Friday, February 20, 2009

The Firing Squad

The market is going down like the proverbial "rock in a pond".

I think that it is highly probable that Citi, Bank of America, J.P. Morgan, GE, Ford, and GM will lose all equity value sometime in the next 90 days (IF GE survives it will be by cutting the dividend to ZERO - they might as well be dead given that outcome).  Considering how little market capitalization these companies have left, you might think that the this will matter little to the value of the index.

Maybe the problem is that the people are coming to the realization that the emperor has no clothes (I don't mean Obama, I mean the entire system).  

This not all bad.  If you are a typical American - no savings, working stiff - this might just be the best thing that ever happened to you.  Average folks won't be so eager to go into debt for consumer pleasures, which only enslaved them to debt repayment that benefitted 1/2 of 1% of the population.  

I came from a family on the lower end of the working class scale.  I remember getting married as a young man and trying to buy a house just north of New York City.  This is late 1980's and I am in my late 20's, mind you, and even back then the house we bought cost us $500,000 and had $12,000 PER YEAR property taxes.  I had been working since I was 14 or so, and I was a good saver, so I had the 20% down payment.  I still had a mortgage for $400k at 7.875% and taxes of $1k per month.  All I did with me life was work.  I commuted into the city for an hour, worked 10 or 11 hours and commuted home for an hour.  I was a wage slave in EVERY sense of the word.  Between income taxes and property taxes and insurance and family expenses I didn't have much left over.  Good thing I had some company stock to count on for my retirement... Oh, wait!  The company was BEAR STEARNS!!!!  SEE WHERE THIS IS GOING??!!  

So perhaps smashing house prices and property values will lower mortgage payments and property taxes.  Is that really a terrible thing?  Maybe for wealthy folks collecting payments on mortgage bonds, but not for the young family starting out.

Many things got out of balance in the system.  We need to accept that the adjustments will happen.  We need to end the entitlement mentality.


On a happier note...

At THIS moment, my bet is that the market is no more than 20% from THE bottom (and I reserve the right to change my mind and go the other way on a moment's notice) - until the Oil Import Shortages show up.  It then follows that some sectors will bottom before the index bottoms and some after, the same with individual stocks (just look at the Ag stocks).  For my money, I began to buy some energy equities that I sold during the last rally, and I will get aggressive on any big sell offs that bring the S&P below 700.  Doesn't mean I am right, but I think energy equities bottom before the market does.

How does this dove tail with my view of the Pension Blow Up?  If  we see a 650 - 700 S&P, the Pension Benefit Guarantee Corp.'s liability will be about $700 Billion.  The administration will be in the unsavory and unacceptable position of having to ask tax payers that do not have a pension to fund those that do.  This would likely spark the political crisis that I stay up at night about - too easy... so it won't happen that way.  More likely the Administration will guarantee some kind of pension for EVERYONE.  THAT will precipitate the currency crisis (the other thing that keeps me up at night), only that too is too visable.... so it won't happen that way, either.... but you get the idea.

Could the equity markets go lower than the 6000 Dow and 650 S & P lows that I envision?  Yes, but it would be difficult.  Bear market rallies will be vicious, and if you are on the right side of them they are the best feeling you can have with your clothes on.

For people approaching or in retirement, the likelihood of a further 20% decline in the equity markets should not be taken lightly.  After all, a 30% Bear Market Rally from that point would put you into the black little more than a 3 year CD at your local bank (keep any bank deposit below $250k TOTAL at any one bank).

Good Luck!

Mentatt (at) yahoo (d0t) com


bureaucrat said...

While I have been one of your readers who likes to point out that the sun still rises, the gas stations are still open and filled, and the Jewel is still loaded to the roof with food, what will happen to the equities markets has been less optimistic for many months. Who in the hell is going to buy your stock from you? The baby boomers, who are going to start panicking soon, as time has run out to make up losses, and they scramble to sell for any price they can get? The hedge funds, who will never be able to borrow the hundreds of billions again to invest anywhere? The internationals, who were just as dumb as we were buying stuff they couldn't afford? The peak oilists, who guarantee oil prices to the moon. And lastly, earnings and credit constrained, making companies fall to their knees? Every one has been of the mind that another great depression could never occur again, cause we were too smart to let it happen again. I say that the 75 year cycle is alive and well, and trying to predict a "bottom" in this environment is somewhat foolhardy. There just are no white knights this time.

Greg T. Jeffers said...

Glad you asked.

The equity market will bottom when dividend income exceeds interest payments to bond holders.

Of course, the markets COULD go to zero. If so, we have littel risk in the markets... we will have entered "Mad Max".

sharon said...

thanks for the information....

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