The ongoing financial turmoil and financial discussion thread

[MoneyGuy]

Remember that the deeper this goes, the better the chance of the rebound happening. When it does, it will be spring loaded. Stock prices are cheap. It's an inexact science so there is no point in going into an elaborate dissertation. Using historic measures, normalized earnings, book value and free cash flow, stocks around the world are cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom. Nevertheless, the 4 per cent dividend return on the S&P 500 exceeds the yield on the 10- and 30-year Treasury bonds for the first time in 50 years. If emerging-market equities, where the growth is, at six to eight times earnings are not cheap I don’t know what is.

Stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the '30s, and the spread between the price and the 200-day moving average at 34 per cent is the greatest since July 19, 1932. The US market is down almost 50 per cent from its highs, Europe is off 55 per cent, emerging markets 65 per cent, with some unfortunates like Russia off 70 per cent. History shows that even in enduring, secular bear markets there are not just 20-per-cent bounces but usually one 30- to 50-per cent rally. We should be about due.

[czure32]

received this from my manager the other day and thought it was relevant to the thread and good for a chuckle

The Investment Banking Christmas Card

[flamesfever]

I have been thinking lately that for many of you young people, this would be an excellent time to take a course in investing. It would probably have a huge impact on what you will be worth 20 to 40 years from now.

Maybe some of you can recommend a course.

PS. I don't mean to insult all those who are already quite knowledgable on the subject.

[Claeren]

Originally Posted by MoneyGuy

Remember that the deeper this goes, the better the chance of the rebound happening. When it does, it will be spring loaded. Stock prices are cheap. It's an inexact science so there is no point in going into an elaborate dissertation. Using historic measures, normalized earnings, book value and free cash flow, stocks around the world are cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom. Nevertheless, the 4 per cent dividend return on the S&P 500 exceeds the yield on the 10- and 30-year Treasury bonds for the first time in 50 years. If emerging-market equities, where the growth is, at six to eight times earnings are not cheap I don’t know what is.

Stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the '30s, and the spread between the price and the 200-day moving average at 34 per cent is the greatest since July 19, 1932. The US market is down almost 50 per cent from its highs, Europe is off 55 per cent, emerging markets 65 per cent, with some unfortunates like Russia off 70 per cent. History shows that even in enduring, secular bear markets there are not just 20-per-cent bounces but usually one 30- to 50-per cent rally. We should be about due.

Well I don't think you are wrong, and I have always said as much -- there ARE good buys for people that have enough cash (while still holding cash out of the market) AND that volatility offers great opportunities for those brave enough to ride it.

I am just not sure that any (not a single one) of the underlying problems in the American economy have been fixed.

So yeah, sure, we might see a on-paper-rally. Not sure that helps anything in the long term.

America has still commited about 7.5 TRILLION so far in either direct bailouts or guarentees on debt, they have still been forced to socialize virtually their entire finance industry and they are still facing the very real (and likely) collapse of their manufacturing sector. Real estate has already collapsed and consumer spending, as it is tied to the rest, is also on the brink of collapse.

What do you think, a 20%-30% rally and then another 50% plunge to the true bottom??

I am confident that prices right now are not nearly as low as you (or many others) might think they are but I also know that the day to day market is not always logical.



The 'deflation v. hyperinflation' debate and the US dollar/US debt/US deficit financing/interest rate situations are big players in how it all plays out though.... I don't see how any of it turns out well....

I think we are just finishing the first stage of this collapse (and eventual recession).

What happens with GM (and Ford/Chrysler) might be the trigger for the next phase? And if not then perhaps Obama taking over and implimenting a new set of reforms or maybe a massive spike in unemployment?

Collapse in the American Dollar also goes without saying I am just not sure when that starts. Next year? 10 years from now?



Claeren.

[Phanuthier]

Originally Posted by flamesfever

I have been thinking lately that for many of you young people, this would be an excellent time to take a course in investing. It would probably have a huge impact on what you will be worth 20 to 40 years from now.

Maybe some of you can recommend a course.

PS. I don't mean to insult all those who are already quite knowledgable on the subject.

I think Slava, MoneyGuy and Claeren are giving us a pretty good lesson here.

Just a question for our guru's, are emerging market ETF's the last to reach the bottom of the bear and the last of the pack to begin a bull? I'm still saving a good % of $ to put into emerging markets, but I'm sort of holding off there and letting the dust settle there.

[Slava]

A) That investment banking Christmas card is hilarious!!

B) A lot of what you are bringing up here Claeren is akin to the "predictions" that Jeff Rubin made earlier this year. When the TSX was screaming ahead he called the year end to be 16,200....when oil was nearly $150 he called it to hit $200. Of course as the markets were sliding CIBC came out and said the TSX could dip as low as 9500...and it did, within about 15 minutes.

I don't really see a lot of factual information to support a rally and then another 50% drop. Historically it hasn't happened. As moneyguy pointed out this slide is in-line with other events in stock market history (although there are a few differences).

I guess my point is that people who thought the uptimes would last forever were wrong....and people who think that the entire economic system is going to collapse at this point will be proven wrong as well.

In a speech I gave last week I likened what is happening now to the Copernican Revolution (a borrowed idea, I admit). Basically the financial world still acts as though the US is the center of the financial universe (just as everyone acted as though the earth was the center of the solar system back in the day). The real center is shifting to China, and this process doesn't happen overnight and is not without some pain in the west. It also doesn't mean that the entire system crumbles as we make this type of transition however.

[Nancy]

Originally Posted by Slava

A) That investment banking Christmas card is hilarious!!

B) A lot of what you are bringing up here Claeren is akin to the "predictions" that Jeff Rubin made earlier this year. When the TSX was screaming ahead he called the year end to be 16,200....when oil was nearly $150 he called it to hit $200. Of course as the markets were sliding CIBC came out and said the TSX could dip as low as 9500...and it did, within about 15 minutes.

I don't really see a lot of factual information to support a rally and then another 50% drop. Historically it hasn't happened. As moneyguy pointed out this slide is in-line with other events in stock market history (although there are a few differences).

I guess my point is that people who thought the uptimes would last forever were wrong....and people who think that the entire economic system is going to collapse at this point will be proven wrong as well.

In a speech I gave last week I likened what is happening now to the Copernican Revolution (a borrowed idea, I admit). Basically the financial world still acts as though the US is the center of the financial universe (just as everyone acted as though the earth was the center of the solar system back in the day). The real center is shifting to China, and this process doesn't happen overnight and is not without some pain in the west. It also doesn't mean that the entire system crumbles as we make this type of transition however.

I'm not saying this is going to happen, just taking issue with the claim that it has never happened before. It happened in 1932, after the bull market recovery from the 1929 crash.

http://en.wikipedia.org/wiki/1929_crash

An interim bottom occurred on November 13, with the Dow closing at 198.6 that day. The market recovered for several months from that point, with the Dow reaching a secondary peak (ie, dead cat bounce) at 294.0 in April 1930. The market embarked on a steady slide in April 1931 that did not end until 1932 when the Dow closed at 41.22 on July 8, concluding a shattering 89% decline from the peak. This was the lowest the stock market had been since the 19th century.[26]

[Claeren]

Originally Posted by Slava

A) That investment banking Christmas card is hilarious!!

B) A lot of what you are bringing up here Claeren is akin to the "predictions" that Jeff Rubin made earlier this year. When the TSX was screaming ahead he called the year end to be 16,200....when oil was nearly $150 he called it to hit $200. Of course as the markets were sliding CIBC came out and said the TSX could dip as low as 9500...and it did, within about 15 minutes.

I don't really see a lot of factual information to support a rally and then another 50% drop. Historically it hasn't happened. As moneyguy pointed out this slide is in-line with other events in stock market history (although there are a few differences).

I guess my point is that people who thought the uptimes would last forever were wrong....and people who think that the entire economic system is going to collapse at this point will be proven wrong as well.

In a speech I gave last week I likened what is happening now to the Copernican Revolution (a borrowed idea, I admit). Basically the financial world still acts as though the US is the center of the financial universe (just as everyone acted as though the earth was the center of the solar system back in the day). The real center is shifting to China, and this process doesn't happen overnight and is not without some pain in the west. It also doesn't mean that the entire system crumbles as we make this type of transition however.

Maybe!


I am just not sure there is anything to build a rally off of though. Solvent consumers? Nope! Solvent companies? Nope! Solvent Government? Nope!

But yep, I might be overstating it. I mean they are ALL not actually insolvent yet, maybe they will find a way to reduce those tens of trillions in debt without it actually impacting equity valuations?

I still like the 7300 floor in the DOW so that is higher than a 30% rise +50% drop?

I could also see the market rallying while the dollar plummits -- in effect meaning the market gains are an illusion.




Claeren.

[Slava]

I see, there is the faulty premise though. There are dozens of very solvent companies today. In fact there are dozens of companies that are valued for less than the cash they hold on their balance sheets, let alone future growth. In other words, if a company has 100 Billion in cash the stock market today values the company at 90 billion....hardly insolvent!

There are actually a fair number of solvent consumers as well. Sure there are job losses, and there are people who are not solvent, but not everyone is in the same boat.

Fact is that there is a lot of cash sitting on the sidelines both in the US and Canada right now. That doesn't make for anything less than concrete gains when the money begins to move in.

[MoneyGuy]

Originally Posted by Phanuthier

I think Slava, MoneyGuy and Claeren are giving us a pretty good lesson here.

Just a question for our guru's, are emerging market ETF's the last to reach the bottom of the bear and the last of the pack to begin a bull? I'm still saving a good % of $ to put into emerging markets, but I'm sort of holding off there and letting the dust settle there.

I'm not sure that that is predictable. However, it is very likely that when the recovery starts, one of the market leaders in terms of intensity (not stimulates the recovery) will be emerging markets. Emerging markets tend to go down more than the rest of the market (as seen with EMs down much more than North America and Europe, for example) and they'll likely go up more than the rest of the markets do when they recovery starts. When to get in? I'd probably DCA in over a period of no more than six months, preferably about four months. Four months is actually what I'm doing, not in emerging markets but across the investment spectrum.

[Phanuthier]

(What's DCA? And thanks)

[Top Shelf]

Originally Posted by Phanuthier

(What's DCA? And thanks)

Dollar Cost Average

[Potty]

Originally Posted by MoneyGuy

Remember that the deeper this goes, the better the chance of the rebound happening. When it does, it will be spring loaded. Stock prices are cheap. It's an inexact science so there is no point in going into an elaborate dissertation. Using historic measures, normalized earnings, book value and free cash flow, stocks around the world are cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom. Nevertheless, the 4 per cent dividend return on the S&P 500 exceeds the yield on the 10- and 30-year Treasury bonds for the first time in 50 years. If emerging-market equities, where the growth is, at six to eight times earnings are not cheap I don’t know what is.

Stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the '30s, and the spread between the price and the 200-day moving average at 34 per cent is the greatest since July 19, 1932. The US market is down almost 50 per cent from its highs, Europe is off 55 per cent, emerging markets 65 per cent, with some unfortunates like Russia off 70 per cent. History shows that even in enduring, secular bear markets there are not just 20-per-cent bounces but usually one 30- to 50-per cent rally. We should be about due.

Bear with me here, as I am fairly young and new to economics/investing debates, but what I don't understand is that so many "MoneyGuy"s are predicting the stock market rebound based on its history when US economic fundamentals are very different than they were during the times you are using as comparisons.

Massive trade deficits, a service-based economy, massive consumer debt, low savings rates, budget deficits about to reach new heights with the increasing amount of corporate bailouts don't make historic stock market rebounds a very good comparable IMO.

Betting on the market to bounce back because it always has when the underlying numbers are horrible is pretty risky, no?

[Phanuthier]

Originally Posted by Top Shelf

Dollar Cost Average

Ah right, thanks TS. I do see alot of people DCA emerging markets.

[Slava]

Originally Posted by Potty

Bear with me here, as I am fairly young and new to economics/investing debates, but what I don't understand is that so many "MoneyGuy"s are predicting the stock market rebound based on its history when US economic fundamentals are very different than they were during the times you are using as comparisons.

Massive trade deficits, a service-based economy, massive consumer debt, low savings rates, budget deficits about to reach new heights with the increasing amount of corporate bailouts don't make historic stock market rebounds a very good comparable IMO.

Betting on the market to bounce back because it always has when the underlying numbers are horrible is pretty risky, no?

If that were the only reason than yes, it would be pretty risky. But there are a lot of different factors that make investments pretty attractive right now and over the coming weeks/months.

[maverickstruth]

Originally Posted by flamesfever

I have been thinking lately that for many of you young people, this would be an excellent time to take a course in investing. It would probably have a huge impact on what you will be worth 20 to 40 years from now.

Maybe some of you can recommend a course.

PS. I don't mean to insult all those who are already quite knowledgable on the subject.

Not a course, but I strongly recommend reading The Four Pillars of Investing by William Bernstein. It can be a bit of a slog in places, but I really found it a great foundational read that put a lot of the pieces in place in my own understanding. The Calgary Public Library has at least one copy of it, so I'd recommend checking it out and giving it a read if you're really interested.

I also follow a number of blogs, although the ones I read tend to be more general personal finance, rather than specific investing information. And of course, as was mentioned, the resident CP gurus make for great reading too!

[Potty]

Originally Posted by maverickstruth

Not a course, but I strongly recommend reading The Four Pillars of Investing by William Bernstein. It can be a bit of a slog in places, but I really found it a great foundational read that put a lot of the pieces in place in my own understanding. The Calgary Public Library has at least one copy of it, so I'd recommend checking it out and giving it a read if you're really interested.

I also follow a number of blogs, although the ones I read tend to be more general personal finance, rather than specific investing information. And of course, as was mentioned, the resident CP gurus make for great reading too!

Links?

[Cowboy89]

Originally Posted by Potty

Bear with me here, as I am fairly young and new to economics/investing debates, but what I don't understand is that so many "MoneyGuy"s are predicting the stock market rebound based on its history when US economic fundamentals are very different than they were during the times you are using as comparisons.

Massive trade deficits, a service-based economy, massive consumer debt, low savings rates, budget deficits about to reach new heights with the increasing amount of corporate bailouts don't make historic stock market rebounds a very good comparable IMO.

Betting on the market to bounce back because it always has when the underlying numbers are horrible is pretty risky, no?

I would tend to agree. His arguement is very anecdotal, I would actually totally ignore his 'spring loaded' comment as there is little basis other than the history of market returns from different eras that experienced a different set and degree of economic difficulties. However that being said a lot of what you read about total economic collapse is really just overreaction by a world that hasn't really experienced even a small taste of bad economic times in 20 years. The experts and worker bees of today's financial world were just begining their careers in the late 80s early 90s and the experts that went through the last serious recession (1980-81) are either passed on or retired. Fear of unknown has driven down equity prices. The matter for debate is rather how much has the real intrinsic value of stocks plummeted. If it's only 30% then we're due for a 20% increase to shape up as fear subsides and the markets start reflecting fundamental values again. MoneyGuy is totally right that there will be a subsiding fear bounce up. It's really a question of how mispriced on the downside equities are. Holding equities now waiting for the surge exposes you to the risk that the underlying fundamentals continue to erode and the bounce up gets diminished down to zero.

[Phanuthier]

I'm actually with MoneyGuy, I think this thing is spring loaded for sure. I know this is a little specific, my university graduating class (where our pay varies $54,000 to $110,000 CND with signing bonuses) are just entering the market now seeing the opportunities pop up. You can see this with some of the crazy 700+ and 900+ gains on the DOW and likewise % on the NASDAQ. Those who are scared are probably getting shaked out, while alot who see opportunity are starting to enter, and while there are alot of jobs lost, there are alot entering the work force making good $ and are ready to invest.

[maverickstruth]

Originally Posted by Potty

Links?

Haha sorry, I guess that would have been the next logical thing to post, now wouldn't it?

Here's some of them... I also tend to get on rolls some days where I just click through various blogrolls and see where I end up. I find I can get a real variety of perspectives that way. Also -- some of the names are really terrible, but the content for the most part is alright

I'm sure there are a bunch of great ones that I'm forgetting, but here are some that are in my feedreader... The latter 4 are Canadian, which is nice.

http://www.thesimpledollar.com
http://www.getrichslowly.org
http://www.iwillteachyoutoberich.com
http://www.canadiancapitalist.com
http://www.four-pillars.ca
http://www.milliondollarjourney.com
http://blog.canadian-dream-free-at-45.com