Oct

22

VNThere are many unprecedented events that we are witnessing these days. To me, the most amazing is that on 12 31 1982 the Nikkei closed at 8500, by no means a local high as it was 9000 a year later.. On 10 15 2008 it closed at 8458 thereby marking a 26 year period where a major enterprise stock market moved without a rise. The S&P stood at 800 to 900 in mid 1997 and reached 1000 in early 1998. Thus, 11 years without a gain in the US. Is there a single overriding reason?

To me, the key aberration occurred in the two weeks of 9 26 2008 to 10 10 2008 when the S&P moved from 1218 to 891 and the Nikkei plummeted from 11920 to 82760.

To gain perspective, I looked at weekly prices:

date       sp     nikkei    bonds    euro   crude gold   wheat vix

0919     1246    1192       118 5   14466   10254  834   718   32

0926     1216    1189       117 1   14609   10618  879   716   35

1003     1108    1094       11920   13772    9301  835   640   45

1010      891    8276       11620   13408    7799  849   563   56

A preliminary insight is that vix and the dollar rise and crude were the major harbingers of the unprecedented decline the week of 10 10.

I always believe that markets and prices are the key and that interrelation and the web is always there. The problem is they're always changing. But at least we've got a description.

Anatoly Veltman adds:

My hypothesis at this hour is that the currency markets are destined to wash-out first, with world equity markets grudgingly following. The reason, obviously, is that margin liquidation in FX takes plays instantly - while generating and then instituting collection on stock margin calls takes time, not to mention timezones.

Kim Zussman wonders:

Couldn't help wondering when/if backbone financial theories (such as high allocation to equities for long term investors) will become so unpopular that demand for courses in financial markets will dry up. Y@le had a guest lecture from David Swensen earlier this year, will he be invited back next year?

Charles Pennington comments:

For any remaining fans of the Fed Model, here are some numbers from the Financial Times (page 23, "Market Data"):

country      earnings yield %      10-year gov't bond yield %
US
                         8%                3.7%
Germany               10%               3.9%
UK                        13%               4.6%
Japan                    9%                1.6%

J.T Holley writes:

body snatchersThe web now includes for me the Vix trading higher than a barrell of oil at one point, and for me a first, the cash trading more than the Dec mini S*P contract. What is next– dawgs n catz sleepin' together? Be very very careful, brainwashin' is in effect and bodies are being snatched!

Stefan Jovanovich replies:

Starting the Index of home prices at 1995 overstates the run-up of home prices. It would be like starting a stock market Index at 1982. Kim may disagree, but house prices here in California in 1995 were still recovering from a boom-bust cycle that was almost as dramatic as the current one. The current boom didn't really get going until after the dot.com bust; 2002 was really the first full year when housing prices only went up no matter where they were.

Time for Oscar Hammerstein and Carousel (first sung on Broadway by Jan Clayton aka Lassie's Mom):

"When you walk through a storm,
Hold your head up high,
And don't be afraid of the dark,
At the end of the storm is a golden sky.
And the sweet silver song of a lark.
Walk on through the wind,
Walk on through the rain,
Tho' your dreams be tossed and blown,
Walk on, walk on, with hope in your heart,
And you'll never walk alone.
You'll never walk alone :| "

Time to buy because it is way too late to sell, and all the canes have been swapped for walkers.


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19 Comments so far

  1. steve leslie on October 22, 2008 12:28 pm

    When in your lifetime, Vic and Laurel, have you ever seen oil DROP nearly 60% in the space of a few months. When it was at $147 people were calling in fact, squawking for $200 I saw that spot gas is $1.60. it should not be too long before those prices are seen at the pump and instant relief for an exhausted consumer. With all of the rhetoric surrounding the credit markets this story has been vastly underreported. We have seen a full Lobagola to summer of 2007.

    I believe copper was priced at $3.47 now under $1.95.

    Bear with me this one thought. If you were the big shot of a corporation, wouldn't you take advantage of this market, throw out all sorts of bad comments,the proverbial baby with the bathwater, drive your stock to multi-decade lows blame everything on the credit crunch, and then get the board to reprice your options. Moving forward, your earnings comparisons become very easy, the stock goes up, you make a ton of money, and the game continues.

    Or if you are a hedge fund manager, close the fund. Open up a new fund to establish a fresh watermark and go from there.

    All that you need are some savvy lawyers, accountants a few cohorts, an organ grinder and a monkey and you are back in business.

    sl.

  2. diego joachin on October 22, 2008 12:32 pm

    The most unprecedented fact is gold. With this environment four-figures price would be expected. As usual, we are facing new vistas in the markets world.

  3. Matt Johnson on October 22, 2008 1:00 pm

    The reason why the dollar is running is twofold. 1. There is the view that the US, while in trouble, is doing something about it, and 2. The fixed income markets have become less liquid, especially the commercial paper market, it's been difficult to get short-term money here in the US, let alone Europe, so what a lot of European banks have done is sell Euros (buy US) in the FX market and delivered, as a way of funding their US dollar needs. It's been a huge sell off — the euro/yen cross as well.

  4. Prudence Gently on October 22, 2008 2:52 pm

    1) I wonder if demographics has anything to do with this decline. In the 90’s super-bull we had the phenomenon of baby-boomers inheriting their depression-era-mindset parents money that had been sitting for years in cash and finally putting it to work in the stock market, mainly via mutual funds. A decade and a half later those same baby-boomers, having witnessed the tech-bubble crash and now older, closer to retirement and/or death, are now reverting to cash?

    2) Could Bernanke’s expertise on the great depression be self-fulfilling? Is he seeing the world through depression-era glasses? Say what you will about Greenspan – at least no one could understand a word he said. We understand every word Bernanke says – and they are all scary! His actions may be meant to reassure us. But his words frighten. Which is more powerful in a world where sentiment is everything?

    3) Demographics again: what is the 40 year old today to think about stock market investing – having witnessed so much frustration and misery to this point? Will she turn into her depression-era-mindset grandparents?

  5. Tom Lattimore on October 22, 2008 3:05 pm

    For once the Uber Bears seem to be right. But they need only be right once. There are very thoughtful people among them. Among them are Jimmy Rogers, Bill Fleckenstein and Marc Faber. Must see Faber at http://www.safehaven.com/article-11638.htm. Can see if you go directly to Bloomberg and search for this long interview of Marc Faber. Shame on Warren Buffet recently with statements against cash. Cash has been King at least since 14000 on the Dow. And what about Prechter's Book, Conquer the Crash, five years early?

  6. Shawn on October 22, 2008 3:33 pm

    You forgot to mention uber bear George Soros. I think Vic and Laurel know him…

  7. Anonymous on October 22, 2008 4:00 pm

    Amazing the complete lack of understanding of financial markets seen in this blog.

    The US Dollar rally is directly related to the plunge and hoarding of US Dollars by emerging market exporters along with a complete disarray of European leadership to address growing systemic risk.

    People…get the head out the sand and follow the money trail.
    A few points that will get you started:
    1)Iceland -> Scandinavian Banks -> exposure to emerging Europe
    2)China -> commodities -> Argentina -> Brazil
    3)”KIKO” options -> South Korea -> emerging Asia -> European banks
    4)Emerging market -> buildup in foreign denominated debt -> commodity collapse -> plunging domestic currency -> US Dollar hoarding

    No wonder this community has been consistently wrong in calling a stock market bottom for the past several months. Perhaps more posts related to actual macroeconomic fundamentals would be more enlightening instead of the usual jib-jab seen here for the past several months.

  8. Mark Isbic on October 22, 2008 4:32 pm

    I'm a sports handicapper by trade and a partner in a service. I must say that after observing this horrific meltdown, leveridging, credit default swaps, hedge funds getting destroyed, traders going belly up and many other disasters i'm convinced that a person is better off trading (betting) on sporting events. I don't say this lightly, however not to oversimplify you can find the best edge and lines and hit them. The games or matches are played and everything is on the up and up for the most part. I'm a big fan of the chair and recommend his book to all new clients so im familiar with his thoughts on oracles and the like. It drives me wild to see these highly paid analysts with suits and ties that cant call the market but try and for the most part would have a hard time navigating themselves out of a shopping mall. FWIW i believe that this too shall pass and that we will look back eventually at these low prices. The pain is severe and bad but the selling will have to abate and some point and the market will go up.Up to now the people in CDs for the past 11 years are the big winners, but going forward would this be the case? That is the question. Is a stock like Philip Morris International which yields 5.2% and is a cash machine going to hurt you? Seems like a good odds stock, however there are many like this. When do buyers step in or is there so much devastation that no one can step in?

  9. Matt Johnson on October 22, 2008 5:44 pm

    Mark, The financial markets have one huge edge over sports betting. What's the one thing, you as a handicapper, wouldn't let me do, that I can do in the financial markets? I'm not an equity trader but I immagine the successful equity traders will step in after the bottom…

  10. Sam Kumar on October 22, 2008 8:37 pm

    Capitalism is only mental illness. There is no real reason for the historical growth that was seen (is it only coincidence that the worst horrors of human history were coincident with the “triumph of optimism” or whatever apoligists have called the golden age of capitalism).

    Perhaps the growth occurred because the earth was not fully expolited at the beginning of the capitalist era, technological growth, natural population increase, geographical expansion etc.

    The earth cannot take any more “growth” - humanking will have to learn the magic of “enough” and stop assuming that “more” is always good.

  11. Anatoly Veltman on October 22, 2008 9:40 pm

    In my book: every post with any ideas is a good post. A noticeable void, however, to make buy/sell decisions at desired nearby prices. And traders only get paid to do that. So as much as I was a seller last night at prices better than 960; I’ll be a buyer on any 10-15 point dip tonight, and that’s at prices better than 900!

  12. Matt on October 23, 2008 12:24 am

    Triumph of the Pessimists?

    What makes riding this market down doubly painful is that the perma-bears were right this time. I am not referring to the people who, after careful analysis, determined that the market was headed for a fall and profited from their convictions. I congratulate these speculators for a great call. I am referring to the people who are perpetually bearish for any (or no) particular reason at all. I am frustrated that they have outperformed me just through blind luck.

  13. I. Laroui on October 23, 2008 5:41 am

    At the risk of sounding arrogant myself I must say this:
    This thread has probably been one of the most enjoyable ever on this blog. Why is that? Could it be the newfound humble tone?

  14. Craig Bowles on October 23, 2008 7:03 am

    Prudence Gently is right on this being demographics driven. Japan is 10 years ahead on demographics, so that’s not very encouraging.

  15. the boy on October 23, 2008 7:34 am

    Is there a single overriding reason why the stock market has not produced any returns in 10 years? My guess is that it is right at the 1997-1999 period that the public was sold on the idea that buying and holding equities was the only viable long term investment goal. The charts showing "no down 10 year periods" were broken out and bowed down to. So of course now, 10 years later, this hasn't worked and will not work again until all the baby boomers pull out in frustration that they wasted thier retirement money in the stock market. First Baby Boomers retire in 2011, when we will surely hear how the pressure of the future baby boomer selling will but a drag on the market for the next 10-15 years. Then it will be buy time.

  16. mark candon on October 23, 2008 8:56 am

    Thank you, Dr Zussman, for the link to Swensen's lecture. It should be required reading. This week I'm rereading chapters 8 and 20 of "The Intelligent Investor" by Benjamin Graham. I'd swear with rates where they are — and the silly illiquidity from the 'fraidy cats in the bond markets — that many stocks are well within the "margin of safety."

  17. david higgs on October 23, 2008 9:12 am

    don’t give me more cow bell, give me cheap energy, boy how that makes the world go round or not. Volatility, talk about “madness of crowds”, here’s one investor that like the statuesque what ever that is these days………….

  18. John on October 23, 2008 12:53 pm

    Why have equities not returned anything over the past ten years? Three words: Jobs, Income, Inflation. How can an equity increase in value when the ultimate arbiter of winners and losers, the end user, has lost ground? Everyone sells to the consumer eventually. If the average consumer is treading water, how can the average equity increase in value? The bull market that was seen from 03-07 was a direct result of low interest rates and a mis-pricing of risk, not an increase in value/wealth. What we are witnessing is re-pricing upon the realization that the value of capital markets is the improved efficiency they bring to doing business, and not the ability to massively over-leverage yourself without paying extra for the additional risk. I am not a perma-bear, nor do I think capitalism is evil, but I am also not an optimist. I am a pragmatist, and while I believe that we will get through this, the practical reality is that a MASSIVE amount of credit just disappeared practically overnight and that will severely impair business’s ability to generate profits and growth.

  19. Ralph Wanger on October 23, 2008 5:27 pm

    Another long, flat spell was here in the USA. The DJIA was 95 late in 1905. In May, 1942, the DJIA sold at 95, 37 years with lots of volatility and no gain.

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