Watch Out For the Second Leg of the Downturn

Financial Sense Editorials ^ | 3/18/2009 | Thomas P. Au, CFA

[weef]

Do you think that the crash is over, as certain former bears do? This question arises as we have breached the first downside target, of Dow 7000, based on my proprietary investment value model that was first published in thestreet.com October 24, 2007. It was less a forecast than an evaluation. The Dow has now vindicated this model by reaching "fair value," as one would expect from a simple definition. Does that represent a base for a new bull market? Or is it just one more stop to the nether regions?

[weef]

This is a month old but interesting none-the-less and I didn't see it posted. Looking over the author's archives, it appears he called this market crash a few years ago.

After saying normalized S&P earnings are likely to be no more $50 a share (they used to be $80 a share), he says:

But I can live with $50 trough earnings, say many. And at historical multiple of 14-16 times trough earnings, the S&P should stop its downside in the 700-800 range. But the point is, they’re not trough earnings, they are the “new normal.” And in the current “slow” (zero or worse) growth environment, a trough P/E of 6-8 times earnings is more likely. Put another way, we are about to get the worst of all worlds; below trend earnings, below trend growth from a depressed base, and below trend P/E, after having gotten the best of all worlds, astronomical P/Es on above-trend and rapidly growing earnings, about a decade ago. Warren Buffett now agrees, saying that we will get "almost the worst of all possible worlds…"

Things certainly look dire.

[unkus]

Ping for later reading.

[weef]

Dow 4800 then 800? Is that a typo? Even being a market pessimist I can’t believe it will go that low. BTW, I’m stockpiling ammo now.

[Cicero]

I’ve been long the market for a while, but I’m thinking of getting out again fairly soon.

[appeal2]

If you believe this, and I am not sure about 800 but feel pretty confident about 3500 to 4500, then purchase SDS, etf double when it hits around 65 or lower, buckle your seat belt and enjoy the ride, well when it hits 150-175-200.

[Frantzie]

The guy is a CFA (Certified Financial Analyst) so he knows his stuff. No one with any intellligence has any confidence in Obama.

I doubt many businesses will be hiring as long as he is President. Obama, Rahm, Pelosi and Reid do not care about the economy. they want power and control. they are shooting for a Dem majority for decades like FDR and by then the country will be a third world hellhole.

If you had a Reagan like conservative you could probably turn it around mainly with domestic energy sources. We have 4 times the Saudis oil reserves onshore in the lower 48 states. This would create loads of jobs plus wealth creation. We had at least 4 mega periods where wealth was created due to energy and mainly oil.

1. PA around the turn of the century.
2. TX onshore.
3. CA 1930s to 1950s or so.
4. AK Early 1970s
5. TX & LA offshore.

4 & 5 happened about the same time.

Domestic energy production could reboot and recpitalize our economy. The problem is due to open borders we are becoming a third world country. Americans cannot afford to have children and start families because we are being taxed to death supporting illegals.

[richardtavor]

You seem to sense it to. There is a storm coming, and it sounds like you are prepared. Jesus said about the end of days, that “it will be like the days of Noah.” That is about where we are at.

[sneakers]

I don’t understand any of this, but my gut tells me that we have to be prepared - for something. We’re paying off debt, buying extra supplies, and planting several gardens.

[giotto]

I like SKF also. The last big downturn back in Feb or so, it went from 105 to 250 in about 2 weeks. It’s now 58. I love its wild volatility.

[appeal2]

There about 5 eye that you can play for the next couple of legs. Key is to take you profits and put them into physical gold and silver before the gback becomes the Obamaback and useless even for toilet paper.

[blam]

The Coming Siege of Austerity

[blam]

Economic Meltdown 2009 Is Worse Than The Great Depression

[Marie]

My son went with his grandfather the other day to buy ammo. They were sold out of most things.

The grandpa says, “Maybe they’re going out of business...”

He’s not really up on current events.

[21twelve]

I don't know anything about cycles or investing. But, a look at the DOW over a long time shows a fairly flat number - around 650 IIRC prior to rising sharply in the 80’s (I think?). And, it coincided with the huge increase in our national debt.

I figure somehow they are related. And that when that huge level of debt (even larger now) can't be sustained, things will go through a huge shift. So, going back to those pre-debt days of 650 (or perhaps it was closer to 900?) doesn't seem that far fetched.

I would like to say that our economy has grown a LOT in the last 30-40 years. But, how much has it REALLY grown in the sense of producing things, getting something of tangible worth back?

Of course with inflation, we just might see a Dow 800,000 as well sooner than we would like!?

[dalereed]

A repeat of the 30s that I grew up in where the market recovered after the first crash and then crashed again.

I believe this prognosis is right about in line with reality and this one will be much worse than the 30s.

[happygrl]

Estimates are that approximately 25-30% of the economy was built on home equity loans and credit cards. Americans were living way above their means on a false economy.

Yeah, this is a reset to real value. We are going to have to live with it.

[MeneMeneTekelUpharsin]

Americans cannot afford to have children and start families because we are being taxed to death supporting illegals.

Wow, someone who sees.