David Tice: S&P 500 May Plunge to 325 30 comments
April 17, 2009
| about: SPY
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And some readers call Zero Hedge pessimistic:
April 16 (Bloomberg) -- David Tice, the chief portfolio strategist for bear markets at Federated Investors Inc., said the Standard & Poor’s 500 Index will probably plunge about 62 percent.
He spoke during a Bloomberg Television interview today. The Federated Prudent Bear Fund that he founded returned 6.7 percent last year as the S&P 500 plunged 38 percent, the most since 1937.
Tice said the benchmark index for U.S. stocks may slump to about 325. It closed today at 865.30. The measure has surged 28 percent since March 9, the most in five weeks since the 1930s.
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Shops are closing down and there's no one to rent them. Companies are retrenching and freeing up a lot of office space or closing down entirely and vacating even more precious office space with no one to rent it again. Huge skyscrapers are becoming ghost-scrapers.
All this expensive commercial real estate is mortgaged to the hilt. With no rental income coming in, the loans against them will become difficult to service and there will be fearsome default. There's insurance and re-insurance here also and the amounts involved are mind-boggling. No bailout plan would come even close.
When the commercial real estate collapse comes, all heck will break loose. And if multinationals like General Motors and Crysler call it a day, it won't just be thousands upon thousands of people unemployed (though its heartless to use the word 'just' here). Two entire towns will be become ghost towns. That's terrible. If you count the number of people - wives, children and parents - who are dependent on those incomes, it becomes worse than terrible. It becomes absolutely and totally incomprehesible. So, I concur on a 500 or less S&P 500.
But what's amazing is that America remains mired in stunning denial. This is a process that will fall like dominos.
Two options will remain and the end "debt default" or "trigger a war".
> Also he gave data about total mutual fund redemptions - only about
> $100B, suggesting lot more redemptions will happen - leading to the
> final capitulation.
Absolutely. Capitulation has in no way happened. We will know it when we see it:
* Magazines will proclaim the "death" of the stock market
* Investors will want to hear nothing about stocks
* Mutual fund shares will be redeemed by the boatload
In short, all hope will be crushed. This is not the situation we're in right now.
One year ago, the consensus for 2009 S&P 500 earnings was at about $94 (aggregated EPS for 1 share of each of the 500 companies in the index). Recently consensus stood at around $50 for 2009. If we use a P/E of 11 (on the high side considering the strength and duration of this downturn) one would expect a low of around 550 for the S&P 500. If the earnings turn out to be optimistic and consensus continues to fall to around $40, and if one then considers this downturn to be harsher than normal applying a P/E of 8, we end up with the S&P at 320.
I am not in any way trying to suggest that I agree with the projection of 325 vs SP. I am just trying to lend some understanding of how one might come up with such a number. For me, anything in the range of 300-600 would be within the realm of possible for the final bottom.
Having said that, I have to concur with commentor, Carlos Lam, that we have not seen a true capitulation phase to end this bear market. I served two tours in Vietnam and have been a student of the markets ever since, so my experience of having observed several capitulations tells me something: you ain't seen nothing yet!
Unemployment is still rising. The CRE debt defaults are just beginning as retail and office space vacancies rise dramatically. Residential real estate value continue to spiral downward and the peak for forclosures may still be a year ahead of us. Credit card defaults (currently 8.8%) have a strong coorelation with unemployment and are heading north of 10% to give the banks even more to worry about. Americans are starting to save and pay down their debt (about time) which is good for the long term but will take at least of couple of points out of GDP in the short term. Consumers are learning to make choices and forgoing or putting off discretionary purchases. If the economy does not turn around soon, many consumers' buying habits will have evolved into a permenant sort of thriftiness. I just don't see where the "good" news is coming from in all of this.
And if you think I'm a bear wanting the worst to happen, think again! I own close to 100 houses. I am getting ravaged as badly as anyone out there. I am still above water because I don't have any mortgages.
But, yes, I am looking for trading opportunities in the market. I buy into the rallies until I think I see an inflection point. Then I sell. I watch for the weakness that I thought I perceived to take hold and then I go short. Right now, I'm mostly out but considering going back in on the short side because once the major banks have all reported earnings I see very little to continue to support the current rally. The banks all want to raise more capital in secondary offerings while their stock prices are pumped up a bit. Once the dilution is recognized for what it is, their stock could sink again taking the rest of the market with them.
I'll go long when I've seen "real" capitulation. I don't expect to need to be too good at the timing game because I have a sense that this bottoming process is going take much longer than the bulls would like. It will tire out even the strongest bulls. Well, what do you know - that is the definition of capitulation, after all!
www.prosperitybypen.co...
Good comments about capitulation. That is often what it takes to make a final bottom. However, sometimes a bear dies with a whimper, not a growl. Examples are 1932 and 1982.
At other times the rise from the bottom has been gradual, such as in 1957, 1963, and 2003.
Doug Short has excellent charts showing these markets:
dshort.com/charts/bear...
dshort.com/charts/bear...
dshort.com/charts/bear...
TheFounder and Moon Kil Woong - - -
My personal prognostication would be somewhere in between the two pictures you describe. I would make a rough prognostication as follows:
* TheFounder projection 30% probability (multiply each of those numbers by 0.3).
* Moon Kil Woong projection of 50% probability the market is going up from here, again weighted by 30% (ie, 15% probable).
* Probability of 40% that the market will follow a path none of this discussion is considering.
Disclosure: I may have over estimated the first two projections and underweighted the third.
On Apr 17 04:34 AM User 369959 wrote:
> Notice - he may have a conflicted interest - he created a Bear fund!
On Apr 17 02:02 PM John Lounsbury wrote:
> Carlos Lam and Mark Bern - - -
>
> Good comments about capitulation. That is often what it takes to
> make a final bottom. However, sometimes a bear dies with a whimper,
> not a growl. Examples are 1932 and 1982.
>
> At other times the rise from the bottom has been gradual, such as
> in 1957, 1963, and 2003.
>
How about a casualty free War on world wide poverty?
Or does that make too much sense?
Friar Hilarius
This is a disastrous trend showing evidence of denial
In a downturn interdependence should increase not reduce
Instead the doctrine of irrational "self interest" ... and the devil take the hindmost is rampant
This is no recipe for recovery either within America or globally
Immorality in business behaviour has brought America to its knees with escalating unemployment
Yet cut-throat economics (disguised as "rational self interest") is gaining in popularity
Free markets have failed ... and the only way out as FDR saw was through Government doing what individuals have clearly failed to do
The cycle of despair will only increase until Americans decide to work together within US borders ... and a similar ethic is embraced globally
"Rational" self interest is a snare and delusion ... and could result in animal like behaviour, civil disorder and violence
Human beings are becoming their own worst enemies
Everyone is ALWAYS WRONG.
The government can't bail out every lender - our children's inheritance was already spent propping up the inefficient and corrupt Wall Street Five.
The CRE bust will result in more wealth destruction without intervention than we could have imagined possible.
Leave your buy orders there @ SPY and prepare "thank you" notes for me.
My charts are rarely wrong and they show the bottom at 530. Sell into this fools rally.
On Apr 17 10:33 AM Carlos Lam wrote:
> On Apr 17 06:13 AM Fighting Yoda wrote:
People should recognize that a struggling company is more valuable than cash getting minimum interests or merchandises and services generating no added real values to society. Why would people pay $1K for an oz of gold, or over hundreds or even thousand dollars for still another fashion handbag or luxury oversea vacation, or over $3 for a gallon of gas, instead of for 1000 shares of a company generating real employment?
Rather than just looking at accounting numbers, we should use more common sense regarding values, to help the recovery. Complicate accounting and investing schemes are partly responsible for getting us into this financial problem.
On Apr 17 12:16 PM Ted Kavadas wrote:
> It is entirely possible the S&P500 may plunge to 325. I recently
> wrote an article about the possibility of it going to 100:
>
> www.prosperitybypen.co...;P500_Target_of_100.html
>