The LFB

Equity Markets and GDP: Growth Questions

Angel

1. Does the stock market anticipate the economy six months in advance,
as many claim?

I would need a few days to build an econometric model to check this relationship out, but a quick look tells me that the relationship between the S&P return and the future 6 month GDP rate is weak.


2. What economic growth rate is implied by the S&P today?

I actually took this approach the other way around, what would be the S&P return based on the current GDP growth rate. However, to answer your question, 2009 Q3 S&P return, of roughly 10%, points out to a 6% growth rate in annualized terms for Q3. The Q3 foretasted GDP is 3.20%, according to the latest estimates.

U.S. Household Sector Not as Bad Off as Commonly Believed

The consumer is devastated. Their most important assets-home and 401k, have been severely compromised at the same time their balance sheets were levered the most in history.

Just look today's oil inventory numbers-demand for finished products fell 6.1% from last year even with all the price declines.

The next ten years are highly likely to be very rewarding? If your grandchildren live to be 100 years old, they won't see DOW 14,000.

Is It Time to Buy? What History Shows

Show me a sustainable rally while earnings are decreasing. You can't because one doesn't exist.

Earnings are going down a lot further than estimated and the employment situation has much further to worsen. Consumers are deleveraging and they won't use credit (if it's even available) for quite some time.

Why on earth would anyone expect consumers will spend when their assets (home and 401k) have been devastated.

Mohamed El-Erian of PIMCO has it exactly right. We are not returning to business as usual. Rather, we are facing "the more nasty reality of a volatile journey to a different destination."

Is It Time to Buy? What History Shows

I really don't know why you and everyone else who writes about this stuff doesn't see this:

Put EPS on an S&P chart. You will see that the sustained 2003-2007 rally didn't begin until long after earnings had crashed and AFTER they begun to rise once again.

And if you look at the EPS during the rally, you'll see it goes up.

Of course there will be intermediate ups and downs-we're in a 18% upswing on the S&P right now from the Nov. 21 low. But these are moves for traders, not investors.

Stocks are probably more likely to move up and down like this without a sustained rally for several years because earnings still have further to fall.

The ones who saw price declines coming and bought debt are way ahead of the game. Why? Because in the three months to October, headline CPI fell at a 4.4% annualized rate which means during that time they were earning maybe 8% annualized. And they got to sleep at night.

Low Rates, Big Problems

The debate about whether or not these policies are going into effect is moot-because they are.

What if mortgage rates are brought down, but loans are then made to credit worthy borrowers who have a down payment?

I think we run the risk here of going from on extreme to the other-credit was far too easy too obtain before and the risk now is that it will become far to difficult to obtain.

Whatever happened to proper underwriting standards?

We need to get housing going again, but not to where it was in the bubble. Increasing the affordability, combined with rational lending standards, is the approach which should be taken now.

Major Two Day Rally: Hold Steady

We believe this will turn into a decent-sized bear market rally which should see the 21 day moving average tested, and a close above there could signal a move towards the 50 day MA.

Four Commonsense Clues to a Genuine Market Bottom

The market found a bottom and began a sustained rally in Q1 2003 after profits, which had crashed 50% in the downturn, bottomed and began to rise.

I suspect the market will not begin to make a sustained rally at least until earnings start to rise again.

Paul Krugman + Al Gore = The Way Forward

I'll pose the same question again since it hasn't yet been answered.

Let's put the issues of global warming and who may or may not be a socialist aside for now.

How is it wrong to use the fiscal stimulus which nearly every economist believes we need to modernize our energy infrastructure, especially when the benefits will be more jobs, less pollution, a reduced current account deficit, less dependence on foreign oil and a better strategic position?

Paul Krugman + Al Gore = The Way Forward

Let's remove the argument regarding global warming for a minute and make this strictly an economic and strategic argument.

There's no question that our energy infrastructure needs to be made more efficient, and there's no question that it's strategically dangerous for the U.S. to continuously send billions to governments which are not our friends (run huge current account deficits).

There's also no question that the economy will require a major stimulus package going forward.

If we can improve our energy infrastructure while at the same time we improve our current account and strategic positions, how is that bad?

Where else would you want the stimulus to go to?

What alternatives do you propose that will accomplish all three objectives?