The (Non) Crash of 2008

Is a Market Crash imminent?

Recently there have been two discussions of a possible market crash. The first warning comes from the Bob Janjuah, the credit strategist at RBS. The second is a more nuanced discussion coming from Todd Harrison, who writes at Minyanville.

The chance of a Market Crash is unlikely. Understand that Market Crashes are tail (low probability) events. Even if we accept that stock returns are not normally distributed but have fat tails, even fat-tailed events are still relatively low probability events.

Market Crashes occur because of the Wily Coyote effect. (Remember when he runs off the cliff in the Roadrunner cartoon, looks down and realizes that there is nothing beneath him?) In order for that to occur, investor sentiment needs to be fairly sanguine. Given that we have had two discussions of a possible Market Crash within the space of a week and the most recent AAII sentiment survey readings are now in the bearish territory (contrarian bullish), it seems unlikely that Wily Coyote has stepped off that cliff.

All this doesn’t mean that the equity market can’t fall – it’s just unlikely to crash. I have been looking for a panic sell-off to mark an intermediate term bottom (see my recent post). Mark Hulbert reports that current sentiment readings, while bearish, isn't bearish enough for a capitulation bottom. This suggests a scenario where the market breaches its March lows and continues to decline.

Comments

[locke]

The fact that the bottom is not a "capitulation bottom" does not necessarily mean we are most likely headed lower. It just means contrarians don't have the highest possible degree of confidence that the bottom is in.

[TA]

You can always tell we're near new lows when the bears come out in full force predicting lower lows(and crashes). We might get one, we might not but no one has a clue and I for one would rather they stop pretending.

[Sing Expat]

How can you tell we are not in a Wiley Coyote moment? It certainly looks that way to me. Earnings suck. inflation is high. Unemployment and underemployment are very high. There are still $600 billion in write-downs to come. There is still another $3-5 trillion in home value to disappear. Then there is commercial real estate, hedge funds, cds, and state budgets.

It seems to me that the market is in denial.

Your brief article stinks of whining and wishful thinking.

If anything, this market is headed for the mother of all crashes. I have been calling for 900 on the S+P and close to 2 for the $/Euro.

Call me an anti_pollyanna, but the pollyannas have been wrong, wrong, wrong.

[CLH]

Sing---You are wrong on everything.

1. little inflation
2. earnings are high
3. unemployment not high
4. real estate losses still unknown

Because what you see is not true, your crystal ball is broken.

[montyman]

Let me see if I understand what the author just said:
a crash is not coming, but rather a slower decline? What's the difference really? LOL

[ajhough]

While we build cash positions and watch very good companies go down hard, the question of a crash is moot. Fear, as politicos have long known, will drive us down as oil scares us to death.

[notsosmart]

cmon-nobody knows anything. the new world order is now entering into capitalism @ high speed & the past means very little. thousands of opinions on the net backed by useless self serving charts ,graphs,etc. are useless.the word "billion" has lost its power to impress.the winners are those that got the money & ran.

[Will Rahal]

Markets participants who believed that we are bouncing at the bottom of the economic cycle , pushed the market higher.
It is becoming clear that the consumer is in trouble.
The business sector (reflected by the NASDQ out performance) is still holding up.
I have posted about business following consumption into a recession.

[SWRichmond]

We have only begun to see this market for what it is. The downside pressure is only now beginning in earnest. We have had our "Fed" bounce; many believed in Bernanke's limitless power, but now see that the Fed can't save them this time. Ford just announced a 25% decrease in production for 3rdQ 08, and more downside for 4thQ. This and other measures by employers translate to genuine pain for workers (read: consumers).

When J6P starts moving his 401(k) shares out of stock funds and into cash, and stops sending new 401(k) money into stock oblivion, ther author will see the cliff. Perhaps not until then.

Investors have no "right" to a stock market that always goes up. But that is the way many investors behave. "Can we get this down market over with so that it can go up again?"

[Delegal]

The S&P 500 P/E ratio is around 22. Historically this is too high for the current economic conditions and will track lower. The end result is a market headed lower.

[Moral Hazards Amok]

Cam, this article very accurate and I like your perception. We aren’t watching a crash, we’re watching a slow motion train wreck or the Bernanke water torture, take your pick. The bulls are looking into the rear view mirror, telling us about PEs, exports, healthy balance sheets, etc., and that’s why there hasn’t been a great crash, but unfortunately the bears have it right this time.

The same detrimental macro economic forces now set in motion will stay in motion and even accelerate. The S&P 500 going down to 900 is a good estimate, as Sing suggests. And by the way, my 401ks are currently 100% in cash. When I hear that the average investor is thinking of doing the same, that’s capitulation and it’s a good sign to get back in.

[bruin532]

The bearish fundimentals and the liqidation of 401K's by the advancing boomers pre-retirement are just the start. Include personal and goverment debt, high US and world inflation (dont give me that low inflation crap), dollar devaluation, slowing US and world economic growth all spell a lowerer dow. A crashing dow maybe not, but 10,000 dow probible then long sideways trading. The retailers, autos, banks, housing are all in the dumper and $135 oil does not make for a quick recovery since Mom and Pop are spent out. Wages are flat and employment is on the rise how can anyone in there right mind not think this dosent project for lower markets Unless your talking materials commodities, energies and related alternatives. Oil is the key get oil to $80 we can have a recover otherwise its a long haul out of the hole were in.

[alphameister]

With the important energy sector solidly embarked on a long-term bull market and valuations in that sector low relative to indicated growth (check the oil drilling and service sectors), we are unlikely to see the type of overall capitulation bottom that many are seeking. The March lows may eventually be seen as the capitulation bottom for the general market. It's difficult to anticipate a powerful and broadly based bull market developing anytime soon, but it's more difficult to see energy stocks making new lows in the foreseeable future.

[bruin532]

correction unemployment on rise

[carey_jim]

Market crashes are unpredictable on principle. They are acts of human nature: greed, fear, war, revolution ....

It was the unpredictability of weather conditions (acts of nature) on the future price of crops that made futures markets necessary for farmers who have a need for steady prices so they can have secure lives.

Stock traders perform the same task for ordinary people who buy stocks and hold them for the long run. They track the vicissitudes of human nature as they manifest themselves in greed, fear, war, changes of government, etc.

If you hold stocks for twenty years based on the fundamentals of the companies underlying the stocks, then the rise and fall of stock markets (even crashes) are simply noise.

Without traders, groups of people, consisting of economists, politicians, businessmen and even philosophers, ministers, rabbis and imams would have to announce the price of stocks at predetermined intervals.

But then we would have to have a futures market trading in their honesty. The stock market already performs that function.

And as we know, honesty is always ready to crash at unpredictable times.

[secmaven]

Don't forget the massive purchases of S&P 500 calls initiated by the President's Working Committee on the Markets every time a crash appears imminent. Monday this plunge protection team will be buying with both fists and miraculously the market will levitate.

[zoilo]

obviously not even one of you own any kind of stock because you are very smart.
Why do you waste your time in these comments ?
Maybe are you shorting?

[blacksilver]

like {P.T.B.}said"don'... beleive anything you hear,and only half of what you see"

[dapperdan19]

Cam, I enjoyed your article. However, I've got to take issue with your Wily E. Coyote scenario that investor sentiment must sanguine prior to a market crash. Sometimes it's true, sometimes not. I recall sitting in front of my Quotron back in '87, and that was clearly not the case in '87, sentiment was hardly sanguine in the week leading up to the '87 Crash. On the other hand, in '89, with the Japanese pullout of UAL, I'd tend to agree with you. Does the '89 decline qualify as a "crash", I guess it's a matter of semantics.

[CaptBob]

All the numbers--(even tho distorted, misstated, cooked and lied about)--can be quantified----"tr...
The only X=unknown in this equation is T=time.
You--the Fed and Paulson can stay in denial and "Cum-by-ya" all you want, but yonder is a pale horse.

[User 186090]

If Israel bombs Iran, then you'll see your crash

[pitaking]

Fundamentaly this is a market riding on the hopes of smart phones and search engines and being led by energy and other inflation sensitive areas that are killing construction and the consumers, ie oil, fertalizer and steel. The more these areas rise, the bigger the drop in everything related to the consumer and if these areas fall, there is no leadership in the market. The technicals show no bottom in site, I'm very long SDS, this market is going much lower, Dow 10,000 by September.

[Tim Plaehn]

Secmaven, where does that info come from?

[jlounsbury59]

I don't know where the market is going in the short term. I have significant long positions in eight stocks (and lesser positions in a few others). The major longs are AAPL, BIDU, GRMN, GS, HOLX, LDK, POT and RIG. I plan on holding for several months minimum and possibly several years. I have protected myself with occasional short positions in the same stocks, triggered by stop orders. In the past six months the net gain on the long side has been only 5%, but I am up 14% on the shorts. I buy to cover short positions using stop orders as well. This strategy produces a lot of short term trades, daily checking and resetting of stop orders, and lengthy tax reporting, but has always been profitable. The big gains will made when there is a "crash" - my definition is a move to Dow 10,000 or below in a few months time - or when there is a sustained rally. In the meantime I make many short term trades while protecting positions being held for eventual long term capital gains.

All this is a lot of work but I can hold agressive positions and sleep well at night. Who cares where the market is going? I don't.

[mariposa]

The difference between a crash and a slow decline -- when I am about ready to hit another car, I sure hope for a slow decline, small dent, vs. totalled car.
The USA is in the beginning stages of learning to be part of the world, not just trying to control it.

[madmilker]

Kudlow eloping with Goldie Locks and Cramer gets a real job as a palm reader to the rich & famous.....peep! peep! the sky is falling!

[User 151885]

Unemployed... over-extended... under-funded... too early for retirement... I'm cutting out everything! How many more like this do we need to make " CRRAASSHH!!!" ??

[do]

Use a simple philosophy in an equitable market system to grow money;the principle being that money can be earned in this market if positioned correctly. Why? Because oil is the life blood of the economy, and there is real, not imagined, need for more. The toughest decision is to pony up when volitility and unrest is high in the marketplace. It is time to be in concentrated fashion in select companies that assist in oil exploration, manufacturing of drilling rigs, and eq. Who are the best in breed to buy, buy, buy!

[chelsel]

The difference between a crash and a slow decline is that my ultrashort etfs are going to kill me on fees if this baby doesn't cave in quickly :-)

[Bob the Bear]

Madmilker-
You are very funny!
Thanx.

[mark mchugh]

Wile E. Coyote ......Super Genius

Cam,
I'm not sure if I agree with your thesis, but anybody that uses Wile E. in an analogy is aces in my book!

[lex]

We are headed for a crash!!! Wily Coyote is looking into the abyss!!! The abyss is...

1) How bad is inflation in the US? No-one knows, look at Vietnam, a darling market last year, now with 25% inflation, India, also a darling market with 11% inflation, China, 10%. Even so called developed markets like Hong Kong/Singapore with highest inflation rates faced in over a decade. But I hear you say,"this is not going to happen in the US". hahahaha, the fact is that the US has outsourced so much of its production and manufacturing base to these countries (guess where you're Nike sneakers are made?? Vietnam? Doh!!) means that prices are now joined at the hip. The weak US dollar has made this even more so.(moneynews.newsmax.com/.../). In fact inflation is now spreading to Europe. Look at the UK and Germany. Just watch comments from the ECB, whose priority is price stability. Stop looking at headline or core inflation numbers! They don't mean anything anymore, their definition has been changed so much over the last 20 years, you can't compare CPI now to 20 years ago. Look at what is happening on the street level.

2) How far will interest rates rise? 6%, 10%, 20%? Now that heli- Ben has hinted that his printing money days are over (i.e. no more rate cuts). How far will he raise rates? My guess is probably not much. Why? Because he is too scared and wants to avoid tipping the US economy into a depression, (hey, how ironic would it be from a man who wrote "Essay from the Great Depression). His inaction in dealing with tightening monetary policy in the face of inflation, will fuel hyperinflation. It is only when there is new boss in the White House, will heli-Ben be fired and replaced by a new (hawk) Fed Chairman who will raise rates to Volcker levels to kill off inflation. Then its all over.

Oh and we haven't talked about crashing real estate prices or the consumer yet.

[limaur]

I agree with the author that there will be no crash , but I am not too sure about much further decline. If you look at the sentiment in the responses to this article, as well as many others , you will realize that most market players are sitting on their cash, including me. So who will be doing the selling that would cause the decline. Not the institutional investors because most of them are committed to be invested. The hedgies might sell off certain sectors to raise cash, but that will be limited.At worst, a sell-off will be nothing more than a bear trap.
On the other hand the chances are very good that oil will come down ; the ECB will hold instead of raising; U.S. exports will continue to strengthen; the U.S. current account has improved and is likely to continue improving; Israel will not attack Iran because that would bring about a seizure in the international economic system; the Arabs will cooperate because it is in their interest to do so; Iran has tons of oil that no one is buying because it is not Light grade;Iraq has opened its doors to western oil cos;the Chinese are most likely to re-value faster than in the past ( given that they lowered their oil subsidies no sooner than the SED meeting was over.)

I am serious when I say that I expect the market to resume its rally by September . Yes, September, at the latest.

P.S. If you think I am hallucinating, then I am right.

[lewis rosenbaum]

there is so much information and opinion on the web, media etc., re:bullish/bearish sentiment, market bottoms long int short etc, capitulation, defining moment, technical indicators, vix, that the market is likely to enter a water
torture bear market, where no indicatiors will be reliable until everyone is exhausted by the drip.......... of bad news and the ever trend downwards and there won't be a bottom until no one can see it!

[karmaguy]

Maybe noboby seems to realize that the U.S. stock markets are losing "market share". Use the analogy of GM losing market share, a couple of decades ago it had 65% of the "market share". Today it's less than 30%. Same with the U.S.stock market. it's losing out to new capital markets, it's losing out to commodity diversification, it's losing out to Sovereign Funds investing their money in the purchase of whole companies rather than simply buying stocks. Yes, there is increased stock trading volume but that's trading, the simple fact is there is no new net inflow of capital anymore capable of propelling the U.S. market higher. Yes, you can have a lot of rotation from sector to sector but you can't have overall sustained growth without fresh capital.
Will there be a Crash? What constitutes a Crash? Was the Nasdaq falling from 5000 to 1700 a Crash in 2001/2003? Is a Crash limited by time or by percentage lost or some combination of both?
Most analysts won't stick their necks out to give you a direct answer as to where, when and to what levels the market will move. I am not one of them, So, in my opinion, here is my concrete analysis: The market will specifically fall to a low in September of 1075 as measured by the S&P. It will then rally a retracement of atleast 33% back towards it's original all time high, This retracement level will top out in December and then the market (S&P) will fall continuously in the year 2009 going to new lows (900 probable) reached in November/December 2009. That will be the bottom!

[theinvestingspeculator]

2008 is not over yet. We might not have a crash but prices could go steadly lower. I think the SP 500 will not see 1400 again this year, I will tell you why @ theinvestingspeculator...

[Jim Hawthorne]

Just for the record, history can be cruel to prognosticators...

"There may be a recession in stock prices, but not anything in the nature of a crash."
- Irving Fisher, leading U.S. economist, New York Times, Sept. 5, 1929

"Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."
- R. W. McNeal, financial analyst in October 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
- Harvard Economic Society (HES), November 2, 1929

"Financial storm definitely passed."
- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

"[1930 will be] a splendid employment year."
- U.S. Dept. of Labor, New Year's Forecast, December 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most."
- Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"There is nothing in the situation to be disturbed about."
- Secretary of the Treasury Andrew Mellon, Feb 1930

"Gentleman, you have come sixty days too late. The depression is over."
- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

[JKC1967]

This author may be in the Jeremy Grantham school of thought, with a prediction of a slow, grinding decline. Grantham predicts a 40% drop in the S&P 500 over the next couple years as the credit cris drags on until 2010. On the other hand, I think Abby Joseph Cohen's last prediction was for the S&P to be at 1675 by year's end. Really, who can truly predict what will happen in the future in financial markets, for every argument for X, there is a counter- argument for Y. All an investor can truly do in this kind of environment is stay diversified across currencies and asset classes, US stocks, international, emerging/frontier, Big & Small, Bonds, TIPS, commodities, real estate, and perhaps managed futures. Maybe even a little bit in something that non-correlated to the overall financial markets, like a Life Settlement Fund. I think people who are certain of one type of future or another in this kind of environment are full of it!

[Joe The Thinker]

I recommend George Soros' latest book: "The New Paradigm for financial markets". It is a small read and will explain the current uncertainty to most readers.