy, what one hormone-jumbled teenager will say or do in any given situation. How could I – or anyone else – possibly know what 100 million panicked “investors,” all acting like scared teenagers, do on any given day?
"What I can do is study what constitutes over-valuation and what constitutes under-valuation and stair-step out when I suspect the former and back in when I suspect the latter. I don’t sell – or buy – all at once but try to spread, in this case, purchases over what I believe will be a bottoming area. And I can do one more thing – I can avoid panicking when the great majority are selling everything and anything at any price so they can hide their greatly reduced dollars under the mattress."
Bonne chance!
J L Shaefer
It's like nothing we've seen before. Very frightening. Nobody can call this bottom yet, nor say how long it will last. This is terra incognito. We have systemic failures in the financial industry that have not fully worked their way through the global economy. The chartists who say we've only had 2 other periods of decade-long trough-to-trough markets may be right but it means nothing because the facts on the ground today are insane.
Sadly , you are both correct . I just viewed a video on Jesse's cafe American where Daniel Kahnsinlann + tassim Taleb were discussing what happened , why+ where we're headed . WE are indeed in deep , deep , s&*t , + are in for what they view as" times similiar to the revolutionary war " , which were much much worse that the 1930 's Fearmongering I am not , Realist I am . Wish I could say otherwise . PLEASE excuse my typing as I've had nerve damage to my fingers .
"General Electric’s (GE:NYSE) dividend cut is the perfect forward-looking indication of what is going on in the global economy."
Not really. It seems to me to reflect a current battle about the financing of the company, not anything about the underlying _business_ of the company.
----------------------...
@Lars39
On Mar 03 07:47 PM Lars39 wrote:
> Someone told me over a year ago to get out of the market completely,
> and do it NOW.
Someone is ALWAYS saying "get out of the market completely and do it now". Always. And 9 times out of 10, the people who're saying "get out of the market" at the top, missed the ride up in the first place.
Its remarkable just how few investors, even celebrated short investors, actually seem to have made any money in this collapse.
Many years ago, I subscribed to a short newsletter, the "Overpriced Stock Service". The folks writing it were smart, the time was right (the late '90s), and the results disastrous.
A year ago, I told my advisor that while everyone was speculating on whether we were in a recession, my feeling was that we were headed for a depression. Last fall, three times I told him I wanted to go to cash or otherwise reduce my risk. Three times he talked me out of it. I am finally in bonds and cash now, but on paper I've lost thousands of dollars by not following my own gut instincts.
The problem is not financial; it's generational and attitudinal. If you are younger than your mid-50s, you've never known anything but some variation of "good times." Those of us a bit older--and with the lingering memories of parents who were tougher and more resilient than 90% of the American population today--at least remember some of those early lessons about the value of thrift, not buying on credit (a "scandal!" back in the day....), and the newly crowned king of attitudes, frugality.
Americans today tried their best to shop their way out of the Iraq War, but had we been faced with the rationing and sacrifice the WWII generation endured, we would have whined and cried all the way to our great rooms. We just don't have the "stuff" to handle anything other than pampering ourselves. That's why we are facing very tough times. It's a chilling thought that before the Depression, only 10% of Americans held stock. Perhaps 50% (?) own stock now in some form or other. That means that along with the loss of jobs and foreclosures common to both eras, the financial lifeline that has been preached to us since the early '80s about the wisdom of investing in stocks is now cut off at the knees. Sure, eventually it will come back, but I'll give it five years or more. That was another observation I'd made last year: We were in "uncharted waters", facing a new paradigm. Funny how many "experts" I hear now, saying the same thing.
The other factor the Depression didn't have to contend with was cable TV, with a 24/7 news cycle to fill up, all they do all day long is find new ways to slice, dice, dissect, and analyze every teeny tiny disgusting aspect of all this. I am convinced that "they" talked us into the recession by spending all of last year asking themselves if we were headed for one, how would we know it, and what could stave it off. Notice now how they are beginning to talk about the Depression? What does that tell you?
If I know nothing about finance and yet I sensed all of what was going to happen, what does that say about the people who spend their lives immersed in this stuff? They see only dollars, not the bigger or broader picture. More than anything, that's the scariest part of all this.
On Mar 04 08:47 AM whisperonthewind wrote:
> As a boomer who has been decimated but not destroyed, down but not
> out, I think the Fear factor is playing the largest part of the decimation
> and destruction. Yes, we are saving now instead of investing, more
> than before. We are afraid we will have to depend on the government
> and social security rather than having our own funds to do as we
> please. That fear is coming from all the doomsday speakers, including
> our illustrious president who chooses words like "DIRE" (emphasis
> mine but he said it emphatically) to describe our current economic
> status.
>
> If we stop being so dramatic about the pain, and more optimistic
> about the relief, more optimistic about the successes, it might generate
> more hope, which is what keeps us going during the hard times.
What's happening is a correction - a bad one and it's going to take a couple years to work it's way through the system. Whether you label it as good or bad is your decision, but it's just going to happen... and probably should. It may teach a generation of Americans to be a tad more prudent in the purchasing habits.