By Any Definition, a Crash

The Russell 3000 has dropped 23% this month.  That is in seven trading days.  This is, by any definition, a crash.

The market has given back all its gains since May 2003.  Heck, it hasn't done a thing since 1998. 

Since the intra-day peak a year ago today, the S&P 500 has fallen 43%.  The two worst bear markets since WWII, 1973-74 and 2000-02, experienced declines of 50%.  We are fast approaching those levels.

On my normalized earnings number of $75 per share, the S&P 500 is trading at 12x, nearing the lows of the past two decades.

The price/book of the S&P 500 is 1.9x, nearing the lows of the past two decades.

Since I began writing my blog, I have railed against the silliness in certain pockets of the asset markets, particularly housing, credit, and most recently, materials.

Now, its starting to get silly on the downside.

This is a global margin call as the world de-leverages.  The economy is going into a recession and stocks, unsurprisingly, are falling.  But stocks are being forced out of portfolios as investors rush to cash, either by their own volition or someone else's.

Typically, structural bear markets bottom at 8x earnings.  By my calculations, that would be at 600 on the S&P 500, another 33% decline from here.

I would be surprised if we hit that level, but markets can do anything they want. 

Do not trust anyone who says that market "can't" or "won't" do something.  They either are being emotional or do not understand the nature of markets.

I am working off the supposition that we are close to a near-term bottom in terms of time, but not necessarily returns.  I have no idea at what level we will bottom at, but I think the market will bottom within the next week. Of course, I'm just guessing and have no idea. But virtually every metric I look at says the market is extremely oversold.  It said that last week, though, too.

Frankly, some stocks are hitting what I call "stupid value," meaning the valuation is so stupid, you have to buy, regardless what the current environment may be.

That is my mindset at the moment.  The market is creating "stupid value." I remain net flat but have my trigger on the finger to buy. However, it is a dangerous time, so if you are unsure, stay on the sidelines.  There will be lots of opportunity to make money when all this ends.

And end it will.  That I can assure you.

Comments

[css1971:]

Sorry. You're making the mistake that there is such a thing as "intrinsic value".

No such thing, there is only the relative value to the currency. If there are 10 trillion units of currency, that 10 trillion represent all of the things you can buy with them. If there are only 10 units of currency, that 10 units represents exactly the same amount of real wealth as the 10 trillion.

Well, with a 30:1 leverage ratio, that 10 trillion could fall to 1/30th of the current value as the debt consumes the credit. Unlikely yes, but there you are.

There's no such thing as "stupid value" when the notion of value is being changed on an hour by hour basis.

2008 Oct 10 04:20 AM

[Sean Maher:]

I agree, and I called the commodity bubble right in the Spring, and have been aggressively short equities since August (see blog)...900 on the S&P is 10.4 (or the long time average) times cyclically adjusted peak earnings and was my floor target in this selling panic. Bombed out value opportunites abound, and on the first significant reversal in Libor/TED spread, stocks will have a record rally...we'll see how Lehman's CDS auction goes today.

2008 Oct 10 08:38 AM

[kurt walter:]

So, instead of a one or two day crash, we got a 1 week crash. Either way, the market has been crushed. ... a major problem is banks won't lend to each other. Why? Because they don't know what the other guy has. But they DO know what they have. If the other guy has the same type of stuff, they know that is terrible. Plus, every time some talking head gets on TV, the lack of confidence in that person is obvious. Two days ago the Fed chief was speaking and the market just kept melting down.

2008 Oct 10 10:27 AM

[Incae:]

i have to congratulat e you colleague, you have been sharp so far. I wish you could say something on the precious metals bull run to come. I see SLV prices trading below physical value and 65 day mov avg. With todays pull it is extremely oversold. That word will be more common when the dow hits 7500 and bounces 1000 points in one day.

2008 Oct 10 04:10 PM

[CLH:]

Forget the word crash. The word is panic and yes stocks are at give away prices.

Incae--- forget gold its headed for $500. Buy DZZ.

2008 Oct 11 08:05 AM

[Incae:]

CLH, GIVE AWAY PRICES? with the way this market is behaving your guess is as good as mine. Today we had ourselves 1,000 points, on friday we had another 1,000 point swing. Is this confirmation? no, usually bottoms are formed when the lazy portfolios start throwing the towel, that has not happened yet. Will they use this bounce to exit? we will see. Now, back to the SLV. It is strange, GOLD-silver historicall ratios have been much lower than the 80-1 we are seeing. Silver is being punished by industrial demand but once inflation starts to pump again will it be treated as a precious metal and come back to "normal ratios" ? Silver is the metal with the most upside as an asset from a deflation phase into a depresion phase economy ? I think so.

2008 Oct 13 06:29 PM

[Incae:]

I apologize to TORO for introducing the precious metal subject, but i think this has to be discussed as investors look to make some money on the bear market.

part 2. gold/silver ratios historically has been 46-1. If CLH is right and gold trades at $500ozAu/$10ozSL, then the ratio will go back to historic ratios. But since we say the $750ozAu bounce up almost $100 in one day, silver looks to me that its time is overdue. Again, Toro, thanks, thats all.

2008 Oct 13 07:01 PM