End of the Suckers Rally or a Healthy Correction?

[Zorrofan]

Since we have had a nice 10% correction I thought it might be interesting to get some feedback from the board. Recently Eric Sprott, well known bear, said that the S & P could retest the March 2009 lows. Several posted interviews with Seth Klarman show him to be cautious about the current market values and we know that Prem/FFH have started increasing the hedge on the equity portion of the portfolio. What are your thoughts? For the record Zorro is leaning towards a major correction, maybe not as bad as Sprott is predicting but over 20% for sure....

 

cheers

Zorro

[StubbleJumper]

I regularly attempt to obtain some notion of the fair value of the S&P by running off a long-term trend line for earnings, and looking at historical P/E ratios (Shiller's database is handy for this type of exercise).  I typically calculate fair values somewhere in the range of 750-900.  Based on this, the valuations of last March would make a great deal more sense to me.

 

Will we drop the required 15-35% to hit an average historical valuation?  I really don't know.  Maybe we'll just trade sideways for three or four years while earnings trend up....  I am reasonably comfortable in investing right now (unlike Klarman), but I'm being selective, and am not in a hurry to leverage up.

 

SJ

[Guest longinvestor]

hmmm......short term predictions......my bet is that we could see a 20+% pull back between now and November. Many macro-shoes to drop but tightening the screws on wall street shenanigans is one of the lesser spoken reasons.

[Viking]

I do not think the overall market is anywhere as expensive as it was in 2000 or 2007. I also do not think it is cheap as it was in March of 2009. Cetain sectors have been pretty beat up at look to me to offer pretty good value (big pharma, big oil etc). As a result, I am now 33% invested in equities with the remainder in cash. Should markets go sideways I am happy with what I have. Should markets correct in the coming months I will get more aggressive (i.e. should the general market fall 15% from current levels perhaps I will move to 60% invested and should markets fall 30% from current levels I will look to go to 80% equities).

[Cardboard]

I will keep my eyes on the ECRI.

 

http://209.157.64.200/focus/f-news/2532706/posts

 

Based on the historical chart, it seems that whenever it goes between -5 and -10% that fairly nasty things occur in the economy. We are not there yet. At this point, it seems like a fairly sharp correction from a very sharp rebound. But if we do get there, it would seem hard for the stock market to go up.

 

I hate this macro stuff and I wish we could just get back to investing based on micro or company specific numbers. However, I am afraid that a depression is not completely off the table yet.

 

Cardboard

[Myth465]

I see the market trading side ways or range bound over the next few years. Short term depends on the news cycle, we have alot of events which are on the edge.

 

Greece, Hungary, Europe, Oil Spill, Turkey, Israel, North & South Korea, Hurricanes, Iran, Double Dip Recession Fears. If any of these tipped over then the markets would correct hard in key sectors. My plan is to hold cash and buy on the pull backs in the affected sector. Sell when anything non core moves up fast and hard.

[txlaw]

Very interesting speech by George Soros: http://www.georgesoros.com/interviews-speeches/entry/iif_spring_membership_meeting_address_june_10_20101/

 

Near the end of the speech, Soros says this: "And as I said earlier the financial crisis is far from over. We have just ended Act Two."

 

The financial crisis is far from over, says Soros.  That's scary stuff.  It would be wise to own businesses that will hold up in the event of a double dip recession -- or hedge accordingly.

[Myth465]

Many think Act 2 will be a Sovereign Debt crisis now that private losses have been socialized. The markets are very interest now because I can already hear the chatter. Its like we are 1 failed Treasury auction away from mass hysteria. Positive news sends the markets up 3 points and negative down 3 points. Anything remotely serious on the negative side will in my opinion cause a stampede.

[scorpioncapital]

I wouldn't put too much trust in what Soros has to say on the subject. In the depth of the 2008 crisis he was so bearish he was like it's the Great Depression, etc.. Anyone listening to him would have *also* missed out on one of the biggest rebounds of the century.

[ERICOPOLY]

So bearish...

 

Can anyone (without resorting to a search engine) guess who said this?  It's only about a month out of date.

 

 

"American business is improving from everything I see now,"

"Unemployment is going to come down,"

"Right now we're seeing pretty strong signs of an improvement in the industrial sector,"

there could be a "pretty decent balance" between housing supply and demand from household formation within a year, he predicted

[shalab]

 

"American business is improving from everything I see now,"

"Unemployment is going to come down,"

"Right now we're seeing pretty strong signs of an improvement in the industrial sector,"

there could be a "pretty decent balance" between housing supply and demand from household formation within a year, he predicted

 

Mr Buffett

 

[ERICOPOLY]

That's right, it was Mr Buffett.

 

Last summer, Mr Buffett said some remarks about not seeing any business improvement yet.  People on this board quoted Mr Buffett back then.

 

Today, Mr Buffett is saying there is business improvement, but nobody yet I think has quoted him on this board. 

 

Why is that?  Just an observation.  I think I hear more about Sprott's opinion these days than Buffett's.

 

 

[Myth465]

Well I think everyone is talking about 2 very different things.

 

The economy is slowly recovering and the sky isn't falling, like the talking heads claim.

But the markets are very jittery and anything / everything seems to set them off.

 

The 2 over the short term are disconnected in my opinion and have been for quite a while.

If I had to guess, the Economy is recovering but we are in for 8% + unemployment for a number of years.

 

This thread is however about the markets, which are dominated by Fear and Greed. I see Fear very slowly taking hold. The dumb money at work (which likely includes me) seems to see this as a good buying opportunity. That tells me we are 1 major news story away from them being scared out. I think everyone feels fairly smart for getting in at 6k or 8k, but folks will want to lock in gains if it continues to drift down.

[watsa_is_a_randian_hero]

I will keep my eyes on the ECRI.

 

http://209.157.64.200/focus/f-news/2532706/posts

 

Based on the historical chart, it seems that whenever it goes between -5 and -10% that fairly nasty things occur in the economy. We are not there yet. At this point, it seems like a fairly sharp correction from a very sharp rebound. But if we do get there, it would seem hard for the stock market to go up.

 

I hate this macro stuff and I wish we could just get back to investing based on micro or company specific numbers. However, I am afraid that a depression is not completely off the table yet.

 

Cardboard

 

Attached is the conference boards LEI year over year change.  In the past 30 years, this figure has only been higher once (in the early 80's).

[twacowfca]

I wouldn't put too much trust in what Soros has to say on the subject. In the depth of the 2008 crisis he was so bearish he was like it's the Great Depression, etc.. Anyone listening to him would have *also* missed out on one of the biggest rebounds of the century.

 

 

Soros is known for changing his opinion at the drop of a hat.  This is his edge: no fixed views on directions in markets.

[Uccmal]

Of all of the above I would be most likely to side with Buffett vs. Soros, Sprott, or Rosenberg.  Everyones talking their book but I would suggest that Buffett has by far the most access to main street intelligence through his daily reviews of all his companies numbers. 

 

If the economies improving, albeit somewhat slowly, then the stock market will at least hold its own for awhile yet.  Especially high yielding blue chips, since yield is so hard to come by elsewhere. 

 

It also appears that the Democrats want to give money to the municipalities as further stimulus.  The US is not appearing to be interested in pulling back stimulus yet.

[ERICOPOLY]

Buffett is forecasting growing household demand to meet supply in twelve months.  That's an incredibly positive forecast.

 

We got 666 in an environment where Depression odds appeared high.  You won't get back to that level of fear if housing demand meets supply.  Instead, you'll see a lot of hiring as the largest sector of the economy expands.

[scorpioncapital]

"Soros is known for changing his opinion at the drop of a hat"

 

Sure, I do that too. Every time I'm wrong I change my opinion, that way I'm never wrong :)

 

 

[UhuruPeak]

"Soros is known for changing his opinion at the drop of a hat"

 

Sure, I do that too. Every time I'm wrong I change my opinion, that way I'm never wrong :)

Scorpion, you are not married, are you?  Sorry, couldn't resist  ::)

[scorpioncapital]

Are you saying marriage is counter-cyclical, like the government :)

[txlaw]

I wouldn't put too much trust in what Soros has to say on the subject. In the depth of the 2008 crisis he was so bearish he was like it's the Great Depression, etc.. Anyone listening to him would have *also* missed out on one of the biggest rebounds of the century.

 

Wait, so you don't think that we were at the precipice of a Great Depression in 2008?  Even WEB said that we were facing an "economic Pearl Harbor."  It was the US government's policies that kept us out of the Great Depression 2. 

 

One of the key points in Soros' speech is that there could be another financial crisis, probably with European banks failing due to sovereign defaults.  Wilbur Ross said the same thing today. 

 

It's hard to say what the spillover effects of a Europe-centric financial crisis could be in the US.  But such a crisis could affect confidence enough to where you might see companies, particularly multinationals, continue to shed US jobs as a result of reduced global demand for their products. 

 

And let's not forget that WEB just recently started talking about terrible problems with municipal defaults.  That would mean more austerity measures on the local level, which act as a negative stimulus on the US economy. 

 

Not saying that we'll ever get back to the market bottom.  Who knows what the market will do?  I'm just saying that the global economy could relapse into disinflation/deflation, which would have a deleterious effect on the businesses we own as equity holders.

[Myth465]

The more I learn, the more I realize I don't know much and more importantly most people don't know much.

Buy Low, Sell High. Hedge with cash or puts.

 

Owning stocks basically means you don't think Armageddon is going to come and that things will eventually sort themselves out, with that said today was a great day. Hopefully it continues for a bit.

[goldfinger]

There is no "decoupling" in between US and Europe and other partners. The EU is the biggest economy in the world and it is going through more than a financial crisis. In countries like France, 1/3 of the active population works for the government. This thing could really bring the EU down into a depression and then impact us greatly.

Sokol was saying a few weeks ago: we will be very lucky if we get a slow but stable economy during the next 18 months. Basically nothing bad must happen at all. What about Japan: it doesn't look like an easy problem to solve. The Prime minister just resigned.

And it is not only Soros, Sprott and Rosenberg that are fretting: what about Klarman (I liked the fact that he thought that some numbers are manipulated, that was my thought for a while too), Grantham and Zulauf for example ?

 

 

[ERICOPOLY]

Some of the numbers coming out would seem difficult to manipulate.

 

Truckers buying fuel for example, or rail shipments of waste freight:

 

http://blogs.forbes.com/streettalk/2010/06/10/truckers-say-markets-wrong-economy-grows/

 

[goldfinger]

1. I think we are not denying there has been some growth. We are questioning whether it is durable and whether there are other factors at play that can change that.

2. I have my doubts on numbers like money supply and inflation.