Panic

[Partner24]

Is it me, or do I smell panic? It smell pee.

 

AIG is a huge disaster, GE is threatened to be downgraded even it it cuts it's dividend, Dow Jones hits a 12 year low, media reporting only the negative things about Warren Buffett's letter to shareholders, I hear people saying that capitalism will be dead, you name it...

 

I'm not calling a bottom. I would like to be able to do that, but the only way to me to make money with a crystal ball would be to buy it cheap and then sell it higher on Ebay. That being said, I guess there is still people that are still optimistic, but suffice to say that they don't get a lot of media attention...

 

But I wonder what will history tell us in 10 years about this period. The glass seem more half empty than half full actually, but we'll see.

 

Cheers!

 

 

 

 

 

 

[Parsad]

This is always so amusing, because all these same people panicking, were more than happy to see the S&P go well over 1500 back in late 2007.  Now with the markets cut more than in half, many stocks trading for less than half of the net assets on the book, and dividend yields nearly double the long-term treasury yield, they are screaming as if the bottom is nowhere to be found and sunlight will never come pouring in through their office windows again!  Cheers!

[Partner24]

If I remember well, Warren Buffett said something like that you shouldn't buy stocks if you can't see them go down 50% in value. I would call this lesson "The human nature and the stock market 101". This theorical lesson don't goes to practice often, so they should all ask themselves this question BEFORE it goes down 50%.

 

 

 

 

 

[Uccmal]

Well, Partner, I am not sure one can actually know how they will behave until one goes through the experience.  I am pretty sure that no one finds this real pleasant.  I have a high threshold for this kind of pain having been down this road but.... I find myself a little short on ammo right now which is frustrating.  I have been selling high quality stuff at a loss to buy other better stuff that's even cheaper, such as FFH. 

 

This in itself is an interesting exercise because I now have capital losses that can be booked back to prior years, if necessary, and I also have the new better product.  Trying to look at the bright side.  I have sold SPY Leaps for DEC. 2010 at a loss, and bought similar leaps with a lower strike for dec 2011 which is nearly 3 years out.   

 

I am figuring that the strike price for spy 2011 leaps will soon be zero.  :P

[Parsad]

That's what Buffett was doing back in 1981 Al.  He said he was selling things trading at 3 times earnings to buy things trading at two times earnings.  Cheers!

[omagh]

Having been through the FFH panic of '03, these last few days have a similar feel.  Luckily, I have dry powder for my elephant gun  ;)

 

Cheers,

 

-O

 

This is always so amusing, because all these same people panicking, were more than happy to see the S&P go well over 1500 back in late 2007.  Now with the markets cut more than in half, many stocks trading for less than half of the net assets on the book, and dividend yields nearly double the long-term treasury yield, they are screaming as if the bottom is nowhere to be found and sunlight will never come pouring in through their office windows again!  Cheers!

[Smazz]

Does anyone remember a thread on the old forum where we all asked "how would this out of whack debt/saving ratio play itself out"?

 

Well,

we are finally getting the answer.

 

Like the old (and one of my famous ;D) ditty goes - "its not a matter of if, rather when"

 

edited for typo :)

[Santayana]

I'm amazed how many people on this board have so quickly given up on the notion that we're entering a 1 in 100 year storm as Prem said a while back.  From a time point of view I think we're still closer to the beginning than the end.    We are witnessing a global deleveraging, and many parties are just now beginning to realize the situation.    Panic?  This isn't panic, this is an orderly decline.    October 1987, now that was panic.  I think we need to have panic before we can start to consider recovery.  A day with a big enough drop to cause trading to be halted would be a clue that we're getting there.

[Mungerville]

These are not 1981-style valuations - those were much much cheaper.

 

 

[oldye]

Many of the people on this board are pretty contrarian by nature.  When everyone starts agreeing that the world is coming to an end its hard not to take a step back.  

[Mungerville]

We are now at 1996 levels on the S&P.  That is when Greenspan uttered his only intelligent remark - that the stock market was entering a state of "irrational exuberance". 

 

 

[scorpioncapital]

"Quote 

 

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We are now at 1996 levels on the S&P

 

"

 

It's much worse than that. Consider the rate of inflation between 1996 and 2008. I believe the total is about 32%. This debacle highly suggests to me that we are in for a doozy of a bull market in the next decade.

[Uccmal]

Scorpion, that is an interesting observation. 

 

RE: 100 year storm.  I would suggest that this is now a 100 year event.  It cannot be defined any other way.  In the last 115 years of US stock markets there have been two bear markets with greater than 50% declines, this one and 1929-32.

 

Yeah, we are setting up for a doozy of a rebound soon enough.  Treasuries just dont pay enough.

 

Besides, how can anyone beat a 61B dollar loss.  Everything else is going to seem mundane. 

[Mungerville]

Scorpioncapital,

 

So we had 32% inflation.  Greenspan - although he is a total idiot - would not have uttered those words had the market not been overvalued in 1996 by at least 30-40% one would imagine - so there goes the 32%.  I therefore don't see how this sets us up for a doozy of a rally. 

[Smazz]

  October 1987, now that was panic. 

Im going to have to disagree with you Sant.

 

For so many different reasons 1987 was no where near the panic we have today.

Im not saying valuations were or were not cheaper back then, Im just saying that Main St Panick was almost insulated from Wall St panic back then.

 

Look at the "market" recovery back then, we are seeing nothing like it right now.

[Mungerville]

The highs for the stock market in 2000 dwarfed 1929 by a long shot relative to GDP/GNP.

 

 

[dowfin1]

"So we had 32% inflation.  Greenspan - although he is a total idiot - would not have uttered those words had the market not been overvalued in 1996 by at least 30-40% one would imagine - so there goes the 32%."

 

This means that American business has had no real growth or retained earnings for 12+ years which is hard to believe.

[Mungerville]

No.  It means American business could have had real growth since 1996 but that 32% worth of cumulative nominal growth since then could easily have be accounted for by the high market valuations in 1996.

 

The point is not 1996 and Greenspan.  The point is that if the market falls by 50%, in order to determine whether it is very very cheap at this point, it depends from what valuation level it fell from.  The valuation level of 2000 and 1997 was extreme relative to GDP/GNP - that's the point.  Yes, we are below fair-value now which Grantham says is 950.  Grantham also says, for his sister's account, in December, he only put 20% into the stock market, rest was in cash.  He said in January his best guess/gut feeling/historical data point to  2:1 odds the market is going to S&P 600 in an overshoot relative to fair-value sometime in 2009.  He said that 750 November low for a few days vs 950 fair-value did not seem like a big enough overshoot.

 

We should not be surprised to see the market fall another 10-20% from here, nor should we be surprised by a 10-20% increase.  That's my point.  Remember, we are part of a crowd that think long-term, the rest of the market doesn't think more than a few quarters ahaed - a year at most. 

[dowfin1]

By my calculation the GDP/stock market cap ratio stands at about 64% while the record lows (post 1970) were 45% set in 2Q 1982 when when long US govt rate was almost 13%, and 3Q 1974  at 47% ratio and 7.2% interest rate.  I don't have data pre-1970, but the current 30 yr. is at 3.6%, so I say we are at or have passed beyond the post-war low on an equalized basis for this specific yardstick.

[Guest ericopoly]

  Yes, we are below fair-value now which Grantham says is 950. 

 

 

He said 1025 in October.  Not to split hairs but why is he dishing out different numbers?

 

In that same article he mentioned that when bubbles pop they correct 20% on the downside.  So this one is now down 32% from 1025 -- way beyond Grantham territory.

 

 

http://www.smartmoney.com/investing/stocks/still-holding-back/

 

"So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging."

 

 

Notice he say's "possibly" by 20%?  He makes it sound like that would be pretty extreme, he didn't say possibly much more than 20%.  Just by the choice of words, I get the feeling he didn't seem to think it would go to 30+%.

 

 

[Guest ericopoly]

http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,0,0,0,0,0,0,0.html

 

 

According to S&P data, financials (by market cap) now account for 9.8% of the S&P500 (as of February 27th closing).

 

I believe Mungerville told us that in 1978 or so they accounted for roughly 8% of earnings.  Today we're at least getting close to that level measured by market cap, not earnings -- not quite the same measure though.

 

[basl1]

That's what Buffett was doing back in 1981 Al.  He said he was selling things trading at 3 times earnings to buy things trading at two times earnings.  Cheers!

 

Which are the best buys?

???

[Santayana]

RE: 100 year storm.  I would suggest that this is now a 100 year event.  It cannot be defined any other way.  In the last 115 years of US stock markets there have been two bear markets with greater than 50% declines, this one and 1929-32.

 

Well if you're going to use the 29-32 timeframe as the barometer of 100 year events, don't you have to allow for the possibility that this once is just as severe?  The Dow was off about 90% peak to trough.    I think it is worth noting that 47-48 and 73-74 were just about 50% declines also, so with where we are right now we're seeing something that has happened 3 prior times in the past 100 years. 

[Guest ericopoly]

Actually, 50% declines are a twice in a decade event.  At least, that's been the case the past 10 years.

 

[Guest ericopoly]

The DJIA peaked at 381.17 before the crash of 1929.  The DJIA finished 1939 at 150.24.  So it was down 60.5% ten years after the peak.

 

It is at 6,763 today, down 42.5%, nine years after the peak.

 

I think after factoring in GDP growth, the numbers of 60.5% decline may be quite similar to 42.5% decline.

 

However, it was a bigger bubble in 2000, relative to GDP.