The Fed has adjusted their target for the federal funds rate to a range from 0% to 0.25%. (For all practical purposes, the rates have already been at zero.) We are now at ZIRP, and aimed squarely down the path of global depression.
My approximate targets for the S&P 500 are now 1200 and 400, in that order.
update, 2008-12-23: consider 1200 a stretch goal, and highly optional.
What is especially precious about the Madoff case is that apparently many of his investors realized something fishy was going on. Knowing the returns were too good to be true and the numbers didn’t add up, they concluded that Madoff was using his market maker business to conduct illegal insider trading. Well, they got it partially correct.
(This post is not intended to malign the naive ones, just the greedy ones.)
China’s statistical bureau reported that industrial production for November grew 5.4% year-over-year according to Bloomberg. The more interesting quote from the article is this:
Electricity output fell by 9.6 percent from a year earlier. Pig-iron production fell 16.2 percent. Raw steel declined 12.4 percent. Steel products tumbled 11 percent.
To echo the concerns of another CR reader, what is the break-even number for China due to the increase in urban population? More critically, the drop in electrical output does not jive with the production numbers. I would be very concerned.
The China number means nobody is buying here. Who finances our government? I just had this mental picture of the US economy flying through the air. It’s a 4 engine jet and we lost number 1 and 2 engines awhile back. Now number 3 just flamed out.
- nova, 2008-12-14
On a side note, it appears that North Korea has closed down both the northern and southern borders. 150,000 Chinese troops are now massed along the northern border, most likely as a prophylaxis against the collapse of the Kim regime. Given North Korea’s precarious position and nuclear status, it is safe to assume that most players in the region are very interested in stabilizing the country and securing any loose buckets of instant sunshine.
Excerpts from Jim Rogers, famed investor and co-founder with George Soros of the Quantum Fund, speaking at the Reuters Investment Outlook 2009 Summit:
“Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt.”
“What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent,” he said. “What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.”
“Governments are making mistakes. They’re saying to all the banks, you don’t have to tell us your situation. You can continue to use your balance sheet that is phony…. All these guys are bankrupt, they’re still worrying about their bonuses, they’re still trying to pay their dividends, and the whole system is weakened.”
Volatility is not risk; still water does not imply a lack of crocodiles.
With plenty of people angry about the auto-maker bailout, I’m personally disappointed that the terms of the deal were not also applied to the TARP. It’s generally a good deal, unlike the windfall of un-encumbered cash the financials got to spend on bonuses and buyouts.
In the next few days, probably sometime next week, I will likely open some long positions in the market. I expect to hold them for a few months at most. There are signs that the market is finally ready to put in a solid rally, and it should be nice and vicious. A stretch goal for this would be 1200 on the S&P 500, but 1100 or 1150 should be easily reachable.
I’m also seeing good arguments for a much lower target for this market. For anyone who didn’t do the math, the traditional bottoming PE of 7, applied to the S&P, would suggest a value around 425. Russell Napier looks at Tobin’s Q ratio to suggest a bottom at 400 around 2014. (In the article a Mr. Brusca feels that this argument is dependent on deflation taking hold, an outcome he feels incredibly unlikely. I point this out because my expectation has been, and continues to be, for deflation. We have experienced the largest credit bubble in history, and as it bursts, trillions of dollars in “wealth” will evaporate from the system.) 400 is an awfully steep decline, but if you take another peek at the S&P long-term chart displayed a few posts back, a nice bear market rally approaching 1200 would put in a very nice right shoulder to form a massive head-and-shoulders pattern with a target around 400. Astute readers will note that Mr. Napier suggests the Fed’s attempts to fight deflation could produce a significant rally (a year or two), much longer than I’m currently expecting, but perfectly in line with such a scenario.
One of the most valuable resources I encountered in the past few years was Tanta, recently co-blogger on Calculated Risk. I do not remember exactly when I had begun reading CR, but do remember when she had agreed to write for the blog. She was able to take a normally dry topic and make it incredibly accessible. I am remembering especially her humor, with references to steel-toed bunny slippers, bourbon slurpees, and delightful metaphors of risk, like this: “Buying a B tranche of a subprime ABS is playing with matches. Buying the equity tranche of a CDO is playing with a blowtorch in the parking lot of the Exxon station while wearing a St. Lucia wreath on your head.”
It is with no surprise I learn she had a graduate degree in English, given her professed fondness for American Lit nerds and literary allusions that I myself would have trouble placing. Her postings collected in “The Compleat ÜberNerd” should be considered mandatory reading for anyone involved or interested in mortgage origination, servicing, and securitization. For those of us who follow CR this is a tragic loss, but I am glad that in her last few years she was able to touch so many. Tanta vive!
http://calculatedrisk.blogspot.com/2008/11/sad-news-tanta-passes-away.html
http://www.nytimes.com/2008/12/01/business/01tanta.html?_r=1
http://www.npr.org/blogs/money/2008/12/on_the_loss_of_tanta_1.html
The week before last saw the market pull a Wiley E. Coyote, slicing through my intermediate target to just below my long term target. When this happens, it’s time to re-examine those targets. The tools for doing so include both traditional fundamental measures, as well as some technical analysis.
What I am currently looking at is the long-term earnings growth of the S&P 500 index (about 6%) and how it relates to current pricing. In April 2007 Hussman discusses fair value, suggesting 850 as consistent with long-term earnings (a little under 930 today). I would consider a P/E ratio of 15 (the long term average) to mark “fair value”, and also consistent with the above estimates. However, markets overshoot. Historical starting points for secular bull markets have P/E ratios around 7. I’m willing to be generous and use an estimate of 10, which would imply S&P 500 lows around 600. Note that P/E ratios may be calculated using either trailing or forward earnings, net or operating earnings, and should be corrected to account for cyclical trends in earnings. Robert Shiller has suggested techniques for such adjustments.
Trend-wise, I would place us in the middle of a secular bear market. This follows the secular bull of ‘82 to ‘00, which in turn followed the bear of ‘66 to ‘82, the bull of ‘49 to ‘66, et cetera. The lifespan of a bear is obviously related to the severity of its losses; most of the damage from a slow sideways grind comes from inflation rather than falling asset prices. I would therefore pick 2014 as a endpoint for a market that trades mostly sideways, and remain open to the idea of steep declines allowing a quicker recovery.
I’ve included below a weekly chart of the S&P 500 for the past 80 years. The long-term trend line presents what I’d like to consider a lower bound. (As an aside, the trend line approximates annual growth of about 6%.) I still maintain expectations for a strong rally, possibly preceded by a significant drop, as the most likely outcome over the next few months.
Here is Richard Kovacevich, Chairman of Wells Fargo, telling Maria Bartiromo why his bank is different:
We did not make any No Doc, Low Doc, Option ARMs, Negative Amortization Loans, Stated Income, Teaser Rate ARMs through any subprime borrowers. None.
- Richard Kovacevich, CNBC interview
I believe it is true that they did not offer negatively amortizing products. I also believe the entire statement can be considered true if you agree with Wells’ ideas as to what constituted “prime”. Which I certainly don’t.
This has been all over the internet by now, but I’m placing a copy here for my archives and your entertainment. For context, Andrew Lahde was the manager of Lahde Capital, a Santa Monica-based hedge fund that achieved 1000% returns in 2007. Enjoy!
I see the SEC is considering a ban on short selling. This is, of course, the same SEC that has failed to take any action against companies that might have, say, spread false information to support their stock prices (cough “we are well capitalized”, “KDP is willing to buy us”, “Buffett will save us” cough). It’s the same SEC that in 2004 exempted certain large banks from regulations on capital requirements, allowing them to lever up as high as 40 to 1, and removed discounting designed to account for risk.
This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.
- Barry Ritholz, The Big Picture
This is a move that reeks of desperation. It’s also a move that historically results in what I like to call Epic Fail. As Tim Knight said, “They can make shorting illegal. But not selling.” If you want to see how well it worked for China, go take a look at the Shanghai Composite (from 6100 to 2000 and still falling). All they’ve done is provide fuel for a rally at the expense of removing the fucking floor. This is the kind of fetid donkey feces one expects to see in developing countries, shortly preceding the rioting and the stonings. We are well into the land of unintended consequences, and Rick Santelli was absolutely correct back in Spring when he said “we might as well put a hammer and sickle on the flag”.