Thoughts on the S&P 500 Going to 325

by: Deep Value Guy

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

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