The Second Leg Down of This Great Recession Could Be Worse Than 1930s.
By Daniel at 11 October, 2009, 2:33 am
The recent run up is creepy similar to the run up after the 1929 crash. This would lead many to believe this market is overdue for a major correction.
Frankly, I believe in math. Negative earnings and double digit PE ratios tell me that this market is overvalued and economy is getting worse. Dow 4500 or lower isn’t impossible!!!
An article on seeking alpha written by Edward Harrison that made a lot of sense to me:
it starts off with this intro and goes from there.
“For the last few months I have been casting around looking for bullish data points as counterfactuals to my more bearish long-term outlook. I have found some, but not enough. If you recall, early this year, I stated that we are in depression, making the case for the ongoing downturn as a depression with a small ‘d.’ Nevertheless, I was quite optimistic about the ability of policymakers to engineer a fake recovery predicated on stimulus and asset price reflation and I certainly saw this as bullish for financial shares if not the broader stock market. But, I saw these events as temporary salves for a deeper structural problem.”
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Well written — “Allow Me to Introduce: The Biggest Sucker Rally Since The Great Depression”
“It’s been said (and perhaps you are getting tired of hearing it) that those who don’t learn from history are doomed to repeat it. If the parallels of the Great Depression continue to hold up as they have (and according to historical indicators they will), history doesn’t have to repeat itself to severely hurt investors. A mere rhyme to the Great Depression would be enough to wipe out tons of portfolios.
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Market tops are always marked by extreme levels of optimism.
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Parallels between the 1929 and 2007 market tops
Even though a major storm was brewing, prior to the 2007 market top, Wall Street saw no ‘cloud in the sky.’ In its Global Economics Report, released in the summer of 2007, Merrill Lynch’s analysts published the following outlook: ‘The Merrill Lynch global economics team believes that the economy will continue to grow in 2007 - with no sign of a significant cyclical slowdown.’
From 2007 to 2009, the major indexes declined some 50%.
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Parallels between the 1930 and 2009 major bear market rallies
Following the initial 48% decline in 1929, the Dow Jones rallied 48% within a period of six months. This rally was powerful and retraced 52% of the Dow points lost in the initial decline. Even though the market was far from its previous highs, investors had once again gotten excited about owning stocks and felt confident that the market would continue to move higher.
On March 25, 1930, just a few weeks before the waterfall decline resumed, the New York Times reported that ‘Wall Street was in a cheerful frame of mind as a result of numerous vague reports of improvement in business and industry.’
Once the bear market resumed, it erased another 86% of the Dow’s value.
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Just when you thought it wasn’t possible
If this sounds impossible, consider the following:
1) The Dow Jones measured in the only true currency - Gold (NYSEArca: GLD - News) has already declined over 80%. To reset valuations, the Dow measured in dollars will have to follow.
2) Japan’s Nikkei has lost as much as 80% since its 1990 all-time high. This drop came amidst a global bull market. Imagine what a global bear market can do.
3) A look at current dividend yields and P/E ratios shows that U.S. stocks are grossly overvalued. The current P/E ratio of 141 (reported by Standard & Poor’s) dwarfs even the P/E ratios seen during the dot.com bubble, where technology companies (NYSEarca: XLK - News) with no earnings traded at $100 a share and more.
- Don
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