Baseball91's Weblog

December 13, 2008

Fuzzy Wuzzy in 2009


The U S Treasury in my view is not being honest with its people, in the battle between the housing market, credit markets, and equity markets.  What has really changed?  There still are credit derivative markets?  Boards of directors who allowed their corporations to underwrite credit derivatives with no reserves set aside have been dissolved?  And a trigger to a credit derivative event almost occurred this week except for the vote in the Senate over the Detroit bailout.  The $15 billion bailout would have cost the market more than that with the inclusion in the bill of an auto czar.  Who was the genius who wrote this legislation?  Such an event was the proposed auto czar created in the bailout bill for Detroit that never passed the Senate.  pundits.  


Exactly how many chairmen of the boards have been deposed in the last 90 days?  Bankers looked on in September unwilling to lend, as reflected in the LIBOR rates charged to each other.   A banks’ reluctance to lend is set to continue now that banks face further write-downs, due to the recession. 


Perception is what drives stock prices.  Not reality.  So if this all along has been an earnings driven bull market, why would anyone be buying the S&P 500 at 890, where it closed today?   At 10 to 15 times $42 a share earning, the S& P should be fairly traded at 660.  So before casting a vote in a market sentiment survey, read this weeks financial


From Howard R. Gold is executive editor of


I believe that the world economy will not be a hospitable place for equities for some time. A long, deep recession, massive debt liquidation, fiscal strains on governments around the world, and a new frugality among consumers could produce sub par economic growth well into the next decade.  And by some key measures, stocks aren’t very cheap at all.  According to S&P’s senior index analyst Howard Silverblatt, the S&P 500 now trades at above 19 times reported earnings for the 12 months ended Sept. 30.   Yale University’s Robert Shiller thinks the S&P 500 is “fairly valued” at current prices below 900.  Currently, S&P’s senior index analyst Howard Silverblatt anticipates about $42 a share in reported earnings for the S&P 500 next year. That’s about half of what those companies earned in the 12 months ended June 2007.  For the last 70 years, the average yield on the S&P 500 has been 3.82%. At the end of the third quarter, it stood at 2.47%. Historically, markets haven’t been considered cheap until dividend yields top 4% or even 5%, as they did in 1974 and in 1981, the year before the 25-year bull market began. The yield got up to 3.87% in the third quarter of 1990, which also turned out to be a good buying point.  But as companies cut dividends, S&P is projecting a slight decline in dividend payments next year, to around $28 — the first expected decrease since 2001. So, assuming $28 dividend payments, a 4% yield gives us 700 in the S&P, not too far from recent lows. But 5.5% brings us close to 500 — a lot lower.


“Members of the American Association of Individual Investors (AAII) hold 37% of their portfolios in cash, approaching previous peak levels of October 1990 and October 2002. In the AAII’s most recent sentiment survey, bulls and bears were about evenly divided, in the high-30% range. Back in 1990, bears topped bulls by more than 40 percentage points, and the number of bulls fell to a minuscule 13%. (The spread approached 40 in January and March of this year, but bulls never dipped below 20%.) It’s hardly doom-and-gloom now.  Our recent sentiment indicator revealed little capitulation, either.  So, it should be no surprise that smart traders and technicians like Sandy Jadeja, who called the top of equities markets last fall and crude oil this summer, don’t believe we’ve hit bottom.” 


“’I’m looking at that as a suckers’ rally,’ he says. “Longer term, the trend is still down.’  He doesn’t see a bottom for the Dow until somewhere in the 6,000 range, maybe lower.   If you’re retired or getting close, I’d stay invested in stocks but sell a little into rallies to lighten your equity holdings. And I’d be looking for bonds and more stable, dividend-paying stocks to give you income while you wait for the market to recover. Because unfortunately, that may take a long, long time.”   


The only real trouble, as was witnessed in those days between September 15th and early October, was when no one was buying


From Nick Atkeson, (Editor, Big Money Options, Partner, Delta Force Capital, LLC) in


The $8.5 trillion chip stack is what the United States government pushed into the middle of the table. Not until the hand is played to the end will we know the fate of that bet. This all-in bet could be a winner. The US government has removed its sunglasses and is looking the world directly in the eye, as it has shoved this humongous chip stack into the pot. Staring right back is a cast of unsavory financial characters and negative economic forces. These are the same characters and market forces that have won every hand so far—market forces that spell “deep recession” and financial speculators willing to purchase credit-default swaps and then short the equities into the ground. Treasury borrowing costs are now down to 1% or less for a two-year term. With corporate bond yields now at about 9%, the spread is at historically very high levels and leaves a lot of room for profit if the default rate does not become excessive. In some sense, the government has rigged the game in its favor. It is capturing profitable spreads with one hand and using the other hand to keep the default rate under control through loan guarantees and direct liquidity injections.  The bet the government is making is to flood the troubled parts of our economy with support money to allow natural market forces to take effect in a controlled, gradual manner. Slowing the rate of economic deterioration may allow some healing economic forces to gain traction.


Says John Authers in


“While equities jumped, credit investors remained wary. German bond yields barely fell, while dollar interbank rates ticked up for a second successive session on Monday. “This is still first and foremost a credit crisis,” says Tony Jackson in the FT. So if the two markets disagree, “go with credit”. What’s more, a “relief bounce” will need to feed on firmer economic data if it is to endure, says Mark Lovett of RCM. Unfortunately, we’re getting exactly the opposite.”  Following losses on credit instruments, the banks will have to raise more money or decrease lending to deal with these. A British think tank this week estimated that high-street banks could require another £110 billion to resume normal lending.  Retrenching consumers, plunging commodities, and the lending squeeze all add up to the makings of a “perfect deflationary storm”, says John Mauldin on US GDP could fall by 5% in the fourth quarter, reckons Goldman Sachs, which also sees profits across the economy declining by 25% in 2009, the biggest drop since 1938.  The last secular bull for the S&P was 1982-2000, taking p/es from seven to a record 44. They then fell as the post-2000 bear began; by the 2002 low the p/e was at 25 and at the peak of the market rally last year it was 21, says Adam Hamilton on 


Bill Gross in his December Pimco newsletter:    


Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future.”


And in the last 3 months the yen has risen 27% against the Euro.  Currencies are moving a lot like the airlines raising or lowering ticket price.  Who can figure out the psychology in the fiat system?  But 2009 will be the year where big money will be made in currency fluctuations based on the fundamentals.  I am uncomfortable with the

$8.5 trillion stack of chips on the table put there by the United States government.  


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