Thoughts on the S&P 500 Going to 325

Bloomberg (via Zero Hedge):

The Standard & Poor’s 500 Index’s 28 percent rise since March 9 is a “sucker’s rally,” and the overvalued measure may plunge 62 percent as earnings continue to shrink, according to David Tice of Federated Investors Inc….

Tice said the benchmark index for U.S. stocks may end the year at 500, representing a 42 percent slide from today’s close of 865.30. It may eventually fall to 325, he said.

Companies in the S&P 500 trade at 1.9 times their liquidation value, according to data compiled by Bloomberg. Tice said that ratio may fall to between 1 and 0.5.

“I’ve never been more confident that this market will fall back to at least book value,” Tice said.

I’d be curious to see how Bloomberg calculates “liquidation value,” whether it’s closely related to “book value.”

Book value is the value of assets as listed on company balance sheets. But nowadays you can’t trust balance sheets…

Post 1929, the stock market fell 90% for a very good reason: the American economy was so over-leveraged its equity value was near $0. But stocks retain some option value above $0, which may be why they never fell quite that far.

All of the above is true today, perhaps moreso since the banking system is in far worse shape this time around. Measured in terms of deposits in failed banks relative to GDP, we’re in far worse shape today than in 1929-1934 (see chart 3). But this makes sense…

Ben Bernanke has said we’re more sophisticated today, that we know how to avoid the mistakes of the Depression. I’ll grant him that we are more sophisticated, but that shouldn’t inspire confidence. His point is that the folks at the Fed know how to avoid the mistakes of their forerunners, choking off credit during the Depression for instance. But reinflating the economy solves none of the underlying structural problems we’re facing.

But I digress. Unfortunately for Bernanke, the “sophistication” of which he speaks also applies to ridiculous financial maneuvers (”innovations”) that served no other purpose than to to increase leverage, to goose credit.

If the S&P falls 90% from the peak this time around, that would put it at 169.*

——-

*Peak = 1565 reached on 10/9/07

Comments

[schlumpf:]

the market was in the short bubble, now he is in the Gov. euphoria bubble.
The tech bubble was running some years, the short bubble 2 month.
Lets wait and see.
I m waiting in cash.

Apr 18 05:04 AM

[sundrenched:]

Well, to be the contrarian here for a minute, around early March, when Nouriel Roubini was on the cover of Teen Magazine and was offered 3 million dollars to pose in Playgirl (OK, I made that up, but the man was ubiquitous), the probability of an Apocalyptic scenario was being priced in. Manufacturing orders and trade were in freefall, which gave rise to some very scary numbers, but some of those figures were exaggerated by businesses slimming down their inventories and problems in getting trade finance. End demand didn't drop nearly as fast as manufacturing orders, but the numbers give investors a sense of hopelessness and loss of control about the economy that might have been excessive. I do believe that eventually, eventually, the US will recover from this. It might take 10 years of more sober living, but people will still eat, dress, send their kids to school, even take vacations... (Not such a bad thing. On a personal note, I never really liked the go-go years with the ever more pretentious restaurants, shops, everything.)

Today the growing consensus is that the government will manage to stave off the worst, and that we're "only" in for a very bad recession, so even if little has changed fundamentally, there's a certain logic to the recent rally. My sense is that even if stocks were to drop again, there would be very strong support in the high 600s (bottom-fishers stepping in), so holding stocks today doesn't feel as scary as a month ago. I accept that it's a possibility that the S&P 500 will see 500, but equally I believe it's possible that after a brief snap-back from current levels, aggressive government action and inflation will make sure that we're never seeing the S&P below 750 again. If only one could short stocks in inflation-adjusted dollars!

I'm not a permabull by any means, just pointing out that it's not necessarily easy to make money even if you get the bear case right. You also have to get your timing right, not an easy thing in an environment with so much government intervention, and the looming danger of inflation and maybe even a dollar collapse.

Apr 18 05:23 AM

[Lunetchen:]

I think Schlumpf is right.

Apr 18 06:44 AM

[Friar Hilarius:]

According to a popular online site sales of Ayn Rand are increasing and the desire of Americans for friendship is reducing

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

Apr 18 08:21 AM

[sour grape ...:]

A lot of wishful thinking from a bunch of sour grapes who sit out the March rally and now hoping it will go way down. Never even try to predict which way market is going, because no one truly knows with so may variables still out there, the most sensible way is to respect the market and admit that it can go either way, and then act based on that realization. Hedge your bet, knowing that if it goes down, you are going to be partially exposed, and if it goes up, your are going to participate too. Have enough respect for the market, or it will give you lesson that is going to be costly.

Apr 18 08:54 AM

[Did U Think...:]

On Apr 17 08:41 PM prudentinvestor wrote:
> I think you are giving them too much credit, as I doubt that they will realize that they cannot print enough money, because, in fact, they can.

This is a common misconception in 2 ways:
1) Lending takes both a sides of the deal to agree to a loan. Just having a lender is not enough. You need a borrower too. Big players know what deflation is and what it will do to asset values. They know the Ponzi scheme is bust and that staying in cash is the smartest play for them right now because when it all collapses they will buy quality assets for pennies on the dollar and live happily ever after. So even if the banks were willing or could be forced to lend, there are not enough borrowers to reflate the deflation regardless of how much money the fed is pumping into the banking system.

2) Even if you had 10 trillion in cash, it is not a simple task to deploy that capital efficiently. This is why you hear claptrap about deploying on shovel ready projects. No way are there hundreds of billions worth of shovel ready projects just sitting around waiting for fed money. In fact, projects are being shut down because the owners of them know that the business models they used earlier will no longer work in a depression. Unless the fed is just going to make everyone independently wealthy by sending us all a check for a million bucks there is no way the capital can be deployed, and here is the key part, faster than the current debt and credit destruction is happening.

Right now people still believe the fed is all powerful but soon they will understand that the economy is so big it will run roughshod over the fed, the FDIC, the treasury and every other Keynesian Klown who tries to change the natural course of the economy. They might as well try to redirect the gulf stream for all the good it will do.

Apr 18 08:57 AM

[AndrewBaker:]

Sometime ago I posted a forecast of S&P 500 at 500 before we begin a real recovery, and since then have been expensively surprised by the recent rally such that I had begun to wonder if I was wrong and the bulls right, though on the fundamentals I couldn't see it. I believe that the money being printed, handed out and thrown at the markets is creating a false bubble that will hurt a lot of people when the bubble does burst, as it must. I am now at least somewhat pleased that there are other peole around who share my believes in this respect, yet still wonder how the hype can not only keep this thing floating but maybe push it even higher before the inevitable fall.

Apr 18 09:03 AM

[logicalthought:]

Sundrenched:

I think your scenario is right, but if we have "10 years of somber living", corporate earnings will tend to be "somber", too, and that's why I think we could see that very low S&P figure. As I posted earlier, if investors start thinking that S&P earnings will be stuck at $35 to $45 for the next five (or even three) years (much less seven or ten years), they're not going to pay much of a multiple for those earnings when instead they could own higher-in-the-cap-stru... corporate debt.


On Apr 18 05:23 AM sundrenched wrote:
>
... I do believe that eventually, eventually,
> the US will recover from this. It might take 10 years of more sober
> living...
> Today the growing consensus is that the government will manage to
> stave off the worst, and that we're "only" in for a very bad recession,
> so even if little has changed fundamentally, there's a certain logic
> to the recent rally. My sense is that even if stocks were to drop
> again, there would be very strong support in the high 600s (bottom-fishers
> stepping in), so holding stocks today doesn't feel as scary as a
> month ago. I accept that it's a possibility that the S&P 500
> will see 500, but equally I believe it's possible that after a brief
> snap-back from current levels, aggressive government action and inflation
> will make sure that we're never seeing the S&amp;P below 750 again.<<

Apr 18 09:26 AM

[allforone:]

S&P 325? Sounds like a shorter's fantasy. The overall (American) market is the confidence in America, and the market is the sum of the individual stocks.
Given the S&P today approaching 900 it's the sum of confidence today and the future.
My guess is that the bulk of the money invested in the market today is retirement funds by mom/pop/grandpa. They rode the market down as the shorters took more and more out - worse than a coke addict with unlimited funds living in Columbia - and the same savers have and will still pump their hopes and dreams back into their retirement funds.
If you can convince enough people to short the market and if someone with enough funds to drive the market down and the real investors go to cash then the S&P and others will do the ultimate spiral down the toilet - again. Your prediction/hope will come true.
Until then, keep losing money shorting a bull market! I'm making money again.

Apr 18 09:42 AM

[Dave Shafer:]

The real question is "is the fear gone." If it is, then the market will become more rational and move according to real numbers like earnings. If it isn't, then you could be right. My gut tells me the fear is starting to subside.

I just wonder why it seems the far right, dare I say libertarian right, is pushing for this market to crash? Is it just a short strategy?

Apr 18 09:52 AM

[drbob66:]

The "far right" (or, more broadly, the Republican party) would LOVE to see the market go down...because the next midterm elections are coming soon enough (in 2010).


On Apr 18 09:52 AM Dave Shafer wrote:

> The real question is "is the fear gone." If it is, then the market
> will become more rational and move according to real numbers like
> earnings. If it isn't, then you could be right. My gut tells me
> the fear is starting to subside.
>
> I just wonder why it seems the far right, dare I say libertarian
> right, is pushing for this market to crash? Is it just a short strategy?

Apr 18 10:50 AM

[Old Trader:]

I saw the segment on Bloomberg TV, and Tice had some pretty convincing arguments to support his call of 425 on the S&P. More so than the other gentleman (some mutual fund manager whose name I can't recall) who argued the worst was behind us, the 666 low unlikely to be tested, and a gradual recovery was underway.

Apr 18 11:08 AM

[Schweizer:]

The last 4 major deep Bear markets bottomed when the PE and the Dividend yield matched, generally in the 8% range.

Dividend yield today is 2% and the PE on the Sp500 is over 50.

If you want to track earnings based on reported data, not analyst data, it is right here:
www.decisionpoint.com/...

It says the SP500 will be zero in Q3 even at a best case PE of 20 based on earnings.

This rally is manufactured for the pros and the banks to get out, and likely TARP money is being used to pull it off.

Apr 18 11:17 AM

[pro1investor:]

I just love today's headlines ....throw out wild dramatic superlatives with conclusions that have no basis in numerical support or any fundamental reasoning whatsever. This whole concept of worse than the Great Depression is ludicrous. Some posters here no more no how a bank makes money than the so called enlightened talking heads on the financial networks. The way today's "town criers" world works: post (or report) BS headline conclusions (to draw in readers or listeners) with over dramatic flair to pump ratings and/or hits. Pretty pathetic that people actually believe it.....

Apr 18 12:07 PM

[InvestBaboo:]

This is insane drivel. On the contrary the market appears set for a summer rally. Let us hope that there are shorts who believe this BS and go ahead and short the market because they will power this rally even higher.

Apr 18 12:59 PM

[Darrell:]

It seems to me that most people fail to realize that the American debt held by foreign investors, foreign institutions, and foreign governments are dominated in dollars.

The Federal Reserve policy wonks have a process called quantitative easing which allows them to simply issues more dollars to pay off the debt.

This means that if you hold a bag of dollar dominated debt and suddenly become fearful about the solvency of the dollar, thus demand that our government buy back your bag of debt, the Federal Reserve Federal Reserve will comply with your demand. You may have to pay an early withdrawal penalty, but buyback they will.

All the Federal Reserve has to do is invoke the quantitative easing policy and print as many dollars as needed to buy back your debt. This is a neat situation for any debt holder to be in! But, unfortunately for most debt holders, they have to pay off their debt through earnings.

Remember that the dollar, or any other currency, has three uses: invest it, spend it or save it. And because the dollar is one of the few currencies that are accepted as legal tender in most countries, the dollar holder has the legal right to buy goods, services, and/or assets with their dollars rather than the currency of that country.

So, debt holders who switched their dollar dominated debt bags to bags of dollars will be spending their dollars or investing their dollars, not buying more debt.

In this situation, how can S&P go to 350?

Apr 18 02:46 PM

[Old Trader:]

"In this situation, how can S&P go to 350? "

If the foreign holders of dollars had no other option than invest those dollars in US equities, I'd agree wholeheartedly. Unfortunately, that's NOT the case. For an example, China, one the largest holders of dollar debt is busy buying hard assets the world over.

Apr 18 04:42 PM

[AussieTim:]

Reading all the "suckers rally" and "worse is yet top come" comments and press forces me to be bullish. Reluctantly.
Until most believe in this rally it will remain in place...

Apr 18 05:29 PM

[Marianthi:]

All these people talking about fear being gone as a positive sign...there is never any fear at the TOP...that being said, there is a lot of fear here...that combined with non-apocalyptic #s/news reports could send us higher for now...but really, this market is not healthy...and won't be until there are not multiple "too big to fail" entities.

Apr 18 05:57 PM

[mbkelly75:]

Peter Lynch said it best. He clearly understood that all the worrying and questioning is a complete waste of 99.99% of our time, saying, “If you spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes.”
So as hard as it may be right now, we need to stop worrying about what’s going to happen tomorrow, next week, even next year. If we’re truly after long-lasting investment success, we only need to answer the big questions - the important ones that we can take action on no matter what’s happening in the markets - like:
How can I get the highest return with the least amount of risk?
How can I protect both profits and principal?
What can I do to guarantee my investment portfolio will be worth more in the future?
As another writer (who - I have no idea right now) said "Where oil’s heading… whether the Fed will raise or cut… if China’s finally undervalued… and if we’re in a recession or not.. Arguing over what Peter Lynch appropriately deemed “background noise” - events that ultimately have no bearing on our long-term investing goals."

But that’s the thing. When the markets act up, everyone stares at their feet, and worries incessantly about it. Worst of all, they want, and try, to figure out precisely what will happen next - so they can trade and profit from it.
You know, I want a Herculean body on a Krispy Kreme diet. But that’s not going to happen. And neither is predicting the very next move of the stock market, oil, interest rates, or foreign currencies. Even our most thought out forecasts, theories and/or hunches are bound to be wrong more than they are right - and our portfolios will suffer from it. None of it makes any real difference over the long term. If the markets drop down to S&P 350 - there will be some excellent stocks on a very good sale to buy, and if they go up from here - money can still be made from them. As bad as the markets have been for darn near everyone - this earnings season has 278 companies RAISING their dividends. Follow the money and the trends - make the trades that ARE available - and stop fussing about the things that you can NOT change. Pay attention to the basics and you will be fine over the long term.

Apr 19 12:55 PM