WhipItAround.com

This was supposed to be published Thur. night - I don’t know what happened.

Here are a couple of excellent tables/charts I found on the Internet (courtesy of Mish’s blog and the Chart Addict’s blog).  I suggest reading both blog entries (the websites are listed below each graphic). 

Source: : “Is The Stock Market Cheap” http://globaleconomicanalysis.blogspot.com/2009/01/is-stock-market-cheap.html

Dow Jones Industrial Average

Price information obtained from Barrons.

A few observations: 1) the analysts are always behind the curve and never get it until it’s totally obvious; 2) estimates have consistently been lowered; 3) the entire market was naive enough to agree with the analyst estimates until recently; 4) earnings can possibly go negative or close to zero, as they did in the 1930s.  Earnings reached a peak in 1929 (the year of the crash).  The decline from the 1929 peak was 45% in 1930, 79% in 1931, and 103% in 1932 (yes, earnings went negative in 1932).  Earnings slowly rebounded in the years after, but note how it wasn’t until 1936 that earnings reached a 50% retracement from the 1929 peak.  5) Don’t expect earnings to rebound any time soon and forget about the post 2002 recovery as that was driven by easy/stupid money, a real estate bubble, credit bubble, commodities bubble, consumer credit bubble and every other kind of bubble you can imagine.  There is nothing else to inflate and the memory of this most recent bubble is oh so sweet, so don’t expect real estate to bail us out of this recession. 6) there are a few economists/analysts that got this right so pay attention to their thoughts (Mish and Rosenberg). 7) whether you want to accept the fact or not, the only other comparable time in history is the Great Depression, as both downturns were caused by major bubbles that were built on excessive leverage.  This downturn was caused by excessive leverage and a real estate bubble; the Great Depression was caused by leverage and a bubble in stock prices.   This downturn will be more severe than any other recession.  The Dow will probably decline around 50-60% from its peak of 14,100 on the Dow.  The 2002 crash was -49% and the Great Crash was -89%.

Source: The Chart Addict http://ibankcoin.com/chart_addict/?p=201

Note the similarity in the current downturn compared to the 1929 crash.  The pattern after the steep crash in 1929 and 2008 is very similar.  As for the jobs data tomorrow, it will be atrocious.  I made some coin today by going long SSO (double long S&P) at the end of the day.  I thought nervous shorts would cover just in case tomorrow’s number isn’t as atrocious as the market expects.

Some time over the weekend I will discuss my thoughts on Obama’s stimulus and why it will not save our economy.  Think about this scenario over the weekend: pretend there are 10 people in the country. 7 people are employed, 3 are unemployed, and the entire economy generates $100 of GDP.  Assume last year, the country produced $70 of GDP, but it borrowed $30mm from another country to buy boats, vacations, etc, which was collateralized by the appreciation in real estate (need to confirm debt isn’t subtracted from gdp).  Next year, real estate declines and GDP is headed toward $70 as leverage/debt is no longer available (the economy is quickly contracting).  In an effort to save the economy, the government borrows $20 from another country and uses the proceeds to create 3 new jobs for the unemployed citizens.  The 3 citizens are hired to build bridges and infrastructure.  The jobs don’t get started until mid-year and the economy continues to decline.  In the interim, the government uses another $10 of borrowed money to give the population stimulus checks. 

These measures would work if it was certain that the economy was going to rapidly accelerate back to the prior level within a year or two, but it is not.  The fact of the matter is that the country needs to adjust to its true run-rate of production, even if the adjustment is painful and entails millions of job losses.  Where will these bridge workers work once the bridge is complete?  After all this, the ten citizens will owe $60 (30+20+10) to the country’s lenders.  The citizens will repay the loans via higher taxes to the government.  Alternatively, the govt could simply refinance the loans or borrow more.  What happens if the lneders demand a higher interest rate because they have too much exposure to us, or what happens when the lenders need to apply their funds to their own economies that need stimulus?  Real estate, stocks, and the government were all one big ponzi scheme (check out Denninger’s take on this: http://market-ticker.denninger.net/archives/720-Calling-Out-The-Excuse-Makers.html   More to come on this subject…..