A Simple Reason Equity Markets Won't Recover Anytime Soon

Discussion in 'Economics' started by ByLoSellHi, Feb 24, 2009.

  1. Earnings.

    As the unprecedented housing boom gave rise to economic bravado and unabashed consumer spending, with banks willing to finance anything levered to real estate, and with consumers literally using their homes as ATMs to finance autos, boats, landscaping & pools, college tuition, home entertainment theaters, etc., the stores were packed, home improvement stores were buzzing, people were buying RVs, new autos every year, and 44 foot Searays en masse.

    Now, with the incredible fall in the value of residential properties, so much so that 1/2 of homeowners are underwater and the remainder who have any mortgage exposure would be lucky if they have net equity (albeit with the banks unwilling to extend equity lending re anything tied to such homes), and with the steep and rising unemployment crisis gripping the global economy (not just the U.S.), and with banks tapped out - unable and/or unwilling to extend consumer/business financing, look for an even further drop off in the level of consumer and business spending in years going forward.

    Equity markets are about to catch an even worse case of cholera than they've already experienced.

    Earnings (lack thereof) will cause them to throw up so much that they'll dehydrate themselves.

    Businesses will continue to lay workers off, people will continue to be either fearful of being laid off or actually laid off, those with or without money will refuse to spend money on all but the most basic of goods, and this vicious negative feedback loop is set to keep repeating itself.

    Some people think Dow 5000 is unlikely. It may be much more likely than anyone wants to admit.
  2. EARNINGS .... good heavens I had forgotten all about them.

    I had been lead to believe that earnings and deficits don't matter.

  3. MKTrader


    Here's a much more balanced and informed view, from someone who has really studied the data--and has the background and credentials to understand it:


    An excerpt:

    Though current earnings are well below the bottom-channel here, there is a very durable tendency for profit margins to normalize – which we even saw following the Great Depression. Since stocks are a claim on a very, very long-term stream of cash flows, I strongly believe that short-term earnings figures should not be the basis for valuation analysis.

  4. I've blown Hussman's performance out of the water.

    But I guess he's still more credible...in a Niederhoffer sort of way.
  5. gnome


    Many will be on their knees PRAYING for the return of Dow 5000..
  6. I agree, but people are obsessed with PEs. Earnings are only yesterday, market looks into the future. PE isn't everything. A PE actually says something about future earnings too. That's why a company losing money doesn't have a stock price of 0, that's why PE has a floor. You must factor in future growth.

    So right now the low market prices are more a factor of uncertainty about future growth, as soon as the picture becomes clear(if ever) and people realize life will go on, stocks will go higher.
  7. :D
    They wont recover because there is no equity and there is no equity being created lately.

  8. i thought stock turder said 'earnings don't matter' :D

    all kidding aside... sp500 earnings projections for 2009 were at $40 in january... i think they have been ratcheted down to $34

    puts sp fair value at 500-520 IMO (that's with a 15 multiple)... and most bear markets end with crazy low p/e's

    just food for thought
  9. And ...

    1) Do not forget that US tax revenues are nosediving....

    2) China's looming real estate/manufacturing revenue losses and needed domestic spending will negate their capabilities to support the US bailouts....
  10. Any idea what the projected tax revenues will be.

    #10     Feb 24, 2009