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Thursday, February 19, 2009

Recovery in US won't occur until end 2009

Concerns about a slowing economy continued to cast investors into the sidelines.
Minutes of the FOMC meeting revealed that the FED thinks a
gradual recovery won’t occur until year-end. Many of the FED
members saw some risk of excessively low inflation for a
protracted period and a few even warned of deflation.

If the stock market typically moves 6 months ahead of the
economy and assuming a recovery by year-end earliest, which is
what our economist seems to believe as well, this will coincide
with our view for the STI to drift down first before bottoming
out somewhere in 2Q.

20th February 2009

Monday, February 9, 2009

US stocks to fall another 40%?

The report below is his answer.


Why U.S. Stocks Could Fall
AT LEAST Another 40%

by Claus Vogt

Every major fundamental indicator relied upon by stock market analysts is unanimously pointing to a stock price plunge of at least another 40% from current levels. That would take ...

  • The S&P 500 down to the 500 level ...

  • The Dow Jones Industrials to below 5000, and ...

  • The Nasdaq to the low 900s.

Don't be surprised. To understand why, you need only step back from the trees and see the obvious chain of cause and effect:

You know that the major factor behind the current business cycle was — and is — a worldwide housing bubble and bust.

You also know that the bubble was driven by the speculative surge in mortgages and equity loans.

What you may not know is that, according to former Fed Chairman Alan Greenspan, that bubble accounted for 50% to 70% of GDP growth in recent years.

So it should come as no surprise that as soon as the mortgages and equity loans dried up, consumption and GDP growth began to take a huge hit.

Worse, the real estate bubble distorted the entire structure of the U.S. economy:

  • It created grossly misplaced investments — second homes nobody really needed, massive numbers of people drawn into the real estate business as brokers and lenders, plus a whole new industry built around mortgage-backed securities.

  • It created broad instability — too much consumption, too little savings, too many imports of goods from China and elsewhere — not to mention a huge current account deficit.

  • It fostered unsound risk-taking by the financial sector — from Bear Stearns to Lehman Brothers, from Washington Mutual to Citibank, from Merrill Lynch to the hedge fund industry. And ...

  • The end result was one of the largest, most unstable and most risky economic environments of modern times.

But now, with the bursting of the bubble,

The U.S. faces the monumental task of bringing this highly distorted economy back into alignment and putting the country back on a sound footing.

Investments that are not viable must be abandoned or aborted. A new equilibrium must be found. New price levels for stocks and all assets must be reached.

The two words commonly associated with this natural process? Recession and depression!

But you ask: Why so severe? And why must stocks fall so far?

For the simplest answer, consider the rule of thumb that has almost always held true concerning speculative bubbles: The bigger the bubble, the greater the distortions; and the greater the distortions, the graver the inevitable correction.

This rule alone leads me to expect a long, severe decline in the economy and the stock market; and this basic reasoning, in itself, supports my forecast for a 40%-or-more plunge in the broad stock market averages. But let's also take a look at the rest of my supporting arguments ...

Argument #1
U.S. Home Prices Continue to Fall

Consider the facts:

  • Despite the unprecedented home price declines to date, the median price of an American home (compared to the median income a family earns) is still 15% above its average level of recent decades. In other words, homes are still overpriced by 15% or more.

  • If you take the bubble years of 2002 — 2006 out of the equation, as any reasonable analyst would, then U.S. home prices are actually 20% out of whack.

  • But that assumes the median income of U.S. households will not go down. If you factor in declines in income, home prices can fall even further.

  • Moreover, once a bubble has burst, price corrections don't typically stop at some average statistical level; they overshoot to the downside.

Bottom line: You can expect home prices to continue to tumble. And you can expect all the ugly financial consequences of falling home prices to stay with us in the coming quarters — huge losses and bankruptcies in the banking sector.

Argument #2
The Current Crisis Is GLOBAL, Hitting
The Whole World Simultaneously

And Providing No Outside Support
To Offset U.S. Domestic Weakness

In 1990, when Japan's real estate bubble burst, the rest of the world was booming, helping Japan's export industry.

Unfortunately we don't have that kind of a cushion today. Quite the contrary, instead of relief from exports to other countries, the U.S. export sector is getting slammed by falling overseas demand. And a rising dollar will only make U.S. goods more expensive abroad, depressing demand and aggravating this problem.

Additionally, as usual in bad times, there are already strong hints of protectionism emerging around the word; the same kind of beggar-thy-neighbour policies that aggravated the Great Depression are gaining traction globally.

Argument #3
Based on Earnings, Stocks
Are Still FAR From Cheap

Let's start with the most widely followed fundamental indicator: P/E or the price/earnings ratio.

Right now the trailing 12-month P/E of the S&P 500 is 18. In other words, the average stock in the index is selling for 18 times its earnings of the past year.

That, in itself, is a very high multiple. It means that, on average, investors will have to wait a full 18 years before the investment they make in a company is matched by the accumulated earnings of the period (assuming the company can maintain its current level of profits).

Yes, 18 times earnings is much lower than it was in 1999 or 2000. But historically, 18 is still very high — even considering today's low interest rates.

See for yourself by taking a look at the following graph going all the way back to 1925. In this graph ...


Source: www.decisionpoint.com

  • The black line shows the S&P 500 Index ...

  • The red line shows how the S&P would have behaved if it had a constant P/E of 20, a level considered overvalued, and ...

  • The green line shows how it would have behaved if it had a P/E of 10, which is borderline undervalued.

For 70 long years, from 1925 to 1995, the S&P rarely reached the overvalued level and even more rarely exceeded it. In contrast, this graph makes it very clear that the period between 1995 and 2008 is an extreme aberration in terms of this all-important stock market fundamental. It leaves no doubt that ...

In the long history of the U.S. stock market, stocks have almost always been much more moderately priced. But in the current period, stocks have been, and remain, broadly overpriced.

That alone argues for lower stock prices. But the argument is even stronger when you look at these two-decade spans:

  • The 1930s and 1940s, plus

  • The 1970s and 1980s

These two periods included secular (long-term) bear markets. And as you can see, during those periods, the S&P 500 often fell to levels corresponding to a P/E of less than 10.

That was especially true when the cyclical downturns in the market were accompanied by severe recessions, similar to what we're already experiencing today. Indeed ...

The P/E of the S&P 500 dropped to 7 during the recession of the mid-1970s — and it did it again in the recession of the early 1980s.

Even if the economic contraction could somehow be less severe this time ... even assuming no decline in corporate earnings ... and even if the P/E only declines from its current level of 18 to about 10 ... that alone would take the S&P 500 Index to my target level of 500 or lower!

Thus ...

  • If the P/E of the average S&P stock were to plunge to 7 again, the market would fall to much lower levels, and ...

  • If you factor in falling corporate earnings, it could fall STILL further.

So you can see that 500 for the S&P Index is not just a reasonable target. It's actually a conservative target, erring on the side of predicting fewer adverse consequences than may actually be the case.

Argument #4
Based on Dividend Yields, U.S.
Stocks Are Equally Overvalued

The dividend yield of the S&P 500 stocks — how much you can earn in dividends per dollar invested — draws an equally bleak picture:

  • After being extremely depressed during the recent bubble years, the dividend yield of the S&P 500 has recovered somewhat to 3.39%. But despite this improvement, history tells us that the current level still signals a highly overvalued market.

  • Solid, long-term buying opportunities don't come until you can get a dividend yield of 6% or more. But to reach that level, the dividend yield on S&P stocks needs to rise by 2.61 percentage points (3.39 + 2.61 = 6.00).

  • Assuming no further dividend cuts or cancellations, to get those extra 2.61 points in yield, the price of the average S&P 500 stock would have to fall by 43.5%. (A stock selling for, say, $100 today and yielding 3.39% would have to fall to $56.50 to yield 6.00% — a stock price decline of 43.5%.)

In sum, the message from this fundamental indicator fully supports the conclusion I reached based on the P/E ratio: The market would have to fall by AT LEAST 40% or so — and that's assuming there are no further dividend cuts. But with dividend cuts inevitable, stocks will have to fall even further to match the 6% yield that might make them attractive again.


Argument #5
Earnings Are Falling, and
Doing So Conspicuously!

Earnings and earnings estimates are already down substantially since 2007, with no sign of let-up.

The following chart shows you the S&P 500 along with the GAAP-based earnings for its component stocks.

As you can see, the earnings are already down from $85 at the top of the cycle to $46 in the fourth quarter of last year. And earnings estimates for the first quarter 2009 are nearly 10% lower, at $42.

The dire situation we're in today: Companies' lack of pricing power — and a recession that leaves hardly any sector unscathed — virtually guarantees further declines in earnings, making the current market valuations even further out of line.



Source: www.decisionpoint.com

Argument #6
Earnings Will STAY Depressed
Longer Than Usual!

Among S&P 500 companies, profit margins reached an all-time high during this cycle, meaning that they must now fall back to a more normal level. This is what has happened in every major recession, and it's what almost inevitably will happen this time as well.

Specifically ...

  • In 1966, profit margins hit a high of 6% and then fell back to 3.5% in 1970.

  • In 1978, they rallied back up to 6% and then came all the way down to 2% by 1986.

  • In 1997, they rose again to 5.5% and fell back to below 3% in 2002. And now ...

  • In 2006, propelled by the big debt and high leverage of the recent bubble, they reached a record high of more than 8%.

But now, having started on a downward path again, it's highly improbable that profit margins will recover anytime soon.

Argument #7
Debt and Leverage Are Gone!

The facts here are even more shocking:

  • At the top of this cycle, the profits of the financial sector reached up to 30% of all S&P 500 earnings — thanks to psychedelic leveraging and drunken risk-taking.

  • Now, nearly all the extreme leverage in the financial sector — and nearly all the leverage financial institutions were providing other industries through 2007 — is no more.

Without a doubt, the forced sobering of the banking industry will have a long-lasting impact, and there is no way we can expect an early comeback of the old greedy days of Wall Street.

Argument #8
The Undeniable History of
Speculative Bubbles

Throughout history, after the bursting of every speculative bubble, prices almost invariably revert back to the level corresponding to the beginning of the bubble. In other words ...

Whatever boost the bubble gives to prices and values ... the ensuing bust inevitably takes it ALL back.

This held true for the global stock market bubble that burst in 1929 and for the Japanese stock and real estate bubbles that burst in the early 1990s. And if you go all the way back to the South Sea bubble, which burst in 1720, you will see this very same pattern.

So our task is simple: To identify the price level of the S&P 500 at the juncture when this entire moon shot was first launched.

And based on objective measures like the S&P's dividend yield or P/E ratio, we know quite well where and when that was:

The U.S. stock market bubble began in 1995, when the S&P 500 broke above the 500 level ... and it reached its climax in 2000, when the P/E ratio of U.S. stocks reached nosebleed levels of 38 on the S&P 500 and more than 200 on the Nasdaq.

Plus, there can now be little doubt that ...

Ever since 2000, the U.S. stock market has been in a protracted bear market!

To be sure, after the first two years of the bear market in 2000-2002, the Fed engineered a real estate bubble, which, in turn, produced a parallel stock market rally that prevailed during most of the middle years of this decade.

But now we can look back at the entire mid-decade rally and see it for what it really was: A mere interlude in a nine-year bear market (so far!) that began at the turn of the millennium.

So, looking back at history and looking ahead, it would not be unusual in the least to see the S&P 500 fall all the way back to the original starting level of approximately 500 for the S&P, validating and revalidating my forecast.

Will This Bear Market and Recession EVER End?

Of course it will, eventually. And when it does, incredible bargain opportunities will abound. But to make sure you can buy them, you must do two things:

(1) Keep your assets intact and ...

(2) Wait patiently for that day.

Sunday, February 8, 2009

Godzilla vs. King Kong

An epic battle being waged
by Jack Crooks

Dear Subscriber,


There is a battle being waged now in the world of economics. This battle is fierce. And no matter who wins, the impact will be felt far and wide. I dub this epoch struggle: "Godzilla vs. King Kong"

I'm not sure who will win, but I do have a favorite.

What I'm talking about is the intellectual and tactical battle concerning the best way to deal with the nasty recession engulfing us from a monetary and fiscal policy perspective.

There Are Two Basic
Schools of Thought Here ...

King Kong School — Intellectual Leader is Milton Friedman (Money Supply Theory)


Milton Friedman believed that the government should flood the economy with massive amounts of money to enhance and increase consumer demand.

Basic Premise: In order to keep the current recession from turning into a depression as we witnessed in 1929, the government must stimulate the economy with massive amounts of money so that we can enhance and increase consumer demand.

This is where Mr. Bernanke and President Obama's advisors reside.

Godzilla School — Intellectual Leader is Irving Fischer (Debt-Deflation Theory)


Irving Fischer's Debt-Deflation Theory holds that the government must let the invisible cleansing hand of the market wash away the debt before economic growth can resume.

Basic Premise: In order to keep the current recession from turning into a depression as we witnessed in 1929, the government must step-back and let the invisible cleansing hand of the market wash away the debt before any real economic growth can again take hold in the economy.

Here is the outline for this theory:

  1. Debt liquidation leads to distress selling

  2. The amount of deposit currency falls and the velocity of currency in circulation slows

  3. Prices plunge and the dollar rises

  4. Business values fall further

  5. Corporate profits tumble

  6. Output, trade and employment take a header

  7. Pessimism and loss of confidence spread like wildfire

  8. Hoarding becomes commonplace and the velocity of currency circulation comes to a standstill

  9. Complicated disturbances erupt in the rates of interest: a fall in the nominal rates and a rise in the real rates

My Favorite —
The Good Old Godzilla

And for this primary reason ...

When debt levels reach such huge proportions in an economy, pumping more money into the system is ineffective because the velocity of money declines.

Let me explain the term "monetary velocity" and how important it is:

Monetary velocity means how fast money is circulated in the economy — the speed in which it is spent. And it is a key measure in the definition of economic growth.

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Now stay with me ... while I explain this simple equation:

M x V = P x O

M = Money Supply

V= Velocity

P = Price Level

O= Economic Output

Ben Bernanke and those in control of U.S. economic policy believe that if the "M" in this equation is lifted, it will impact prices (reduce the deflationary scare) and output (economic growth) accordingly.

But here's the rub: When debt levels become so huge, people get scared. They save, hoard and use their money to pay down debt. They don't take on more debt or run out and spend more just because the money supply has been increased by the government.

In fact, more money pumped into the system only adds to the total debt in the economy, and therefore prolongs the downturn.

The practical policy is to accept the fact that "V" shrinks dramatically at times like these — thus we have the big dip in "O" (output) and "P" (prices).

Here is How the Market
Cleanses the System ...

Debts get paid down; reserves are rebuilt with increased consumer and institutional savings. This provides the eventual pool of capital for fresh growth.


At a time of major risk aversion, the world will flock to its reserve currency — the U.S. dollar.

And once the debt is removed, monetary velocity "V" increases to more normal levels; therefore tinkering with money supply isn't necessary.

Sadly, I think, all governments are on the side of King Kong. And their flood-the-market monetary policies may make this global recession a whole lot worse.

So from a currency perspective I think it means this: We will be locked in a sustained period of risk aversion (rising unemployment, deflation, and sovereign debt defaults) as this crisis plays out. And in a world of major risk aversion, that mantle rests at the feet of the world reserve currency — the U.S. dollar.

Best wishes,

Jack

Friday, February 6, 2009

This Bailout Is Great!


A lot of people have been complaining about the bailouts. This is understandable. The basis of capitalism is that the strong survive, while the weak collapse. It's galling to see people rewarded for failure.

The problem is that, as a country, we can't make decisions based simply on anger or capitalistic dogma. We have a responsibility to do whatever will help ensure this country's future prosperity. And right now, that means bailing out the banks, increasing regulation, and stimulating the economy.

Capitalism's blind spot
Capitalism works well, generally allocating resources efficiently. It's the reason why there's usually food on the supermarket shelves, while there often wasn't in the U.S.S.R.

But capitalism has its blind spots, too. In a capitalist system, it's rational for bank executives to take huge risks in order to pad bonuses based on short-term metrics. Bank executives don't care about systemic risks -- often they barely care about their own shareholders. So, regulation is necessary to reduce systemic risk.

Unfortunately, our regulators disliked regulation, and last year, the resulting crisis drove the banking system to the brink of collapse.

House of cards
And I really mean collapse. Of the big five investment banks, only Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) are still standing, with Lehman, Bear Stearns, and Merrill Lynch all either bankrupt or sold.

Same with the biggest retail banks. Citigroup (NYSE: C) fell from over $50 per share to under $5 per share despite huge cash infusions, and Bank of America (NYSE: BAC) looks to be getting there. Wachovia, the fourth-biggest bank, was acquired. Washington Mutual, the sixth-biggest, became the biggest failure in U.S. banking history.

Without government assistance, it seems likely that most of the top-tier banks would have collapsed. As if that weren't enough, the Bank Insurance Fund (BIF) -- which provides deposit insurance -- has less than $100 billion, enough to cover only 1.01% of outstanding deposits. Citigroup alone has over $600 billion in deposits. By itself, Washington Mutual would have drained the BIF if the Federal Deposit Insurance Corp. hadn't used sleight of hand to transfer WaMu's operations to JPMorgan (NYSE: JPM).

With widespread bank failures, deposit insurance would falter, and the taxpayers would be footing the bill regardless. That's why we see all these acquisitions -- because the banking system can't handle the failures. It's cheaper for the country to just save the banks.

The domino effect
If we do let the banks go under, there will be huge problems, because our whole economic system runs on credit. How many small companies use lines of credits to handle seasonality in their businesses? How many large companies rely on sales of commercial paper? If that money is unavailable, many completely viable businesses will go under because of liquidity issues.

Any company that uses debt is vulnerable. Procter & Gamble (NYSE: PG) is practically invincible in any normal situation. But it has $35 billion in net debt. What happens when its lenders ask for some of that money back, and it has to borrow at 15% to get the cash? Wal-Mart (NYSE: WMT) has $41 billion in net debt. When nobody wants to lend, how do you borrow $41 billion?

What happens when the farmers, truckers, and other businesses making up the backbone of our infrastructure, fail? Will there still be food on the supermarket shelves? I don't know, but I'm not eager to find out.

A New Deal
In fact, the history of the Great Depression shows what happens when you start killing the banking system. Between 1929 and 1933, about one in five banks went under. As you'd expect, these bank failures took a massive toll on the economy, with real GDP falling by 29% and unemployment hitting 25%.

At that point, President Franklin Roosevelt stepped in with a plan called the "New Deal." He shut down the banks and allowed only sound banks to reopen. He passed the Emergency Banking Act, which made federal loans available to banks. Then, he enacted the Glass-Steagall Act, establishing deposit insurance and preventing depository banks from being investment banks, reducing the risk of banks blowing up because of bad investments. (Unfortunately, Glass-Steagall was repealed in 1999, which is one reason why banks were able to trade asset-backed securities (ABS) and blow up the system nine years later.)

After these actions restored confidence in the banking system, Roosevelt focused on employment through numerous public works projects and agricultural programs.

The results of this government intervention were impressive. GDP skyrocketed from 1933 to 1937, posting real growth of 9.4% annually -- a huge rate for a developed country. Unemployment fell to 14.3%.

Reasons for optimism
Warren Buffett knows this history, and that's probably why he said that the bank bailout was "absolutely necessary to avoid going over the precipice." Now he's confident that America will bounce back.

The government's actions have helped to restore confidence in the banking system -- a TED spread down from 5 to 1 indicates that banks are more willing to lend to each other now than any time since September. Now, President Obama, like Roosevelt, is working on programs to help Americans get back to work.

The Foolish bottom line
To me, it seems likely that these government interventions will pave the road to recovery. The world's richest man seems to agree, and says that if stocks continue to trade at bargain prices, he'll put his entire personal portfolio into equities. That's why I think now is the time to find undervalued stocks, invest, and grow rich.


Thursday, February 5, 2009

Warren Buffet's advice for 2009

We begin this New Year with dampened enthusiasm and dented optimism. Our happiness is diluted and our peace is threatened by the financial illness that has infected our families, organizations and nations. Everyone is desperate to find a remedy that will cure their financial illness and help them recover their financial health. They expect the financial experts to provide them with remedies, forgetting the fact that it is these experts who created this financial mess.

Every new year, I adopt a couple of old maxims as my beacons to guide my future. This self-prescribed therapy has ensured that with each passing year, I grow wiser and not older. This year, I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser.

* Hard work: All hard work bring a profit, but mere talk leads only to poverty.

* Laziness: A sleeping lobster is carried away by the water current.

* Earnings: Never depend on a single source of income. [At least make your Investments get you second earning.]

* Spending: If you buy things you don't need, you'll soon sell things you need.

* Savings: Don't save what is left after spending; Spend what is left after saving.

* Borrowings: The borrower becomes the lender's slave.

* Accounting: It's no use carrying an umbrella, if your shoes are leaking.

* Auditing: Beware of little expenses; a small leak can sink a large ship.

* Risk-taking: Never test the depth of the river with both feet. [Have an alternate plan ready.]

* Investment: Don't put all your eggs in one basket.

I'm certain that those who have already been practicing these principles remain financially healthy. I'm equally confident that those who resolve to start practicing these principles will quickly regain their financial health.

Let us become wiser and lead a happy, healthy, prosperous and peaceful life.


__._,_.___

Wednesday, February 4, 2009

Blame USA - World Economic Forum

Chinese Premier Wen Jiabao blamed his country's problems on America, saying:

An IMF spokesperson said:

"Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth."


Russian Premier Vladimir Putin pointed

"Today, investment banks, the pride of Wall Street, have virtually ceased to exist."


An IMF spokesperson said:

"Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth."