Posted on 10/09/2002 5:25:50 PM PDT by rohry
Market WrapUp for the Week The Week in Graphs Storm Watch Geopolitical News Energy Resource Page Precious Metals Raw Materials Wednesday, October 9, 2002 The Unthinkable is Not Impossible One hundred year storms have a way of surfacing when you least expect it. In the financial world, bear markets have a way of fooling the majority of investors most of the time. Just when you think it's over, it isnt. Just when you think a bottom is in, the market heads lower. When you think the news cant get any worse, it worsens. The truth of the matter is nobody knows where the current storm will head and what damage it will bring. All that the experts can do is bet on probabilities. What lies on the tail end of the curve is that 10-sigma event that is incalculable. The models dont factor it in -- just the probability of its occurrence. The extent of the damage, the long-term consequences, the impact upon lives, economies and governments can only be a guess. History can only alert us to the consequences and remind us that these storms do reappear throughout history. An archduke is shot, a naval base is bombed, a dictator rises to power, a government is overthrown, and suddenly 10-sigma events erupt and a daisy chain of dominoes begin to fall in unison. Business cycles, market crashes, depressions and wars havent been eliminated despite the reassurance from experts and politicians that they will no longer happen. Economic and financial modeling is good at giving you probabilities, but not predictions. They can tell you about the probability of the unexpected, but not when they will occur. Nor can they predict the consequences. The truth is that no one knows what fury a $110 trillion derivative market will unleash if it does in fact implode. In 1998 a hedge fund called LTCM with 1.25 trillion in derivatives nearly brought the financial system to its knees. It would take the Fed, along with 14 other banks, to organize a private sector bailout. At stake were LTCMs lenders who could be dragged along with it. An emergency bailout package was put together and a crisis was averted. A Bank in All The Wrong Places Playing Hot Potato Most OTC derivatives are custom tailored to meet the needs of specific clients with specified risks. This makes them highly illiquid and vulnerable to panic selling in the event of a crisis. This proved to be LTCMs undoing when it occurred. In the volatile markets of 1997-98 when credit spreads widened, risks multiplied. Instead of going from divergence to convergence, divergences widened as they are today. In the corporate debt markets, the yields on investment grade bonds are now 2.5% above Treasuries of the same duration, the widest in at least 10 years. Junk bond defaults are averaging 9-10%. Gaps between junk bonds and Treasuries are now approaching 11%. According to todays Bloomberg, the spreads between Treasuries and junk bonds first hit the 10% level on August 14th and have breached that level 11 times since then. Never Underestimate the Impossible Complacency Rules Today's Market Meanwhile the days headlines point to more stresses in the financial system and in the economy. Job layoffs were a common theme along with possible bankruptcies. Abbott labs will cut 3 percent of its workforce. AT&T, the perpetual restructuring company will cut 4.3 percent of its cable-television payroll. EDS will be sued by employees for a loss of $407 million in its employees 401(k) plan due to a drop in the companys stock. SunTrust reported that it would take a $98.7 million charge for bad loans as non-performing assets rose by 14 percent to $594.7 million. TXU, the Texas power company is asking banks to drop terms forcing it to pay $500 million should a European unit of the company default as energy trading plunges. These are just todays business headlines. On the political front, the socialist candidate Lula in Brazil is emerging as the likely winner of Brazils run off election. Venezuela is on the verge of a political coup as Hugo Chavez begins a political witch-hunt of his opposition and citizens riot in the street. Venezuela is the 4th largest oil exporter of oil to the US. A war against Iraq is looking more likely and the government is alerting us that renewed attacks of terrorism are possible. These are the kind of headlines that don't breed confidence in the markets. This lack of confidence and risk in the financial markets explains much of gold bullion's strength. The latest sell off in shares of gold and silver companies is another leg of a wider sell off by weak hands into stronger hands. A lot of the share accumulation of precious metals stocks over the last few quarters has come from the day-trading crowd looking for a way to make a fast buck. They neither understand nor comprehend that they are dealing with a precious commodity that is returning to its historical role as money. Those in the know, and who have strong financial hands are accumulating at the expense of the ignorant and ill-informed. They will be back in the metals after they explode. Several key silver stocks are looking to break out as option spreads and short positions are unwound. The metals markets are a lot like a volcano. You never know when they are going to erupt. But when they do, it will be similar to the eruption of Mt. St. Helens. Gold and silver are commodities that are in short supply, with growing investment demand, and limited options for investment. When they take off, their rise will be parabolic -- not gradual. The residents below arent aware that the volcano is rumbling. Short-sellers, take care. Today's market was predictable. The major averages suffered their broadest decline in over four years as many analysts lowered their profit expectations on GM and GE. The S&P 500 hit a new five-year low; while the venerable Dow closed below 7,300 -- something we havent seen since October of 1997. We seem to be slipping back to the past at ever increasing speeds. It also looks like the inevitable may have a possibility of occurring. After the market close, Moodys Investor Services cut J.P. Morgans long-term debt rating one more level, citing the bank's inability to maintain acceptable profitability. As the bank's credit rating is lowered, it begins to raise the issue of counterparty risk. The downgrade is causing many of the bank's customers to take their business elsewhere because of Morgans growing risks. As earnings falter, it leads to more downgrades. At some point, the bank may be swamped as it finds itself with more at risk in the derivatives market than it has capital to support. Many experts estimate that the bank's value at risk runs in the tens of billions. A failure by Morgan could become the first of many ten-sigma events. For greater understanding of derivates I would suggest reading Rogue Waves Part II, and Rogue Waves and Standard Deviations Part 1 and Part 2. Volume came in at 1.82 billion on the NYSE and 1.75 billion on the NASDAQ. Market breath was horrific with losers outdistancing winners by a wide margin, 28-5 on the big board and by 26-9 on the NASDAQ. We may be seeing the impossible. Time will tell. Overseas Markets Japanese stocks fell, driving the Nikkei 225 Stock Average to a 19-year low for a fourth time this month. Mizuho Holdings Inc. and UFJ Holdings Inc. slumped to their lowest levels since they first started trading. The Nikkei lost 2% to 8539.34. The average has lost more than a fifth of its value in the past three months. The Topix index shed 1.9% to 844.29. Bond Market © Copyright Jim Puplava, October 9, 2002 |
Ed Yardeni is the Chief Investment Strategist at Prudential. He says that the stock market is 49% undervalued as of today's close. That puts fair value for the S&P around 1520, and the Dow around 14,300.
I think his model may need some tweaking.
:^)
I built it in 91 to retire in but changed my mind.
My son bought two houses in Glendora, Ca this year, what do you think of that?
Points taken. It'll be the Johnny-come-latelys that will feel the big heat (as is always the case).
As long as those rental properties make you money (and don't cause you to tear your hair out every time some dome mick tenant confuses the kitchen with the bathroom), they're a good investment.
As for your home, again, I can't argue. It's hard enough to find a good one without worrying whether it'll remain a cash cow. The idiots that see their home as a cash cow are the ones that'll be jammed.
If the situation with JPMorgan doesn't improve and God willing we get a quick victory in Iraq, I think that the bear trap triggered by lower oil prices post Iraq war will be a good time to get out. I've stayed in with half my 401k since July 2001 hoping for a level market until PEs could slowly lower with increased earnings but it looks like that isn't going to happen with JPMorgan spiraling down. Now I'm forced to wait for a rally that post Iraq war lower oil prices will trigger and hope that JPMorgan survives that long or else take a big hit right now. If JPMorgan levels out post Iraq war then I may stay in. Tough calls coming up.
Not knowing the details I can't comment. Are they rentals or does he live in one. In some areas you are forced to go with Section 8 but you get up to 40% more rent guaranteed. I had people tell on every property I bought that I was nuts. :-)
If the Dow ever cracks 9000 again, they'll vent their pent up fury. LOL
Two houses on the same property. He lives in one and rents the other. Not a section 8 area.
apparently not the same world the Japanese live in....the Nikkei's down 263 points[3.08%] as I type this...
as always, thanks Rohry and good luck to everybody!
Stonewalls
Excellent...now you need to finagle a contract with you and momma to take you in and support you in your "Golden Years". :-)
With Iraq, NJ election fraud, and the DC sniper not many are paying attention to the bleeding to death of the stock market. Another 200 pt down day. Ho hum. I guess it will take some other financial calamity to wake people up. My guess is that calamity will be real estate bubbles bursting leading to loan defaults leading to bank failures leading to the US looking like Argentina.
I predicted 7k Dow and now I and looking for a mid-5k Dow.
Forget Gold.
This should be a wakeup call for people to turn away and change the channel! Game over you loses. 80% of the individual investors do NOT belong in the market. Please don't ask why. This game is cook for a few years. The greater fool is now broke. Foreign cash is gone, and all the cash is now in the renovated downstairs bathroom. Bleak? You better get with the facts folks. Stand and face the smoke. If you could see what I am seeing on the street these days you would know that I am not making up stories here.
Forget 8-10% a year. Look for 2-3% and be happy for your health.
Just because you thought you knew what you were doing means nothing. Forget the Dow, S&P 500. Paint the garage, and take your time.
There is no momma (died when he was four) and daddy has his own thang going down here in the Alabama woods, lol.
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