While today was another awful day, it is probably not the bottom. The world has just lost confidence in virtually all financial institutions, and investors are deeply concerned about their solvency. Product orders are probably being cancelled throughout the world. It would not be surprising to see the downturn accelerate this quarter from the 4th quarter's 6.2% GDP fall, with the 2nd quarter of 2009 possibly leveling off at a 4 to 5% decline with gradual improvements in the 3rd and 4th quarters but still negative. The market is signaling an acceleration of the GDP decline in the coming months with no light visible at the end of the tunnel.
Art Cashin said on CNBC that 700 in the S & P 500 index was a long term trend going back to the early 1980s. I do not know about that statement. I did line up a piece of paper with the S & P lows in 1974 and 1982, and the result was a line that would be around 700 now. The S & P 500 closed today at 700.82.
Loiuse Yamada was on CNBC'S Fast Money today and she was predicting the next stop at 6000 on the DJIA and 600 on the S & P. If that level breaks, then her next target is DJIA 4000 and S & P at 400. Chartology: Dow 6,000 On The Way? - Rapid Recap - CNBC.com
This is a plausible scenario. For now I am sticking with 6400 for the DJIA as the low.
Henry Blodget posted a blog using Professor's Shiller's cyclically adjusted P/Es and assuming a trough P/E at 8 and a low P/E of 5 for this down cycle. This would imply a high trough of 460 in the S & P 500 index and a low trough of 300. How Low Can the Market Go: Tech Ticker, Yahoo! Finance
Or, under Schiller's theory, you could have the market averages stay the same for 5 to 10 years, and earnings could start to grow again until the S & P's P/E reaches the 5x to 8x Schiller cyclically adjusted P/E ranges, and arrive at about the same destination. ING Preferred Stocks/Professor Schiller/GM Bankruptcy/A fall to 300 would take us to the 1990 lows. A 460 level was the start of a major bull move in the index starting around July 1994. No one really knows where it will bottom. A fall to below 500 coupled with massive reforms of financial regulations to restore some confidence, and the replacement of many senior executives, could generate sizable returns for a very long term investor.
Jim Cramer reminds me of the Bloviator in Chief, Rush Limbaugh. I generally can not listen to either of them for more than ten minutes. Today, Cramer was ranting that the recent market fall was due to Obama's budget proposal, which he refers to with great bombast as Leninist and as a confiscation of wealth, apparently meaning the tax increases that the Beanpole was proposing for 2011 by letting the Bush tax cuts expire for couples making over $250,000. This is part of the process of how and why recent history will be repeated again, because people like Cramer are refusing to learn from history and are already drawing conclusions that are wrong and misleading. This is occurring in real time over many different media outlets, including Fox of course, and it involves the creation of an alternate reality that requires explanations for recent events that defy any relationship to historical events. The explanation for what is happening now in the world's stock markets has nothing to do with Obama's budget, but to events set in motion before he became President. Once Cramer accepts that fact, he may be able to impart a word or wisdom or maybe two. AIG's 61 billion loss was for the 4th quarter of 2008, which precipitated yet another federal bailout. The market realized today that the most recent one is probably not the last. The origins of that loss and AIG's earlier losses had to do with decisions made for several years by AIG employees, primarily at the Financial Products Unit, prior to Obama becoming President. The problems with Citigroup and the other financial institutions, from life insurance companies to banks around the world, did not start with Obama's budget proposal but have been brewing for years. The market is reacting to the growing realization that all of the government's actions have not stopped the implosion of the financial institutions that started with Bear Stearns last year, and accelerated with the Lehman failure. These institutions were destroyed by a lethal combination of bad investments and excessive leverage, with the leverage reaching 40+ to 1 before their failure or forced merger. It is inconceivable that the U.S. market, let alone markets around the world, is reacting to possible though likely increases in the marginal tax rates two years from now which is just a preposterous proposition or to any aspect of Obama's budget (some sectors are impacted like Sallie Mae and health care). We are now in what economists call a negative or adverse feed back loop. Bloomberg.com: WorldwideBernanke: Fix banks first and growth will follow - MarketWatchUnless one starts to comprehend the source of the problems, then nothing will be learned from what has happened to prevent it from occurring again. People like Cramer and Limbaugh just prevent the assimilation of the lessons that have been clearly taught by recent history as to the origins of the Not-So-Great- Depression. Life Insurance Companies in the Toilet/ TOP TWELVE CAUSES OF THE NOT SO GREAT DEPRESSION/POM
Clearly, restoration of confidence in the financial institutions is the key rather than Obama's budget. This is not likely to occur as long as they keep coming to Uncle Sam, on a weekly basis, for more money and better deals. The market tanks whenever new information comes out that establishes that the financial institutions are going from bad to awful and now to beyond anyone's prior ability to even comprehend the degree of badness. This connection is clear. The most recent spiral started with Bank of America asking for help, accelerated recently with the latest Citigroup bailout (remember that BAC and C used to be Americas' largest banks) and ended with yet another try this weekend to keep what used to be the largest insurance company in the world from bringing down the world's financial system for a few more weeks. Cramer of course knows all of this so I wonder why he is off on such a tangent.
Some maintain that we are already in a depression. The D-word: Will recession become something worse?: Financial News - Yahoo! Finance
Goldman Sachs added AT & T to its conviction buy list. The analyst, Jason Armstrong, cited the safe dividend. Tech Trader Daily - Barron’s Online : AT&T Added To Goldman Conviction Buy List I am not sure any dividend is "safe" anymore. There may be degrees of relative safety with T and VZ ranked higher than any bank, REIT, or life insurance company.
AIG has sued the U.S. in a dispute over 306 million in taxes, interest and penalties. In Twist, AIG Sues Its Benefactor Over Taxes - WSJ.com
That is sort of like suing yourself.
Greed and stupidity together are one dangerous combination.