Please let me point out some of the current risks and indicate there are similar parallels today in banking, tariffs, and employment level. 1) Currently the FDIC insures banks; but most of the money for "insurance" comes from other banks. The FDIC actually has very little in monetary reserve available to bail out banks. A large scale number of bank failures will cause a run on the banks. The Federal Government may step in to bailout the banks or simply let them fail; with falling tax revenues the Fed Government would be hard pressed to bail out the entire banking system. Note that in South America the governments can not afford to bail out banks which are folding quickly. 2) Furthermore on banking; many banks currently have large derivative exposures which are just as risky as any bank loans for stock utilized during the Great Depression. JPM and C have huge derivative exposures which would cause shock throughout the banking system if they faltered. 3) Tariffs were actually "comparatively" low during the 1920s. The government greatly increased tariffs after the economy turned south; this did not help the recovery from the Great Depression. Notice the increasing tariffs today on steel, wood, farming, etc. ... there is a similar tariff issue. 4) The greatest unemployment at the depth of the great depression in 1933 was 29%. During the early stages right after the stock market crash; unemployment was only 6-8%. 5) The P/Es on most stocks (e.g. the S&P500) are still at very high levels. - Greg
two factors to include are event risk from terrorist attacks instability in the mid-east, and loss of confidence in corporate america from the accounting scandals. While corporate scandal is nothing new,this is the first time in history that we have a sustained threat on American soil that could be nuclear or biological. Also in the forefront is an impending war with Iraq and jitters about the oil supply as a result. This is a unique time in history. However, I feel that with any real capitulation that occurs, a vacuum will be created that will inevitably be filled no matter what the circumstances (unless it is total armegeddon, but if that happens, the market won't seem that important)
This sounds a lot like the opposite of the big bubble that is still currently deflating. People were so bullish back then you couldn't believe it! Yet, the markets kept going up and up and up and up...... Basically, we got stupid to the upside and now we are going to get stupid on the downside. And boy do I mean stupid. All I know is, just watch out for short covering rallies....they are quick, violent, and can wipe out all your profits in a heartbeat. As soon as everyone hates stocks and stops watching CNBC.......yes Maria will lose her job as well as many others......then we will make a bottom and start the next great bull market. Oh yeah....one more thing....this may take 10 or more years to happen. (If you don't believe me, just take a look at Japan). Long SMH and OEX puts at least until November =) BB
The problem is that the fundamentals of a company and the price of their stock are not necessarily linked. When people are scared enough, they sell without regard to price. The same thing happens when they are very greedy. What 'should' happen and what is happening can be very different, and the difference can persist for a long time. I'm in the middle of re-reading a great book, "When Genius Failed", which chronicles the Long Term Capital Management debacle. These mathematical geniuses made massive bets on bond spreads based on what they 'should do'. When the ball of yarn started to come unraveled, nobody seemed to really care what prices should be, they just wanted out. LTCM was right on their bets, but things went against them too far before reversing and they were toast. The firms that bought out their positions made out like bandits. So maybe things shouldn't be doing what they are doing. But they are and I personally have no clue what tommorow, next month or next year is going to bring. I'm sure it will be an interesting read in hindsight. For now, I'm glad I cash out every day and have finally beaten the 'have no bias' mantra deep into my subconscious.
Forget the "historical" average for P/E values. Too many investors have had their fingers burned by the current bear. It will take time for these people to stop thinking that stocks are too risky to be trusted. Worse, I am sure that "E" will drop too from both the slowing economy, expensing options and much greater caution on the part of corporate executives (who will soon have personal/criminal liability for the numbers that their companies report). What's a person to do? Well, trading looking pretty good (take avantage of all the current bouncy-bouncy). If trading does not appeal, you can always look at a hedging strategy of buying quality stocks and shorting the index to profit from the relative strength of the better equities. Happy trading/investing, -Traden4Alpha
OK. So, the FDIC only has $20 billion or so. So what? The idea the US government wouldn't step due to some "inability" just ain't so. Remember who controls the printing presses at the US mints. While I'll grant you that banks' derivative exposures are somewhat opaque when looking at their financials, I'm not going to use this as a reason for taking any position on this without solid evidence. Simply referring to total notional principal amounts of derivatives is nothing more than inflammatory and doesn't represent evidence of anything. Have you read the notes to the financial statements of C or JPM regaring their derivatives exposures? I'll bet not. Yet, you and others try to use the "derivatives" catch-all because it suits your view of the world.
- the FDIC stuff was interesting. I didn't know that the FDIC itself lacks money. - its true that unemployment was 28% a full four years after the crash of '29. However, Hoover also raised taxes a lot during that period, dampening both business and consumer spending. There was zero fiscal stimulus after the 1929 crash which is very different from the current Fed policy. - there is a simple reason P/E is important. Eventually, if P/Es remain low and interest rates remain low then nobody is incentified to remain public. Companies will do MBOs and LBOs because the money will be cheap. This assumes some economic growth but in the long-run the economy has never not grown. All arguments assume some resilience in the economy, no matter how many "dips" we do. - the Smoot Hawley tariff act preceded the crash but did not take full effect until later but the expectation of higher tariffs had a chilling effect. Smoot-Hawley was an across the board tariff which resulted in mass shrinkage of global trade. There is no comparison to a few steel and textile tariff increases right now. - economic policy is completely different now than in 1929. Although Greenspan and crew are far from perfect its like comparing a brain surgeon with someone who cures people with leeches.
Please check out the following two links and their associated material and then get back to me on the derivatives risk. I actually have read quite a bit about the banks derivative risks during the past six months including the 10Ks of JPM, C, and BAC plus other associated material. JP Morgan Chase - A Derivatives Monster http://www.zealllc.com/2002/jpmgrows.htm http://www.zealllc.com/2002/jpmcrash.htm
I was reading an essay by "Adam Smith" written in 1974. In the essay he is talking to a friend of his who is talking about how bad its about to get. The friend refers to "a major bank collapsing". It seems this story never really goes away.
We are traders, speculators, not investors. All that we care about is predictable movement (Predictable in the span of a few hours, or days). If the market goes down, short it, if it goes up, go long. It doesn't matter. We make money on volatility, not on price appreciation. This current market is close to being a traders dream. Up, down, up. There is much money to be made for the speculator that is willing to play both sides of the game. Just my humble opinion