By SP follow 2008 Oct 12, 11:45pm 10,205 views 193 comments
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I wanted to get this in before the Dow crashes again... (it is up 400 points this morning).
I have no reason to believe this is the bottom of this depression.
However, what are you going to look for as signs?
Reversion to trend? Which trend, and how far? Dow was 3800 at the beginning of 1995, and 6800 in Jan '97.
Or "is it different now", and we can't really look to simple numbers like the DJIA and Nasdaq to tell us when a widespread credit-bust may be coming to an end?
(Racist, sexist and other anti-American posts will be taken out back and shot.)
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I do not think the bottom has been reached yet. There will be bad earnings galore this week and the next 3 weeks, and the re will be plenty of cautionary statements about exptected Q4 results.
Focus will shift away from the "immediate meltdown" scenario and towards longer term fundamentals, which are not looking good at the moment.
Oct. 13 (Bloomberg) -- Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at ``healthy'' firms..
This sounds strange. If the firms are healthy, why do they need capital? It sounds more like providing capital to big and less-unhealthy banks so that they can take over smaller and really sick banks.
because the term "healthy" is only a relative comparison to the really sick. Our healthy institutions are insolvent, just not as insolvent as our sick ones.
I think they're too late with all of this. The damage has been done to the real economy. Earnings are going to be grotesque. Follow that with layoffs, the worst Christmas shopping season EVER, and next year is looking pretty bleak.
They keep attacking what has already happened and not what is going to happen. The first 15% drop in housing almost took the whole economic infrastructure of the world down (still might actually). Now what in the hell do they plan to do for the next 20% of declines?
The biggest challenge I see for us is misallocation of resources. When you try to stop the natural flow of Capital by not allowing companies to die, resources get taken from economic activity that could actually grow the economy.
The forced socialism of America is throwing good money after bad. We have little precious capital to be wasting on these banks. The elites of the country refuse to accept their lost wealth. Like the money I loaned a brother in law, the money they gave to the $hit of the earth is gone and will never come back. I would seriously like to know where the consumption went. How much went to SUVs, vacations, or to eating out?
Here is an interactive graph of the current down market compared with other downturnd.
The losses in the last 12 months are steeper than most of the other downturns. The best historical match (so far) appears to be the 1937-1942 downturn.
The 1942 bear market end has been attributed to certain historical events that took place on Dec 7, 1941.
I shudder at the obvious analogy.
Near term: look for the 'lost confidence' to pressure the markets down.
Medium term: look for regulation to choke the next bubble (a good thing)
Long term: look for the cost of 'back-stopping everything' to create either huge national debt servicing burdens or huge tax burdens or both. Also in the long term is the greying of the planet and the impossible promises made to retirees in terms of pensions.
In terms of the market, I think we will continue to see 'sell into strength' and the illusion that there is trillions sitting on the side-line is just that, an illusion. A ton of money is moving into goernement debt financing. And a ton of wealth is just evaporating under deleveraging.
Taking the loss of globalization off the table for now, and factoring debt burden as more than 6 months out, I see DOW 7000 +/- 1500.
As for housing. Since prices have already reverted to about 2003, and with national average time-in-house at 7 years, we see most homes as under water and really unsellable without loss, in many cases a significant loss.
I still have no idea what governement intervention on mortgages will do to price discovery. If you bought a house for $1m, then the gov buys your note and crams down to $600k, it is not reported anywhere that the real price of your home is $600k. This HUGELY distorts the market as some live in "$1m homes' for $600k and some have to try to buy them for $1m. This should discourage anyone from buying anything but foreclosure properties. Sooo, courtesy your Fed govt don't even try to sell your home. Job loss? Divorce? Illness? Relocation? Forget it all.
With little or no sales volume outside REO we will see property tax issues at every level of government: city, county, state. States can try to go to the Fed, as CA already has, but CA alone is something like the world's 8th largest economy. Hard to backstop CA given the backstop being thrown up against the banks.
Best I can see is fortress area price decreases starting in earnest in 6 months. Even though we mayget full reversion to mean by late 2009/early 2010, elite areas will take longer.
I really thought about buying some Ford at this morning's opening. Now I think I shouldn't have chickened out. It's gone from $1.99 to around $2.50. GM is in many ways the weaker party but its stock went up even more by percentage. :?
Ford and GM are a huge problem. They have massive CDS associated with their debt. If they bankrupt it would pop the insurers. Proplem is this: massive government infusion could dillute your shares. I also wonder how Japan feels about the US propping up its auto industry.
Once again, rock and hardplace. At a guess I would say they DO get backstopped. Figuring out if they are a good investent given the deluge of dollars coming is pretty hard.
I think Toyota and Honda should buy one each. Then maybe they would starting making some good cars.
Russia had another trading halt today, because of a 5% drop. This was the only european exchange to have a drop, I think.
the worst Christmas shopping season EVER
I may be partly to blame for that... :-)
When people start talking about the economy at work or at parties, I share some of my views. Although what I say is a mere fraction of what we see here on patrick's or Mish's blogs, the general effect is pretty chilling. Most of them have also begun to wake up from hypnosis and realize that CNBC and MSNBC are not really telling them the truth about about how bad it is, and that Bernanke, Paulson and The Chimp are _at best_ making sh*t up as they go along. So they are pretty much prepared to believe the worst.
All it will take for the herd to really panic is one credible person in a public leadership position to stop spinning the party-line and say even half of what we say.
So, yeah, it is shaping up to be a lousy christmas and a crummy new year, and this ain't the bottom by far. There's a reason I picked that image for this thread - the chair is about to buckle...
Krugman praises Gordon Brown and asks why Hank Paulson was so slow to do the right thing
It may be a temporary bottom, but it can't be the low - after all we still have all those Alt-A's out there - does anyone have an updated reset chart or more information on the coming resets?
The MSN is not (AFAIK) reporting on the coming Alt-A's yet, it all seems focused on the sub-prime fiasco.
Nobody seems to want to comment on them yet. What do you all see happening with them?
They are working furiously in the background with institutions like Fannie and Freddie to buy up the Alt-As and cram them down so they we don't repeat this meltdown over the next 3 years.
It just chaps me how grossly unfair this is.
In fact, that is a noble pursuit of this board going forward. An on-going discussion of how the irresponsble few are being massively subsidized by the prudent many.
The Alt-A's should even be the biggest worry. What about the rest of the people that are about to lose their jobs? Doesn't matter how good their loan was.
If housing drops another 5%, and unemployment goes up another 2%, the show is over. You're going to see massive defaults. Almost every home bought in the last 6 years will be in serious trouble.
Anyone who accepts a cram-down right now is making an unwise decision, especially if they are sitting on a non-recourse loan.
I'm assuming a cram down would involve losing the "non-recourse" part of it.
If you take such a deal now, housing drops another 20%, and you lose your job, you're 10 times more fucked than you would be otherwise.
There is a spreadsheet at the New York Fed website that compares Alt-A to Subprimes from a 1% sample. I'm not getting into the Fed website right now or I would provide you with a link. (Hmm.. wonder what that's all about.)
The basics are, 1) the amount of Principle we're talking about is about the same: fewer Alt-As, but they are higher amounts. 2) leveraged 98% or more, just like the SPs. 3) falling into default at a rate that resembles 2 years ago on SP. 4) low/no doc percentage very high. 5) Higher percentage are ARMs
In other words, by most measures the Alt-As look almost as crappy or crappier than the SPs. And, as per point one, that means we have just as big a default to absorb from them in the next two years as we got in the last two.
And as per Fuzzy's point, with incomes and RE values going down ever faster, Alt-A will tend to implode even more spectacularly. But of course, what's left of sub-prime will also continue to go round the drain.
One last point: Owner Occupied is only about 75% for Alt-A Vs. high 90%s for SP.
I am still in moderation after 8 hours?
However, what are you going to look for as signs?
Unemployment and foreclosures decrease for six straight months.
OK: Here's the site:
Some modification of my numbers from above, but the upshot still the same. Roughly $4.7T in ALT-A ARMs that haven't started to reset yet, vs. $4T in SP ARMs. As of August, 75% of Alt-A Arms were current(!!!), Vs. 47% of SP ARMs. I am assuming that 25k-30k observations yield a pretty fair statistical sample. ;-)
25% of Alt-A ARMs are already delinquent before the resets!
SP, I don't know if you saw it on a prior thread but I scanned that letter from Boxer and can send it to you. Just let me know.
Ok I made a bet that may work out for me.
If this 401k withdraw penalty and tax free does get written into law, I plan to take advantage of it to the max! Lucky for me I took the biggest loan out that I could 3 weeks ago before the market carnage. The best part is I took it out to add to my cash position for buying land. I don't need the money for paying my bills :)
WOW Markets up close to 12%. Yes, this is the bottom. LOL
The Results about to come out would be nasty and that should put downword pressure on stock prices. I am pretty sure there isn't much support for commodities. Paulson & Co scared the heck out of general population and froze markets. It should take a long time to unfreeze it.
I would look for Job losses over 200K+/month, add 3-6 months for a reasonable bottom. My guess is the results will start to look bad from past quarter. End of Q1 2009 would be my guess. Any case, I'll start fishing when markets are down another 25% from here.
My Predictions ( Assuming best case scenerio for US):
1) Dow rallies to 10,000 ( few months - year)
- We keep getting bad news from financials due to its anemia from the chronic toxic debt diarrhea.
- Moderately bad earnings from other sectors.
- massive consolidation of financial sector continues.
- Dow goes sideways for months to find the right values between 8K - 10.5K. Most likely settles at 9.5k
2) medium term (2-3 yers)
- Earnings keep coming less than expected which keeps hammering the stock martket's moderately. US consumer cannot support the propped up market. US keeps moving ahead with ecoonomic contraction.
Housing keeps dropping moderately. Stock market back at 8K
3) long term ( 6- 7 years)
- Stock market keeps going sideways between 7K - 8.5K
- Another bubble is brewing. This would be the final bubble if unchecked.
Dollar keeps going down the tubes.
-housing still in the price range of 1999 - 2000.
*not an investment advice *
And to answer the Blog title : Is this the bottom ?
I think , It is a bottom +/- 15% , unless our economy completely loses its ability to function. In that case , it would be a depression and nobody would even care to do bottom fishing.
This is no bottom. This is relief that our economy didn't derail completely over the weekend.
THE bottom will be when housing stabilizes. The pundits seem to forget that we have another 20% to fall. Meanwhile, our government has pulled every backstop available to solve a liquidity crisis which doesn't exist. The country is broke. No one is buying ANYTHING. Earnings disappeared starting from mid-September.
1 in 6 homeowners are underwater. In 6 months, that number will be 1 in 3. Unemployment is in route to 10%, but not likely to stop there.
Not to mention our government just sold out the only thing we kindof had left... the dollar. Who did they sell it to? The banks.
Gee, I feel so warm and fuzzy. Maybe I'll buy stock in one of those companies that makes speaker systems for ipods tomorrow.
FuzzyMath : "1 in 6 homeowners are underwater"
The real question is, how many of those who are underwater are still willing to service the debt. We will only see the losses, where the homeowners are just walking away.The rest of the impact will be seen as loss in consumer buying power which will be felt rather slowly.
No body denies that US will see a contraction due to exhaustion of the US consumer.We need to payback all the excesses we loaned via the housing ponzi scheme.It could either end in long protracted recession or a steep depression.As i said before, We spent 12T excess money using our Housing ATM.I am sure we can pay that back in 4 years, if there are no financial disruptiions.
OR we can always postpone the payments like we are doing with the rest of the Debt (50 T). In that case, don't be surprised to see a normal short reccession.
dollar might not go down either as dollar and national debt, no longer have any correlation.Dollar is running on all time high irrational valuation. Can you believe that dollar is basically priced based on just demand and supply (like a commodity). There is no concept of future earnings of the country (which is very very weak for US). lets not even go near the national debt.
"The markets can remain irrational longer than you can remain solvent"
The only true valuation of US dollar and its financial worth can come from a depression. Sadly thats the truth. We will keep pushing the envelope till then.
How do you evaluate anything these days? The only thing that seems certain is that governments around the world will continue to undermine our efforts engage the economy in any way. One can't look to politics because both sides are advocating more and more manipulation. This massive rebound today looks like a giant manipulation, an overcorrecting swerve just before the minivan rolls over and over and over.
It's either demand for dollars or lack of alternative.
With 700B the Gov't could buy 140Million e-mini s&p futures (margin is about $5,000). Obviously they didn't over leverage as it only traded 3.5Million contracts. Hopefully they took profits at the end of the day!
What if it starts tunneling?
Oct. 13 (Bloomberg) -- The Bush administration will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, according to people briefed on the matter.
I absolutely can not wait to hear what the valuation and terms of the investments are.
the question may be, is this the nominal bottom?
For most sectors (other than financial), maybe. It looks like all the governments are going to ignore inflation for quite a while and focus on pumping, so in the end the stock price expressed in nominal terms may have bottomed.
Oh, one thing that bothers me are those rebate checks. Why does the government want its citizens to prop up the Chinese employment by spending money on rebate? How about building and maintaining some lousy infrastructure here, making sure that the rebate effect stays home? One cannot find stupider and more short-sighted politicians than the American ones, distributing more tax money so that their people can buy more Chinese shit.
You think Dow 8000 is a nominal bottom? Or did you mean local bottom?
TOB, I once saw a book in Barnes that had a similar book. It talked about the golden ration in market movements. I don't remember the book, but I do remember the math.
Make a line segment with points a' b' & c'.
A= (a' to b') B=(b' to c') C=(a' to c')
Now solve it with the following system of equations.
the roots are,
This is the golden ratio that is found everywhere in nature.
Well, looking at the trillions of dollars pumped into the system, and trillions more lined up, I won't be surprised that this is the nominal bottom. I am not saying one should jump in and buy more stocks, but there won't be too much nominal losses from where we were last Friday given the pumping action.
But, here is one major risk which may break all bottoms - boomers cashing out to fund their retirement, originally there could be an orderly exit, given what we are facing, orderly exit is impossible. It depends on how their auto-balancing mutual funds, pension funds, or boomer individuals cash out, the bottom may completely fall out.
What I expect to happen is we will make US stock market far more accessible to foreign investors, particularly from Asia. Boomers understand very well that they will need more than the Xers and Yers to support the current valuation for their comfortable retirement.