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2800 vs. 500 (I heart efficiency!)

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February 19, 2011 – Comments (21)

Yep, we certainly have efficient markets. All this information abounds and we are iterating on the 'correct' price for the markets (you know, within 500% or so).

LASZLO BIRINYI: GET READY FOR S&P 2,800

JEFF GUNDLACH: THE S&P 500 IS GOING TO 500

21 Comments – Post Your Own

#1) On February 19, 2011 at 4:02 PM, HarryCaraysGhost (99.67) wrote:

Can't they just compromise and say 1650.

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#2) On February 19, 2011 at 5:06 PM, DarthMaul09 (29.75) wrote:

Both could  easily be correct, with QE4 in 2012 the S&P 500 may reach 2800 and once QE ends then a retreat to 500 may follow.

Wingardium Leviosa

This video pretty much explains what has been happening to the market and what may likely result when QE eventually ends.

 

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#3) On February 19, 2011 at 5:33 PM, rfaramir (29.27) wrote:

It's these kind of obvious things that make the Efficient Market Hypothesis false on its face.

The Austrians can cogently explain why it's wrong, I can give it a try:

The EMH assumes perfect knowledge. Austrians know that we don't all know everything. Mises and Hayek proved (logically argued successfully, i.e., showed a priori) that socialism has a calculation problem. The Soviet Union proved (demonstrated by trying and failing) that central planners cannot efficiently compute what's needed. A free market present prices which act as signals to everyone who use them to make local decisions (along with their local knowledge and subjective values).

If there were perfect knowledge, advertising wouldn't be needed. Rational people utilize advertising to improve business, therefore advertising is needed, therefore there is not perfect knowledge.

If there were perfect knowledge, there would be no profits, or at least, no "economic profits" above base interest rates which reflect the degree to which people prefer present goods to identical goods at a later date. This is because with perfect knowledge, every possible capital project that would increase desired production (stuff actually wanted by consumers), would already be made, driving down economic profits to zero. Economic profits do exist, therefore there are still worthwhile capital projects, therefore there is not perfect knowledge.

Learn more at mises.org and fee.org, I did!

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#4) On February 19, 2011 at 7:29 PM, binve (< 20) wrote:

HarryCarysGhost,

That's close to my target for the end of this cyclical bull (next 4 years or so).

I have little doubt that we will see 2800 sometime in our lifetimes (I am long term very bullish), but I don't think we see it in the current bull market (I am not impressed with a linear extrapolation based on current stock growth trends). 500 is basically my target for the end of the secular bear. I basically think we have more upside for the next 4 years or so, then more downside before the secular bear is done. At that point I think we are set for another secular bull.

DarthMaul09 ,

Maybe. I am still calling for a large range, just not quite that large :) -- http://marketthoughtsandanalysis.blogspot.com/2011/02/secular-bear-market-projection-in.html

rfaramir,

Completely ageed! Great comment.

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#5) On February 19, 2011 at 10:49 PM, HarryCaraysGhost (99.67) wrote:

 I basically think we have more upside for the next 4 years or so

Binve that goes against the Benner Cycle. 2012 buy 2015 sell.

What gives ; )

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#6) On February 20, 2011 at 1:38 AM, FleaBagger (28.18) wrote:

DarthMaul09 - Peter Schiff and I have been wrong about this before, but I do not see inflation allowing the S&P to fall below 1,000 ever again, much less to 500. With the indefatigable power of money printing in the Fed's hands, and the irresistable lure of driving up stock prices to win the Fed chief popularity contest, there's no reason to think that Bernanke won't print enough money to make 2008 a happy memory with the stagflation of the 2010's. 

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#7) On February 20, 2011 at 3:35 AM, DarthMaul09 (29.75) wrote:

  FleaBagger

Good point.  Maybe the gold value of the S&P 500 that was reached in March 2009 might be reached again when the US dollar dies and the markets implode.

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#8) On February 20, 2011 at 9:21 AM, binve (< 20) wrote:

HarryCarysGhost ,

>> 2012 buy 2015 sell.

Isn't that thing awesome :)

Actually, my thinking does jive with the Benner cycle up to a point. If you check out this post, you see my projection shows that we peak out somewhere around this level (1350 or so) and then we will spend the next year or so in congestion (not crashing, just consolidation). So I do think 2012 will be a bottom of sorts. Then I think we move up until 2015-2016, and then we get another cyclical bear to finish out the secular bear.

So not in complete agreement, but pretty close..

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#9) On February 20, 2011 at 2:58 PM, 100ozRound (29.36) wrote:

I'm not sure how to phrase this but hopefully it makes sense.

What if the nominal price of the S&P makes it to around 2,800 but the real price of the S&P (inflation adjusted backwards) is around 500?

In other words, what if we have deflation within inflation?

Does that make sense?

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#10) On February 20, 2011 at 3:27 PM, DarthMaul09 (29.75) wrote:

  100ozRound

 Agree ....

As in measuring the S&P 500 by something non-fiat like gold.

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#11) On February 20, 2011 at 4:02 PM, 100ozRound (29.36) wrote:

DarthMaul09

Exactly

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#12) On February 20, 2011 at 4:14 PM, binve (< 20) wrote:

100ozRound ,

Hey man, that is a very valid possibility. However, I am suspect of that happening on this cycle. US monetary policy has been undeniably inflationary throughout history, but there are still some major deflationary trends in place (the US consumer still remains in a balance sheet recession and will likely be in one for years. Prior to 2000 the private sector has $4 trillion in debt, it peaked out at $13 trillion in 2007 and it is still in the neighorhood of $10 trillion. The US consumer needs to deleverage and that is a trend that is likely to continue). I remain skeptical of the runaway inflation argument (either very high inflation or hyperinflation) for the next 5-10 years.

So I actually think the S&P will make both a real and nominal lower low before this secular bear is done. However, I still believe in Gold's fundamentals and think it will continue to outperform the stock market and many other assets in both real and nominal terms. There is nothing I am more bullish on.

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#13) On February 20, 2011 at 4:30 PM, Valyooo (99.39) wrote:

EMH is definitely bogus, but this doesn't debunk it.  Two people with differing opinions means their opinions are each weighted and therefore the current S&P level reflects the two different opinions. 

What does debunk it is when the market plunges 25% in a day on new news, or when a stock shoots up 10% in a day when the earnings misses expectations.

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#14) On February 20, 2011 at 4:45 PM, 100ozRound (29.36) wrote:

binve

I don't disagree with you but what I'm afraid will happen is that if the S&P does make a significant drop (because I don't think it will be an orderly decline), Gold will drop just as much, if not more than the S&P.  With all the funds that are holding leveraged paper gold, they will be forced to liquidate in order to cover margin calls.  Now I'm not saying this will happen, it's just what I've been thinking.  I would LOVE to hear something counter to my thinking - I'm just getting worried... err concerned... at these levels.

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#15) On February 20, 2011 at 4:57 PM, binve (< 20) wrote:

Valyooo,

The point of this post wasn't to debunk it.

100ozRound,

That's always possible. But I would welcome a disorderly drop. I bought like crazy in 2008 (November and December especially) in Gold, lots of Silver and GSMs. I am thinking Gold will take a pullback sometime in the future to 1100-1200, but I would be skeptical of much lower until the Dow/Gold Ratio gets down to 1-0.5 or so. Just my take at any rate..

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#16) On February 20, 2011 at 5:20 PM, 100ozRound (29.36) wrote:

Dangit binve, you just helped validate my assumptions :)

Well I guess we can always count on the Bernank to keep things propped up for awhile?

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#17) On February 20, 2011 at 7:23 PM, binve (< 20) wrote:

:)

thanks man.

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#18) On February 21, 2011 at 5:13 PM, checklist34 (99.72) wrote:

rec

binve, our outlook for the secular bear is pretty similar, but...  where in history do you find any precedent for another drop of that magnitude?  >50%?  no secular bear todate has had 3, this one has already had 2.  And that would bring us, as it would be well out into the future, to an all time record for drop*time, as in that far below a previous high that far into the future from the previous high.

There just isn't a precedent for that magnitude of drop.  The 70s saw the last cyclical bear inside the secular bear drop to roughly the high prior to the onset of the secular bear...  

I acknowledge the plethora of potentially significant negative catalysts - a japanese default, a chinese contraction or credit crisis, eurozone problems, US municipalities and so forth - and I acknowledge that its unlikely a new secular bull begins until the worlds debt situation is brought to a managable level, but...

don't you think that bearish slanting onlookers get a little too dramatic in their predictions of drops?  S&P 670 saw essentially every debt-laden company and financial reduced to zero or close...  But we'd somehow get 25% below that?  It approaches a situation that just isn't really practical and I think bears continue to underestimate the massive magnitude of the last flush and how many things were completely obliterated...

I will bet my left arm that we don't break the march 2009 lows.  To even get to them took, as I said, essentially every company with a levered balance sheet being sold to zero, essentially every financial being sold practically to zero.  What was left standing?  There wasn't that far left to go.

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#19) On February 21, 2011 at 6:11 PM, binve (< 20) wrote:

checklist34,

Thanks man. As far as precedent for the level of 3x 50% in a secular bear, none in nominal terms. But there are several in real (inflation adjusted) terms. 1929-1945 and 1966-1982 spring to mind immediately and I think there are others (1975-1982 never saw a lower low because of massive inflation, but in real terms the sideways market of the late 70s/early 80s made a lower).

I think the environment for the next several years will will not be marked by high general inflation. It could be considered stagflationary, but the drivers now are different than the inflationary drivers of the 70s (which were driven by the oil shock). The biggest factor that I believe that will prevent inflation from being a major problem is the fact that the private sector remains in a balance sheet recession. I think private sector deleveraging is far from over. We started in 2000 at around $4 trillion in private sector debt, it peaked in 2007 around $13 trillion, and the last I saw it was still around $10 trillion. In this case, I think there will still be weak overall demand in the economy and a mildly inflationary environment (inflationary pressures will be countered/balanced by deflationary tendencies). So in this case, I think there will be a lower low in both nominal and real terms to finish out this secular bear.

>>I acknowledge the plethora of potentially significant negative catalysts - a japanese default, a chinese contraction or credit crisis, eurozone problems, US municipalities and so forth - and I acknowledge that its unlikely a new secular bull begins until the worlds debt situation is brought to a managable level, but..

I agree with all of these (except a Japanese default). And the Eurozone has problems, but they are very uneven problems. As bad as Greece, Portugal, Spain, and Ireland are, Germany is just the opposite. It is in fantastic shape and continues to get better: http://caps.fool.com/Blogs/germany-confidence-rising-/535444

That will be the theme of the final leg down: unevenness. 2007-2009 was a deleveraging and (primarily) a liquidity crisis. The Fed still has all of the Dollar swap lines open and so I don't think liquidity (or lack thereof) will be the primary driver of the next fall. But in 2007-2009 everything was sold indiscriminately, regardless of merit. So at the bottom, there really were once in a lifetime buying opportunities. You were there and you called them, and I have nothing but props for you. It has taken me a long time to get over my bias and see the reality of that situation, but I have (albiet too late, but I am there finally nonetheless).

The next crisis will be much more uneven. Many corporations (outside the financial sector) have really used the 2007-2009 crisis to clean up their balance sheets, and many (again, outside the financial sector) are in spectacular shape. So I am also not a bear that looks at the economy and stock market monolithically. Even within the financial sector, there have been banks that have effectively recapitalized (such as a lot of regionals).

So for the next crisis, there will be sectors that make lower lows (consumer discretionary and financials), but many sectors that don't. I think there will also be many healthy financials that don't make lower lows.

So as far as drivers go, my thinking goes like this: the 2009 low and congressional authorized accounting changes and Fed intervention in the MBS market posponed the day of reconking. Some companies have cleaned up their mortgage books, but others have not. There is still a lot of bad bets (mortgages, CDOs, CDSs where the counterparties will never pay, etc.) that have not been unwound. Trillions of dollars worth. And I think they will.

I think consumer demand will stay weak for the next decade (as it should, the consumer is overleveraged still and needs to pay off debt or default). Based on the employment situation, I think it will be the latter. Another default wave will ripple though and affect the weak and undercapitalized financials. This will be compounded by muni defaults (I am not as bearish as Whitney, but I am not as optimistic as Gross). I think there will be no politcal will to institue 'too big too fail the second time' ... but I also think they won't have too. Many of the healthy financials have recapitalized and will be able to pick up broken and bankrupt ones on the cheap.

The next driver will be margin and P/E compression. We had a P/E compression cycle from 2000-2009, an expansion from 2009-2015/16 (my guess), and then a final compression from 2015/16-2020ish. The last cycle will mean revert. The 2009 cycle bottomed at the long term average, and the last cycle will undershoot. This has been a secular bear market ending signal for the last >100 years. Also, margins right now are at a cycle high and just slightly off an all-time high.

I think the whole economy will have to deal with falling margins and this will lead to another P/E compression cycle. Again, this will be very uneven. Many companies will handle this, and many won't. The healthy companies will use their balance sheets to pay out dividends in higher rates than we have seen in the last many years. The markets will be crushing stock prices, and to return shareholder value the companies will increase payouts. In fact I expect very good yields before this secular bear is done.

In a similar manner, I expect the healthy corporations to be picking up bargains at the bottom of the final cyclical bear.

That will be a catalyst for lower lows. 2009 was murder for the economy and market, but there were not a historically significant amount of bankruptcies. From 2009-on, the ones that could clean up their balance sheets have, but I think many are still marginal / hanging on. Bankruptcies and fear will cause another market selloff and smart corporations will be pick up bargains.

So 2009 was the worst I think the economy will face as a whole (housing will likely take another dip, so there will be portions that are worse off, but I expect we have seen the low in corporate profits). But I think we have one more 'fear' bottom, where the weak companies / sectors / debt etc. are finally purged. As a technical analysis corollary, 'there willl be a lot of economic positive divergence' for the end of the secular bear.

I do think we will have another cycle of P/E and margin compression. I do think we will have another cyclical bear to end the secular bear. I think the market as a whole will make another real and nominal low. But I think the participation within the next cyclical bear will be very uneven. There will be many weak sectors (I am thinking financials and consumer discretionary) that will make lower lows vs 2009, but I think there are many sectors that don't.

Again, just stating things how I see them. And, as always, I fully reserve the right to be wrong :)  ..

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#20) On February 21, 2011 at 11:36 PM, checklist34 (99.72) wrote:

I don't agree that the last cycle bottomed at historically average valuations.  it was a once-ever event where a cascading series of things resulted in losses being uniquely high for a relatively brief series of time.  These factors include:

1.  mark to market accounting which overstated losses at many kinds of financials considerably

2.  the fantastical swing in commodity prices which whiplashed several industries and left them briefly bleeding cash

3.  a huge wave of goodwill write-downs and other one-time charges.  many companies had to write down all good will, resulting in monstrous losses, essentialy all of which were concentrated in q4 08 and q1 09.  

4.  the enormous rash of layoffs was accompanied by associated costs

5.  etc and so on.  I bet I posted this 10+ times in 2009 in response to that freaking p/e chart of the S&P that was constantly being used to state that prices needed to crash huge.  

Was the march 2009 bottom the all time record for lowest price/forward earnings of the S&P?  What did the S&P earn in 2010?  or, rather, from q2 2010 to q1 2011?  one forward year?  80 bucks?  90?  so we were trading at an PFE of 8?  7? 

FURTHER, changes to GAAP have resulted, since about the year 2000 (i can, if challenged, find a link for this, but don't have it handy) reported GAAP profits falling well below operating cash flow for the S&P, whereas before then for decades they had tracked as one.  So old p/e's are under-stated relative to current ones and you must adjust.  So was that price/forward p/e 8, or was it 7?  was it 6?  Was it the all time record low, or at least record since the depression? As market participants, should our role be to think stuff like that over, and is that what the market did, and did the sheer magnitude of the bearishness let what was a pretty obvious call (that 1-5 above where happening, along with others listed below) and that it was super cheap on likely earnings in a year or two?

FURTHER, as so much of the market cap of the S&P is now bio/medical tech and tech companies, and their assets are essentially their R&D and technology, and those AREN'T marked onto balance sheets as assets at all, we have companies like MSFT and so forth trading at sky-high price/book values.  This probably understates that actual book value of the S&P by 20% and FURTHER, the value of financial assets has marked up enormously, my portfolio of BDCs and insurers has nearly 2x the book value it had at the march bottoms.  

FURTHER, buybacks are now more than 1.5x dividends paid, compared to 1980 when dividends were about 10x more than buybacks.  I do not dispute that buybacks are not really a very good way of returning money to shareholders and I'd like to see more dividends, but...  the oft-touted price/dividend ratio of the S&P is simply out of date in this regard, and the price/capital being returned at the march bottom was consistent with or better than that seen in the inflation-adjusted bottom in the early 80s.  

And stuff.  Stocks weren't cheap then, they were crazy cheap.  Crazy cheap.  Even after more than quintupling my array of financials trades well under book value.  

Maybe the next cyclical dip in this secular bear will see a lower trailing p/e...  but it'll never get as actually, reasonably-thought-out, cheap.  In my view.

With respect to the accounting changes, they are a step toward the reasonable, and fair value accounting causedpart of, or significantly exacerbated, the crisis.  The changes are a victory for the world, NOT a way of letting financials cheat and lie. 

I agree on housing, but maybe its a drift and drawn-out drag and not a dip causing an actual acute reaction.

And I think that if the commodity bulls create a super-bubble, the result is that it forces another recession or slowdown, sending commodity prices back down (as they really aren't demand driven right now), this combined with China's eventually having to spend less on infrastructure...  flopflation, not stagflation.

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#21) On February 21, 2011 at 11:44 PM, checklist34 (99.72) wrote:

Anyway, I agree on the secular bear not being over and this whole thing having at least one more notable cyclic bearish event left in it, to go with the 3 we've already had (monster bottoming in 02, monster bottoming in 09, and the near-bear-market in 2010).

But i've got to say, I don't think anybody, really, has sat down to really appreciate the scope of how hard things got sold off to the 2009 bottom.  In so many ways, from the comments on valuation I offer above to how many years it had been and it was down >50% (9) to how many years it had been flat (like 13 or 14) and so on. 

It saw companies with no debt trading for less than cash on hand, it saw companies at 20, 30 year lows, all time lows, companies very very unlikely to go broke trading at 40% of the share prices they last had in 1983 when their revenue was 8x lower.  

That was it, the real deal.  

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