Another Bloodbath?

by: Index Universe October 24, 2008 | about stocks: DIA / EEM / EFA / GLD / IEF / SPY / UUP    
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By Jim Wiandt

For those of you just waking up this morning, I should warn you that it's not going to be pretty today. Time to give up and cash out?

The FTSE 100 is down over 9%, the Nikkei dropped 7%, Dow futures are trading down about 500. Meanwhile OPEC announces slashed production and markets react by lopping another $4 per barrel off the price of oil down to $63 while again oddly, gold has dropped off a cliff, to $686 or so. You'd almost think it was time to buy Gold (GLD) if there weren't so many other values around.

Currencies have gone completely wacky, with the dollar at a 13 year low vs. the yen, at 95 yen to a buck, the dollar at a 5-year high of $1.55 vs. the divebombing British pound and at a 2-year high vs. the euro to $1.25.

As a sidenote for Gold and currency notes, my favorite, often referred to sites are The Bullion Desk and Oanda.com.

In short, things are looking as insane as they have in what has been a very, very crazy month of October.  So were my Five Ways the Global Economy is on the Rebound blog complete lunacy?

Well, no. First let me clarify what I meant.  What I did not mean is that the Dow is going to soar toward 15,000 in the next 6 months (or maybe even in the next 6 years).  What I did mean (and Matt Hougan got this right in his follow-up) is that it appears to me that we are not headed into the Second World Depression.  I mean (as Matt said) that the financial system seems to be stabilizing. And that is the big thing, the fundamental issue keeping things from finding some equilibrium.

And the TED spread has come way down from its peak. That, the LIBOR and Treasury rates are the key metric to look out to see how money can move around. I wouldn't be surprised to see it give back a little bit in the unease around plummeting equity markets, but fundamentally the banks have the cash and those who have taken money from the government have orders to put it to use.

So depression seems less likely, but strap on your seat belts, because this is going to continue to be a very rough ride in terms of volatility everywhere, and though the financial system appears it won't fail outright, I think we've got a long hard slog through a serious recession in front of us.  Matt is right on that. Officially we'll almost certainly enter recession in 2009 (at least according to intrade, which has the probability of a recession in 2009 almost as high as the probability of an Obama victory in 2008).

Speaking of politics, here's an analysis of stock plays on a McCain or Obama win.  It's interesting, but almost seems trite in the current market with great values seemingly in abundance.

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This article has 30 comments:

  •  
    Oct 24 07:59 AM
    Let's hope that the worst is over, although I severely doubt it!
    Reply | Link to Comment
  •  
    Oct 24 08:36 AM
    Wow, you guys are amazing. Can I throw money at you?
    Reply | Link to Comment
  •  
    Oct 24 08:43 AM
    "A wink is as good as a nod to a blind horse" - Quote from a drunken student during my college days,

    You guys are clueless if you think thinks are improving. We are in the throes of a major deleveraging and an unprecedented loss in the velocity of money. Money is not circulating and our money velocity is cratering. Fed wholesale dumping of cash is doing no good because that cash is immediately being "stashed" and hoarded. Unless people and banks start spending this money, we will continue to crash. Big downward moves like the market will show this morning do not help the sentiment of those with the money.
    Reply | Link to Comment
  •  
    Oct 24 09:20 AM
    What amazes me is "even" I was able to see all this coming. Refer to a comment I posted long ago. I went to total cash June 7 2007. Yes I missed the top and many in-out oportunities since I went cash, but I sure as heck missed the bottom as a buy and hold invester. My point is I'm not an economic or investing wizzard. Why didn't the Wall Street "brains" see this coming?
    Reply | Link to Comment
  •  
    Oct 24 09:22 AM
    John Maynard Keynes: Lavender & Bolshevik
    www.knology.net/~bilrum/keynes.htm
    Reply | Link to Comment
  •  
    Oct 24 09:25 AM
    I agree with Carl Spackler. Your group is nuts and have consistently given bad advice for the last year. We'll likely see a big dead cat bounce next year. The market has thrown the baby out with bath water in every sector and some sectors are drastically oversold. And you'll get a temporary psychological lift from a new Administration with the 'Obama' socialist euphoria (not that McCain could have solved this either, I am a Ron Paul fan).

    But the 'real' economy made up of the middle class, the majority being small business which creates the most jobs has been destroyed. Every other person I know is behind on bills, has low credit ratings and are petrified there next on the layoff block. And the true issue is that only half the overcapacity created from excess leverage has come off (as I anticipated would happen). The other half (total of 20+% from 2000) will be coming off over the next three years. The next formation of a bull market will be 2013 and that is if Washington can create jobs through upward mobility infrastructure programs.

    I do believe you'll see private equity begin looking at early stage or start ups next year to begin to create innovation and jobs. That in and of itself will restore the economy at some point. If Washington if it is smart will incentivize this process. Washington should stop resisting the fact that Efficient Market has failed and consumers are already heading back to Save and Invest mode.
    Reply | Link to Comment
  •  
    Oct 24 09:28 AM
    They saw it coming and those with half a brain cashed in there holdings. The rest was hiding the truth in the balance sheets hoping government would be competent to stimulate enough growth to avoid a catastrophe.
    Reply | Link to Comment
  •  
    Oct 24 09:58 AM
    I'm just going to toss this out there: EQUITIES WILL ALL BE EQUAL TO 0 before this mess is over.

    MONEY IS WORTHLESS!
    Reply | Link to Comment
  •  
    Oct 24 10:07 AM
    Gold is down to $666, broke the critical 700 level that is support for a long time. This bodes ill for anyone. Whole market is down. Budgets are tight. Jobs are scarce.

    Demand of finished goods dropped off a cliff. Ask any car/bestbuy/home/furni... driver/gasoline dealer.

    This is the clearest indication that we're running headlong into a deflation.

    And then fed's money lending/giving spree is getting stuck inside banks (shoring up balance sheet), recycled right back into buying treasuries, and fighting a losing battle with the amount of money currently evaporated by the deleveraging event.

    Fed print about 2 trillion so far, which on it's own sounds like a lot. But the market's deleveraging lost more then 4 already (and perhaps 10 times that still not "reported" or in the pipelines).

    Sounds like a losing battle to me.
    Reply | Link to Comment
  •  
    Oct 24 10:09 AM
    With the above happening in real time.

    I hear things like:

    Equities/Gold/House/Ha... Asset is King.

    all the time!

    Unless there's mass delusion out there or I'm not invited to smoke something great.

    What gives? (beyond random hope)
    Reply | Link to Comment
  •  
    Oct 24 10:29 AM
    Exactly, loco rico -- however how low can it go? That is utterly anyone's guess, however with every $1 leveraged 1280 times (Freddie and Fannie) that is a heck of a lot of vaporization...

    Thoughts?
    Reply | Link to Comment
  •  
    Oct 24 11:03 AM
    What we are seeing today ,is a history in making.We are reaching the final stages of the market consolidation and getting ready for an unprecedented market rally .Today's market is a response to the events in Asia and Europe .These economic zones are today ,where the U.S economy was about a year ago.In that time we have identified the problems and the issues and are addressing them.While there is a lag between addressing the economic /structural ills and the economic response ,we are on the way to a major economic/market rebound.The strength in the dollar and the Gold implosion are reflective of the global recognition that the dollar (Not gold) is the ultimate" flight to quality".
    It is a matter of short time only before we will see a dollar conversion(cash) into a dollar denominated assets -that includes the equities and the real estate(U.S).
    Depression?it is a word coined by CNBC to attract the audience.
    Recession? classical recession (two consecutive quarterly declines) will likely to be deflected .The FEd should cut FF another 50 bps.
    The only thing that is restraining the major market rally is the mass psychosis/paralysis.
    Sit back and relax.
    The dollar strength is reflective of the global fears of the Armageddon outside the U.S.
    One more time ,these record dollar inflows will shortly induce an unprecedented stock market really and meanigfull stability in the housing sector to be followed by the price spike in the real estate market.
    This is history in making. The US GDP will attain 5% growth by the second half of 2009.-hard to believe?
    Then againg I have predicted the current turmoil on the Bloomberg TV (Brian Sullivan) September18 /2007 (FED) -I was right.Now I am logical-and will be right.
    Reply | Link to Comment
  •  
    Oct 24 11:11 AM
    to NeilEzell

    because the guys on wall st. have no brains!just fancy suits,with relatives who got them thier overpaid,to put it midely,thier jobs.if they really cared,then how come they all take thier multi million dollar bonuses after costing people thier life's savings.here is the answer.

    THEY DO NOT CARE ABOUT ANYONE BUT THIER LOUSY,STINKING,SELVES.

    THEY ALL SUCK!!!
    Reply | Link to Comment
  •  
    Oct 24 11:11 AM
    Where's all the jobs, Gabe?
    Reply | Link to Comment
  •  
    Oct 24 11:19 AM
    gabe:

    What is the fundamental driver for US growth in your upcoming boom?

    Until you can answer that question, what you've described is only market psychology guesses.

    1. Consumers are tapped out.
    2. Housing as a growth engine is done, we've miraculously build so much houses that demand will be sated for a long time. Boomers are past their prime home-owning demographic peak and is going to downsize/cash-out going forward and act as a net drag on home values.
    3. Export as a solution is completely toast. Rest of the world is in turmoil and cannot import our products with their demand nor buying power.
    4. Debt as a money-infusing mechanism is done. We'll be lucky if it doesn't blow up in our face, let alone provide an engine for growth. A cousin of debt is the mandatory govt obligations (aka Social Security, Medicare) is also going to become a net drain on resources from the economy.
    5. Boomers are moving more and more into sunset years, and that engine of net demand gain is becoming more a net demand drain.

    Until you solve the fundamental economics problem, everything else is just building castle in the air.
    Reply | Link to Comment
  •  
    Oct 24 11:33 AM
    ITHINKBIG, best analysis I have ever read on this website. Good Stuff.
    Reply | Link to Comment
  •  
    Oct 24 11:34 AM
    To answer two key questions we need to understand this.
    A) WE are now the global flight to quality magnet attracting unprecedented dollar inflows which will be invested in the U.S assets/economy and create a record employment.
    B)the current loss of jobs has to do with the issues that I have originally discussed with Mark Gilbert(Bloomberg -London) in June of 2005 and again repeated them on September 18 ,2007 (Brian Sullivan -FED Time) on Bloomberg TV.
    Now ,we are looking at the early stages of the historically
    relevan economic/market boom.
    The only thing that we should fear is the fear itself.
    Now that the U.S economy had become lean mean economic machine,we heading for an 'economic Nirvana".
    Remember I have coined the word an economic Armageddon-now I am referring to the period ahead as an" economic Nirvana"-even as the psychosis grips the news media and the investors.
    Reply | Link to Comment
  •  
    Oct 24 11:41 AM
    One more time .....we are heading for a mega bullmarket/rally.
    In fact the synonym for this unquantifiable uptrend will be Gabe.
    Reply | Link to Comment
  •  
    Oct 24 11:45 AM
    Gabe I respect your position, however, I will also name the recession, depression, or deflation "Gabe".
    Reply | Link to Comment
  •  
    Oct 24 11:54 AM
    gabe---whatever it is you are smoking,I will bet that it is about the only thing going up and experiencing any type of bull market!
    Reply | Link to Comment
  •  
    Oct 24 12:15 PM
    Gabe said:

    "One more time ,these record dollar inflows will shortly induce an unprecedented stock market really and meanigfull stability in the housing sector to be followed by the price spike in the real estate market.
    This is history in making. The US GDP will attain 5% growth by the second half of 2009.-hard to believe?"

    I am putting a copy of this on my bulletin board and suggest you do the same, Gabe.

    Your projection is similar to my most optimistic outlook, with the exception of time. My earliest 5% GDP is 2011 - 2012 time frame. I fear it might take longer.
    Reply | Link to Comment
  •  
    Oct 24 01:27 PM
    Mr. Borenstein: A couple of thousand points ago you were saying the Dow was in the final stages of shaping up for a rally through 14,000. Did your model not see the intervening 'dip', or did it just not seem important enough to mention?
    Reply | Link to Comment
  •  
    Oct 24 02:50 PM
    For the record ,almost a year ago I have said that deflation not inflation is the issue .I am not a bottom picker but an observer of a cyclical/economic behavior-this is not a precise science.The magnitude of the global dollar inflows and the gold implosion(more on the way)are reflection of the real flight to quality .One more time ,these megadollar inflows will be the catalyst for unprecedented economic rebound.
    The only think to fear is the fear itself and most CNBC reporters who perceive themselves as economists/traders and spew quantity of economic/analytical nonsense.
    Reply | Link to Comment
  •  
    Oct 25 09:00 AM
    Gabe, You didn't say anything about oil. Decrease production and the price goes down? That has to be causing Chauvez some real heartburn for a change (sorry side comment off subject). That gives further support to your thesis since that money(or most of it) goes somewhere. So what is this economic engine going to create in the future? Energy alternatives including alternative power for transportation, alternative energy for homes including battery packs that are reusable and are not part of the current power company grid, longer life batteries for anything that needs power, think unpluged from power and don't have to recharge. Health care new diagnostics, less invasive diagnostics, e-healthcare(I don't have to go to your office) although all of the above will require a real shift from the current mindset of the medical associations which will be gotten when their palms are greased, robotic surgery(look at the Davinci), software programs that diagnose. Food, and we will need a lot more of that, pesticides or alternate pest control, fertilizers (think potash last summer), better agricultural chemicals overall, better agricultural practices (we are probably the leader in the world of producing food), agricultural research(think about current problem with bee collapse syndrome) Education, every other country's wealthy send their kids here to be educated and last I checked there are a lot of kids in this world now, requires landguage translation. I could go on. The point is the rest of the world got a taste of middle class affluence. They are going to want more. Darn, I forgot the flush toilet! 2.5 billion people on this planet don't have one of those. Buy plumbing!
    Reply | Link to Comment
  •  
    Oct 25 12:55 PM
    I would argue that if you have money, then money is not worth less, it is worth more. We are in a period of deflation. Take housing as an example. A house that earlier this year took $400,000 to buy now takes less than $300,000. This is good news for you if you want to buy a house. If you own a house free and clear the real estate funny money equation has not changed because although you can sell your house for less than last year, you can also buy another comparable one for less as well. If you owe the bank and you bought at the high then you and/or the bank are in trouble. In many cases it is the bank that is taking the loss rather than the homeowner since their recent lending practices bordered on the irrational. This government is doing all it can to inflate money and this ultimately will make it worth less, unless it doesn't work. For now this deflation offers untold opportunities for those folks with courage and cash as traders de-leverage.

    What to do? I suggest investors start putting their dream list together. For me it is well managed companies with a history of solid earnings who pay substantial dividends. Watch and wait and act when your gut and intelligence tells you it is time. When to buy? When they stop going down.
    Reply | Link to Comment
  •  
    Oct 25 04:38 PM
    Don't forget there is trillions on the sidelines and most of the nations want this realignment to occur fast so they can carry on. Look for even the labor party (Dem)victory to make motions for reasonableness in it's first few days - because it needs to jobs to protect with tariffs and small business to tax.

    Once some clarity ( most likely gov proposals for the ST) is restored the flight of capital and confidence will slowly be restored there is no other choice - For me the stock market has been leading the way into the recession but no one knows the severity - sounds like an opportunity. Some stocks are at 15 year lows even with a cheaper dollar. In the end you don't have much of a choice when you are ignoring 5%-6% div yields on good companies. When you see the first M and A - watch the rush.

    No one mentions that if the structure of the US business environ was changed with no cap gain, no div tax, reduction in bus spending, slashing gov payrolls, the dow would shoot to 13000 overnight and help gov revenue.But I am only reciting what we insist emerging markets do with our IMF parameters and bailouts all with a great history of success. The US gov and it's many minions in Congress do not take the medicine it doles out.

    Public work projects like the bloated 18 billion BIG DIG does not get the 7 trillion in private money off the sidelines. With the exception of some canteen trucks private money does not invest alongside one-time boon doggle construction projects. They only buy votes -again history in Brazil, Arg, Korea bear this out.
    Reply | Link to Comment
  •  
    Oct 26 03:00 AM
    Buy companies that pay dividends out of profits, not out of cash flow which turn out to be merely a return of your capital. But with consumer spending in freefall because of actual or feared unemployment, finding companies that will continue to earn a profit is a project. If we have a nice war, the antidote to economic malaise defense stocks should fill the bill.
    Reply | Link to Comment
  •  
    Oct 26 02:54 PM
    WOW !! This article really lit a fire under everyone!

    Gabe. Bless you, I would wish you were right but I think we're still in for a bunch of hurt.

    We can thank our hurt on the slime on Wall Street and in Washington. I'm talking about the fat cats on Wall St. (Not the everyday grunts like you and me that work there) and our self-serving congress. Neither of them feels badly over the situation because they're still living high on the hog and will continue to throughout and after this crisis. And what facinates me is that the American public will vote the same self-servers right back into congress. Wait and see!

    Daytrader hit it on the nose: THEY DO NOT CARE ABOUT ANYONE BUT THIER LOUSY,STINKING,SELVES.

    I've been an optimist my entire life but it's beginning to wear on me. Excluding the slimes mentioned above, the United States is still the greatest country in the world and it's Main Street that makes it that way.
    Reply | Link to Comment
  •  
    Oct 27 01:21 PM
    Your welcome. It's back to fundamentals and getting reaquainted with the term "value proposition". I make the comment about innovators as some consider me one. All I know is that for every deflation there is an equal buying opportunity. Those that rush headlong into the problem solving will come out of this fine. There were many millionaires made during the Great Depression.

    Let's hope we handle the geopolitics with care this time around, I prefer avoiding Emporer Hirohito style resolution of cranking our GDP up to 75% for a third world war...
    Reply | Link to Comment
  •  
    Oct 27 01:54 PM
    Gabe, hear is how I see it: As an investor and business operator of two companies, I look for talent in management team first prior to investing. Whom is guiding or whom will guide the ship? You are too confident that this batch of idiots in Washington whom will largely stay in power will create policy to capture this short term dollar rally and reinvest wisely as opposed to continue sinking it into the black hole as some of the money comes home. And as some of it does, lots of the benefit will vaporize from sovereign nations pulling out there investments. Others have wisely stated comments about the sickly nature of the US consumer and job destruction.

    I see it from a human nature perspective, that the entire country's leadership is corrupt and inept from the House of Representatives whom are supposed to answer to it's citizenship to the celebrity CEO whom is supposed to answer to shareholders. To purge bad management in Washington which are the creators of fiscal crisis historically is a four year process. Cross-polination of boards that were supposed to bring the axe down on CEO's who were partaking or didn't understand risky ventures to protect the company will also take time to replace.

    The reason I always rebuffed your "Bull is Coming Soon!" consistently for the last several months is for this reason and the other fact that none of us investors, eco