Why We'll Probably See Another Serious Equities Sell-Off 22 comments
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It’s a little difficult right now for me to find attractively valued stocks relative to the horrid macro environment that the stock market seems to be ignoring. Even though it’s still possible to find some attractively valued equities on an absolute basis, I believe that the market is dangerously overbought right now and I would rather hold a good amount of cash.
Here are some reasons why we will probably see another serious sell-off.
- Housing is still a bubble. Housing prices are still overvalued in most major metropolitan markets. For the US at least, I don’t think we will be able to resolve this financial crisis sufficiently until housing prices bottom out and become affordable for traditional buyers again.
- Banks have been going easy on actually foreclosing on houses. This is probably due to political pressure from Washington to a certain extent. But banks could also have been holding out for a PPIP type program for housing whereby the taxpayers takes most of the risk and the banks enjoy most of the upside. Now that it’s apparent this kind of program won’t be forthcoming, another tsunami of foreclosures is surely on its way. Banks have to clear their balance sheets one way or another.
- Commercial mortgages are a ticking time bomb. Commercial mortgages are about to become another serious problem that will hit the regional banking system particularly hard not to mention CMBS investors like insurance companies and pensions. The potential adverse effect on municipal finance is particularly scary.
- Chinese economic growth is artificial. China’s seemingly miraculous strength through this crisis has heartened investors and given ammunition to bulls. Beware. China’s continued growth is little more than ill fated central government stimulus to build bridges-to-nowhere and add capacity to a half communist economy that probably has a mountain of over-capacity as it is. Beijing’s politburo is probably betting they can buy enough time for the rest of the world economy to recover before they run out of economic ammunition. But how long can they really do this? Signs of stress are already emerging with Fitch ratings issuing an ominous warning about the solvency of China’s government run banking system.
- Consumers are tapped out and debt ridden. Consumers in the US and Europe have finally run out of spending power and will continue to pay down debt, save more and spend less. Unless consumers in emerging markets start saving much less and spending much more, I don’t see where growth is going to come from anytime soon. Indeed, growing unemployment among middle-class educated Chinese and Indians surely isn’t an incentive for those still with jobs in China and India to save LESS.
- Counterproductive government response. A bungled, confused and inept US government response will do little for the economy except perhaps prolong the inevitable adjustment process in housing prices.
- On the other hand, I believe the Fed’s actions to date to print money and add inflationary pressures into the economy are actually a net positive assuming of course they know when to turn it off. But that is a problem best left for after economic growth resumes. Deflation brought on by plummeting global output and yawning overcapacity in the economy is the real threat.
- A stock market that is no longer cheap by most metrics. Of course, not every stock is overbought only the S&P 500 by my reckoning.
Disclosure: Still own equities, but I am raising cash.
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When I look around in Europe's shopping malls and stores I can't see anything that reminds me of a recession. Spending is basically going on the same as a year or two or three ago. Little changed - neither much more buying, nor much less.
Such overstatement without detailed references which can be refuted point-by-point are the talking points of a partisan viewpoint.
Continue to hold those "beliefs" and "feelings" ...or, buy when there's blood on the streets. One of those approaches will be rewarded.
They are growing at 8% this year, that's hardly bad news! They have bought up commodities at the bottom and have hoarded cash all along.
If America had the apparent problems China has, Americans would be dancing in the streets.
- the market may tank. However, w/ all the massive gov't deficit spending going on, it seems more likely share prices go higher. The US$ may go the way of the Mexican Peso @ some point; that much is true. In absolute terms though, the stock indexes s/go higher.
On May 27 07:17 AM User 305589 wrote:
> I share most of your observations, but it is not correct to classify
> the European consumer as 'tapped out and debt ridden'. 'old Europe'
> was laughed about for quite a long time by Americans as the consumers
> there stubbornly refused to borrow for spending and instead kept
> saving and the European economies therefore didn't enjoy the artificial
> domestic demand boom that the US did.
> When I look around in Europe's shopping malls and stores I can't
> see anything that reminds me of a recession. Spending is basically
> going on the same as a year or two or three ago. Little changed -
> neither much more buying, nor much less.
That being said, the 8% are ambitious, top say the least. the last quarter saw 6.3% - but that was already with the help of 2.5% DEFLATION - i.e. 3.8% nominal growth bolstered by declining prices to a 6.3% real growth.
I guess you have no idea how poor 80% of the Chinese are! For all the talk of a booming China, these people haven't seen any significant imporvement and live from little more than rice, a few vegetables. No big consumer goods, no big flats or houses, no vacations... And may of them lost their jobs now and are back to square one. The govt. is trying whatever they can to stimulate ANY growth that generates ANY jobs, just to keep people from revolting.
I seriously doubt that you would want to have China's problems - if you just knew about them.
On May 27 07:44 AM maxe wrote:
> I take your comments about China to be nothing but your opinion.
> You use the word "probably". It's best to offer up hard facts rather
> than "guessing".
>
> They are growing at 8% this year, that's hardly bad news! They have
> bought up commodities at the bottom and have hoarded cash all along.
>
>
> If America had the apparent problems China has, Americans would be
> dancing in the streets.
We are currently experiencing the collapse of the housing bubble. Why did we have the housing bubble in the first place? Because the Fed didn't turn the monetary explosion off. Why not? Probably because it would have hurt bank profitability.
Since they didn't do it then, why would anyone expect them to cut off the the monetary explosion at the proper time now? (And of course the Fed is only half the problem--the other half being the Congressional/Presiden... philosophy of huge deficits)
Someone was front running the number and knew damn well what it would be before the report hit.
Wonder who (he said sarcastically)?
This market if it were priced on real fundamentals rather than green bs would be significantly lower, IMHO, but anyone going against it with a short trade is going against a powerful alliance of government and one or two big program traders who are putting a huge bid under this market every time it looks weak... like I said, I wonder who that might be.
Watch what happens when the buy programs hit this morning on the homes report. If they go according to plan, they'll hit at 9:59 and this market will rocket regardless of whether the report is good, bad or cancelled... its all about the spin, and the guys with the money have the spin.
I was of course referring to the economy and not the people, but the fact remains they are prudent savers overall rather than living beyond their means.
Just like death and taxation are unavoidable, so are the poor!
On May 27 08:30 AM User 305589 wrote:
> Hm, I would never take ANY number from the Chinese govt. at face
> value. In essence, they can claim any growth they want to.
> That being said, the 8% are ambitious, top say the least. the last
> quarter saw 6.3% - but that was already with the help of 2.5% DEFLATION
> - i.e. 3.8% nominal growth bolstered by declining prices to a 6.3%
> real growth.
> I guess you have no idea how poor 80% of the Chinese are! For all
> the talk of a booming China, these people haven't seen any significant
> imporvement and live from little more than rice, a few vegetables.
> No big consumer goods, no big flats or houses, no vacations... And
> may of them lost their jobs now and are back to square one. The govt.
> is trying whatever they can to stimulate ANY growth that generates
> ANY jobs, just to keep people from revolting.
> I seriously doubt that you would want to have China's problems -
> if you just knew about them.
Housing has bottomed.
Banks putting foreclosed properties on the market in a "tsunami" has been going on for more than two years.
The Chinese numbers are cooked and the communists who cooked them will get their commupance.
Waiting for absolute proof that a bottom has been reached means you will miss out on 2/3'rds of any recovery.
It is refreshing to hear from an author who, presented with the manifest negative effects of government intervention/direction of capital on the US economy, develops similar (perfectly justified) expectations of the Chinese ("half-communist") economy.
And I second 305&change
On May 27 12:08 PM Mad Hedge Fund Trader wrote:
> that's where I'd put my money. Today is the 60th anniversary of the
> launch of the Intelligent Investor, by Benjamin Graham, the Bible
> for all fundamental analysts. So it behooves us to recognize that
> multiples for the S&P 500 have just leapt from 13.1 to 15.5 times
> in a mere two months, the sharpest and most rapid multiple expansion
> in history. Did I say multiple expansion? Have the fundamentals really
> gotten that good, that fast? I think not. If anything, we are enjoying
> the calm between two back to back hurricanes. You only have three
> days left to sell in May and go away.
The US does not want the problems of China. I'll use Premier Wen Jiabao's own words:
"First, China is not a superpower.
Although China has a population of 1.3 billion, and although in recent years China has registered fairly fast economic and social development since reform and opening up, China still has this problem of unbalanced development between different regions and between China's urban and rural areas. China remains a developing country.
We still have 800 million farmers in rural areas, and we still dozens of million people living in poverty. To address our own problems, we need to do a great deal. China is not a superpower."
www.cnn.com/2008/WORLD...
Valuations are too high for my taste, biding my time.
Richard Russell had some great comments on time as it relates to investing in his newsletter today:
"I can't emphasize strongly enough the concept of time. I've written before that time is maybe the most important ally you can have in investing. Why? Because if you have enough time, I can almost guarantee that you'll be rich -- over time."
Gold was a terrible investment...for two decades....
Stocks from 1966 to 1982 were a poor investment...
Folks, if America can pull its collective head out of its butt we will see one of the great investing opportunities of a lifetime in stocks...once we hit bottom. The bottom wasn't 6500...but give it some time.
On May 27 08:13 PM Fred Voetsch wrote:
> You've got it right. I've been holding SRS and SDS for weeks now,
> not something I want to do but I am actually pissing-in-my-pants
> excited about every dollar I lose becaus I know it will all come
> back and until then just build my position.