5/23/2011 7:03 PM ET|
Don't fear market ghosts
Investors are worried that the current market pullback will turn into a full-fledged bear market. Here are 3 things investors should have learned from recent crises.
Every time oil tumbles or silver plunges I can feel the icy fingers of 2008 creep down my spine and I can read fear in my email. "Should I sell my shares of Freeport-McMoRan Copper & Gold (FCX, news)?" I was asked more than once when silver was on its way from $49 to $35. Understandable question. Shares of the copper and gold miner fell from $57.73 on June 4, 2008, to $12.18 by that Nov. 26. Who wants to go through that again?
When Renren (RENN, news), the Chinese Facebook, goes public at 75 times revenue or when the initial public offering of LinkedIn (LNKD, news) soars to more than $120 a share from its $45 offering price before closing at $94 on its first day of trading, it brings back memories of the dot-com bubble that saw Yahoo (YHOO, news) rocket 154% on its first day of trading. The dot-com bubble turned into the tech bubble and both eventually burst, wiping out not only newcomers like WorldCom, but also established names such as Lucent Technologies and Nortel.
When Greece totters on the edge of default with yields on its 10-year bonds breaking 16.5%, it revives fears of the mortgage-backed asset collapse that took down Bear Stearns and Lehman Brothers -- and almost claimed Citigroup (C, news), American International Group (AIG, news) and the global financial system too.
Fear isn't bad
This remembrance of bears past is a good thing. Fear is as essential to financial markets as hope. Without the latter nobody would buy anything, and without the former everybody would buy everything.
But investors are supposed to move from blind panic to rational fear as a crisis moves further behind in the rearview mirror. (Although it's wise to remember that "objects in mirror are closer than they appear.") We're supposed to have learned something from a crisis that will make it less likely to occur in the future, but we're not supposed to jump at every noise or lock ourselves in a panic room whenever a car alarm goes off.
So what have we learned, and what do those lessons tell us about the current likelihood of a crisis turning into a market-shaking bear? (The kind of crisis I'm writing about here is quantitatively and qualitatively different from ordinary volatility or the 10% corrections that investors go through regularly -- and that we seem to be going through now.)
What we've learned (I think), No. 1: Extreme overvaluation precedes a crisis -- you might say it's a prerequisite.
Caveat to Lesson No. 1: Extreme valuations are sometimes hard to recognize. The overvaluations of the dot-com bubble were clear to all -- even if all thought they could make money as the extreme got more extreme. The extreme valuations in the mortgage-backed asset bubble weren't as clear -- you had to challenge the prevailing risk assessments for these AAA-rated assets in order to see how badly prices were inflated.
Where we are now on the scale of Lesson No. 1 depends on what market you're looking at. If you're worried about a conventional bubble, I'd say the danger is relatively low.
In emerging markets, for example, their relatively low price-to-earnings ratios -- the trailing 12-month P/E for the iShares MSCI Brazil Index (EWZ) was just 11 as of April 30, well below the 15.6 trailing 12-month P/E ratio for the Standard & Poor's 500 Index ($INX) -- argues that they aren't going to be the locus of the next blow-up.
If you're worried about a bubble in the U.S. domestic stock sectors that have done the best in 2010 and 2011, industrials and materials, their relatively modest relative P/E ratios should reduce your fears. The S&P materials sector trades at a below-index P/E ratio of 15.3, and the industrial sector is at just 17.2. I say "just" because, first, sectors such as telecom (at 18.9) and consumer discretionary (at 17.5) show higher trailing price-to-earnings ratios and, second, because the P/E ratio for the materials sector is down 13.5% since the end of 2009 and for the industrial sector it's up just 0.04%.
Worries about dangers in the eurozone seem more real. Greece is on the road to default -- unless the other countries of the European Union decide to throw more money at the problem. It's hard for me to see how Portugal avoids going the same route eventually.
And if default is the end of the road for these countries, then their bonds, even at the recent yield of 16.5% for Greek 10-year bonds, are overvalued (especially since many banks in Europe haven't yet marked all their holdings of these bonds to market prices). And, of course, right now Europe's financial leaders are hoping that they can hold the line without Spain falling into crisis. I think Spain will skirt the crisis, but I understand the depth of the worry. If Spain falls into crisis, then all current mechanisms for dealing with the crisis will turn out to be inadequate.
And then, as my caveat says, there are those instances of overvaluation that are hard to recognize in the same way that overvaluation in the mortgage-backed asset market was tough to see. For example, U.S. Treasurys would seem to be overvalued given the long-term problems in the U.S. budget and with the dollar. But are they really? The world currently is willing to pay up for the liquidity and security of this market. As long as that lasts, you can make a case that Treasury values are high but not completely out of line.
China's property market has the earmarks of a bubble, and some Chinese stocks are priced in bubble land, but is China as a whole overvalued by enough to constitute a bubble? Certainly bad loans at Chinese banks and massive off-balance sheet debt in the financial sector are legitimate worries. But given the Chinese government's track record of successfully burying bad debt (after the Asian currency crisis of 1997, for example), how much bad debt would be enough to rattle the entire economy?
VIDEO ON MSN MONEY
What? Time to worry about a financial meltdown? What are you people blind? No, of course not, we're good, we're far better than we were two years ago.
I'm sorry, i apologize, does the above statement sounds to you like i'm insulting your intelligence? Or are you one of the many who actually believe this is real, that we're safe and with time it'll only get better. That's what these "experts" say to the people and make them believe. Like we don't fuel our cars, or pay for groceries every week, or see an increment in everything we pay for. But hey, don't worry we're good.
Please you "experts" who deceive the people and make them believe all their funds in the banks are safe, and all those of you in the government who tell everyone that IRAs, 401K, etc... are there for sure. You should be prosecuted and put away for the rest of your life.
You're the ones driving this country even deeper where we will not be saved!
Invest in anything you want for the long haul. It probably doesn’t matter what you pick as much as you think. But, before you do that, make sure you’ve got 2-3 years of your necessary expenses set aside in cash to ride through whatever comes along. That’s how they break you, with a liquidity trap that forces you to sell at the bottom. There’s an old saying, “The markets will test you”. Don’t fail the test and you just might survive.
Let's see- The Gov is still printing and we cannot even dent the interest on the national debt. Europe and other countries are shunning the dollar to buy oil-and the dollar is fast becoming the currency no one wants worldwide.
Meanwhile, as the dollar sinks its next step is devaluation - which means that everyone's savings would be halved or worse.
I don't see anything rosy on the horizon.
Jim, our government running the printing presses and monetizing the debt has caused this market to be where it is....if fundamentals had ANYTHING to do with the market, we would be at SP 1000. Just like the banks, mark to market ?? WHO NEEDS THAT ??? We'll just make it mark to FANTASY (meaning ALL of out major banks currently are BANKRUPT).
You, whom Im surprised, has called this totally wrong.
We're in DEEP CRAP.
But then again, you now have your own fund to keep afloat.
Here are three other things we 'know': First, Standard and Poor's and the other major rating agencies are owned by Wall Street and are not reliable. Remember those mountains of derivatives and credit default swaps they rated AAA, that they now claim they didn't even understand? Nothing has changed there, they still rate things as they are told to by Wall Street 'banksters'. Second, all the primary causes of the last financial crisis still exist today. After the banks and investment houses were bailed out by the Treasury and the Fed, they went right back to doing the same things. Still over leveraged, still buying and selling derivatives, still gamboling with hundreds of billions. There has been no real reform at all. No new laws, no one held responsible ---nothing at all. Third, if the US Government can't break the anti-bipartisan approach now dominating Congress they may well blow the US credit standing in the world.
The first of my other concerns is still going on, the other two could happen at any time. Be scared all you want to be. It may save your nest egg.
Umm what? Are you paying any attention at all? Oh wait LinkedIn is worth what 238 times earnings? Come on. You people are so blind because you rely on fictional nonsense. The housing bubble was crystal clear to any idiot buying a house from 2005 - 2008. I know people who got mortgages for houses 15 times more than what they had gross salary.
I am not surprised. Fundamentals have been tossed out in favor of boom / bust cycles. You just have to know when to ride the wave. This new tech bubble is going to smack us in the face hard. The problem is that most of the country has yet to make it out of the recession before the bust cycle will start again. Don't get me wrong, professionals will make money hand over fist. The other 95% of the country is in for a world of hurt though. I understand the appeal of boom / bust. It provides more opportunity to make much more money in a much quicker time frame. I just question if it is sustainable. People are going to be pissed when their retirement funds take a dump again.
AS Wiccapoet stated as well, I do not even want to imagine the near future with oil. You can throw boom / bust, fictional valuations, and fundamentals out the window when oil gets scarce.
Is this article a joke, Or a bad propaganda pitch by the Media?
Fear is good but despite your fears; don’t worry about the reality staring at you
We wont fall again.”
This has to be a joke or do they really think all Americans are stupid.
I will be honest..I did not read the whole thing.. someone please tell me I am wrong
Hey Jubak, has it every occurred to you the entire world market is completely dependent on cheap energy, which doesn't exist anymore? Apparently not.
www.energybulletin.net, or try www.theoildrum.org, if you want to see the reality of the failed U.S. capitalist system. Check out the report published by Shell Oil Company which conclusively states that by 2017, most people in the world will no longer be able to afford gasoline for their cars and there's nothing we can do about it. This is what Peak Energy is leading us to, so get ready for a new, better world.
I wonder if Jubak will ever publish an article telling us how all the biggest banks who we were forced to bail out, have not paid one thin dime in federal taxes on the profits they've earned for the last 4+ years? I suppose we all have a better chance of winning the lottery before seeing anything that is honest from people like this.
FYI, author Johan Galtung, the man who accurately predicted 3 years before Reagan took office the collapse of the Soviet empire before 1990, has now published his prediction of the collapse of the U.S. empire before 2020. No reason to think he'll be wrong this time.
FYI again folks, there is currently an effort in DC to make any alternative currency system (e.g., bartering) illegal in the U.S.
In the immortal words of that war criminal Dick Cheney, they're in their last throes.
I am thinking the next crisis will be three fold but related:
1. The American Gov't and our representatives will allow a perfect opportunity to start using our own natural resources to pass by without a whimper. With having enough gas and oil here at home, along with the capability of safe nuclear energy, the American Continent could be the next OPEC of the world. But we won't, as we have a link in protecting Saudi Arabia for the reason in #2. Our debt is also beyond controlling. Our people are just like those of the PIIGS countries. We have tasted of the free food of socialism, but forgot there is no such thing as a free lunch.
2. Iran will eventually get their nuclear weapon but most likely from Pakistan, Russia or China already made for use. It would be very easy for Russia to bring them over land to Iran or for China to bring them through their new military port in Pakistan. Once they have their hand dealt, Iran will play it like this: Iran is the center of the Shiite Muslim world completely surrounded by the Sunni Muslim whom they hate with a passion. These two groups are mortal enemies and have been since someone poisoned Mohammad 1,400 or so years ago. They have been fighting over who would take Mohammad’s place since. Once they get the weapons they need, they will extort oil from the Sunni who control most of it. The Iranians will control the Straits of Hormuz and Bab el Mandeb in west Yemen from which most of the Middle East oil must pass through to get to the rest of the world. You can see the plot thickening already in the so called “Arab Spring” throughout the region. The Egyptians, lorded over by the Muslim Brotherhood now control the Suez, Iranians will control Yemen and the two shipping bottle necks. The Sunnis are getting their people to revolt against the Shiite rulers and the Shiites are getting their people to revolt against the Sunni rulers. This so called Arab Spring is only the start of the Shiite Muslim’s bid for control of the oil the rest of the world needs to survive. Both Sunni and Shia will eventually benefit in the long run and the rest of the world will be holding on to their @#@#s while it happens. Prices for oil will be in the $300 a barrel range and the world will be held hostage. The Chinese are using our debt to purchase gold and gold mines, they are trading partners with the other non middle east OPEC nations like Venezuela.
3. With the hatred of the Muslim world against Israel, and the poorly guided steps being taken by our “inexperienced” President, Israel will have no choice but to preemptively destroy Iran with their own Nuclear weapons in a bid for survival.
From Audacity of Hope:
"I will stand with the Muslims should the political winds shift in an ugly direction."
Actually there are more dark times coming as Obama plans to carry on the economic suicide with QE3 the printing of another 600 billion or more dollars which will only put America in an even worse state as the Federal Reserve buys those bonds with our own money.
Peggy Bundy economics don't work and never have.
The short stroke would be to go ahead and invest just do it in a market who's value isn't tied to the dollar.
Combine that with the unemployment spike that will come as the stimulus money runs out and the "saved jobs" become unfunded which will start around June.
Expect the current real unemployment of 22% to hit close to 25%.
Old Man 76,
That bag of cow dung went up because of the almighty dollar being devalued which in turn caused the price of commodities to rise (think corn) which in turn meant the food consumed in order to produce that pile of dung cost more. You can therfore blame the financial wizards of WS and QE=Bernanke (and those congressional leaders who pushed for Glass-Steagall act removal) for the price of your sh!t going up.
The price of corn essentially doubled in the last five years. What was the price of sh!t five years ago?
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