Posted on 09/21/2007 8:04:38 AM PDT by oblomov
Unlike all the Wall Street strategists who compare the current credit crisis to the credit crisis of 1998 (Long Term Capital Management), I believe that the ongoing credit problems will be far worse and of a longer-term nature. This will make it difficult for the market to reach new highs in the near future. Moreover, even if the 1998 comparison were to hold, we would still be looking at a much deeper stock market correction than the 22% sell-off we saw in 1998.
The stock market peaked out in July 1998, after having been in an uptrend since the 1991 lows. It then sold off on the Russian default and on the LTCM crisis by 22% to its intraday low on October 9, 1998. When it became obvious that the Fed would bail out LTCM, and it flooded the system with liquidity, the stock market took off. Between the October 9 intraday low and the year end, it rallied by 33%, to achieve a new all-time high, and then continued to rise — interrupted by a correction in 1999 — into the final March 2000 top.
Pundits who are likening today’s market rout to that of 1998, and who expect the market to rally strongly towards the end of this year and to close at a new all-time high, are failing to consider the very different economic and financial circumstances of today, compared to those of 1998. In the years leading up to the 1998 crisis the US dollar was in a bull market, and interest rates - which had peaked in September 1981 - were in the middle of a secular decline. At the same time, gold and other commodities were still deflating.
(Excerpt) Read more at dailyreckoning.com.au ...
“credit crisis of 1998 (Long Term Capital Management)”
Yes, it was devastating, wasn’t it?
last year the republicans gave credit card a big break by passing a law doubling the minimum payment.
I wonder if we are just suffering from the government intrusion into credit and political payback.
It is a marketplace after all and so subject to the eddies and currents of world events.
The bail-out of LTCM, or rather, the bail-out of the “can’t fail” banks that unwittingly threw money into LTCM, was one of the causes of the ‘98->’00 tech bubble.
And yes, there was a credit crisis, but it was unknown outside the world of finance, because the Fed injected themselves into what should have been a private-party-only situation.
They’ll be pushing the NAU and the Amero pretty soon as the only way out of this. The American people better watch this or we will loose our country to the money people.
P/E ratios are, historically, poor predictors of possible appreciation in equity prices.
Price:sales ratios, price:book and free cash flow are all better predictors. “Earnings” can be gamed by deferring expenses, cutting expenses, etc. Cut/defer expenses out at least one quarter and a company can “exceed expectations” until they cannot defer any more.
Sales, however, cannot be faked. Either they’re made (and accounted for) in the current quarter, or they’re not.
Sarbanes-Oxley has removed MUCH of the wiggle room to manipulate expenses, provided the company in question has good intent to begin with.
The disconnect between the stock market and the price of oil is truly amazing. Even if we take into account inflation, we are fast approaching parity with the oil crisis in the 70’s - approximately $90/bbl in today’s dollars. By cutting interest rates, BB wants to stave off a recession, but is essentially telling the rest of the world that GDP trumps the dollar every time. The continuing plummet of the US Dollar only throws fuel on the commodities fire. So while we’re cheering our 401k’s that benefit from the stock market surge, we’re paying 4 dollars for a gallon of milk, and inevitably higher prices for bread, cereals, corn, gasoline, heating oil, natural gas, places to live - you know, the basics of existence in our society. This is all wonderful for the wealthy who are outstripping inflation, but for the middle class and the poor who are either just trying to save for retirement or make ends meet, this is a terrible scenario. (But there’s no inflation! No! Pay no attention to that $4 cup of coffee and your $5 box of Corn Flakes! Everything is fine!)
There WILL be a tipping point for foreign investors of our Treasury notes. Saudi Arabia sent a very pointed message to the Fed when they very publicly indicated that they are leaning towards depegging from the dollar. Essentially they warned the Fed not to repeat this mistake - that the situation has gotten to the point where they will have no choice but to depeg. If they follow through - if Saudi oil begins trading on anything but the USD - the dollar will be severely impaired, plain and simple. Therefore, I find it EXTREMELY unlikely that there will be another cut in October or December.
And as a sidenote, this cut does nothing to resolve the collapsing housing bubble. Most ARMS are pegged to the LIBOR, not U.S. rates, and those who are trapped cannot afford 3% much less 6%. Long term rates are still pegged to the U.S. 10-yr bond. If the dollar selloff continues, these rates must go higher. There really isn’t anything the Fed can do to help the homeowner, just the banks that are on the hook for all that toxic waste on their books.
All very true. Your post should be required reading for folks wanting to debate the economic consequences of the current situation.
I agree that the Saudi announcement of a possible unpegging sent a message that cannot be ignored. Yes, Iran already told buyers of oil to handle their accounts in Euro’s, but that’s Iran.
Saudi Arabia announcing a possible unpegging from the USD is tantamount to saying “You think oil prices are high now? Just you wait until we add on the currency exchange rates.”
Worse yet, consider foreign investors in US debt: If we start an inflationary cycle, why would they want to own US debt? And if they don’t want to own US debt, then where is our economy going to get the trillions necessary to keep pushing all these M&A deals as well as peddle corporate bonds?
The Fed can do one of the following:
1. try to address the rocketing default rates on homes,
2. defend the dollar,
or
3. Inject liquidity to allow the over-leveraged ‘investors’ on Wall St. to get out of their illiquid positions.
It cannot do all three.
Bernanky is not amused.
BUMP
You can add Chavez to the Euro only for dollars. Last week he instructed his finance minister to start the process.
That's a great point. Ultimately, what fueled much of the credit boom was the securitization of assets. Since these CDO's are now radioactive, I can't think of where they can come up with the kind of cash they've been throwing around the last five or six years. I mean, not only did they screw domestic institutions, but they've burned more than a few bridges overseas (Northern Rock, anyone?)
William McDonough, President of the New York Fed, acted only as a sort of overseer or coordinator of the consortium. The Fed never put up one cent of taxpayer (or any other) funds.
Really? Tell that to Tony DeAngelis, the "Salad Oil King"of the 1960's
Seriously, point taken, but although what you say is true it is not a common practice carried out by any substantial number of companies. Also many companies stock will trade on orders booked and these orders can flake out. P/E has it's place as do those criteria you have mentioned.
How long until somebody comes on this thread and says “BUY GOLD!”
Looks like you just did.
You are correct — the Fed committed no money directly. But they took extraordinary actions to facilitate the creditor-sponsored bailout. Oh, and they chopped the Fed Funds Rate three times subsequent to the LTCM blow-up. That counts as injecting liquidity.
The Fed intervened claiming that they had an “interest” in preventing the failure of creditor banks that were “too large to fail,” and were acting in their capacity as “lender of last reserve...” but as you point out, the Fed injected no money. So... it begs the question “Why did the NY Fed get involved at all?”
Personally, I think the whole thing stank to high heaven. Greenspan was (and still is) speaking out both sides of his mouth on this issue. And the reduction in the FFR contributed to the tech bubble.
Greenspan’s subsequent report on the matter downplayed any role the Fed played, yet the three cuts to the Fed Funds Rate are a matter of public record. These reductions in the FFR came as the economy was growing at a pretty brisk rate; so there was no economic need to reduce the FFR. It was a response to the extraordinary leverage used by LTCM.
http://research.stlouisfed.org/publications/review/04/03/Neely.pdf
“He fails to note that the P/E ratio of the major corporations that make up the averages are trading at historical lows. “
Making up your own facts?
When stocks were at the low in 1982, the average PE for the S and P 500 was around 9 and the average stock paid a dividend of 3.5%.
Now the average PE is around 15. So I guess you are wrong.
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