Sean’s Rant

By special request, I am reposting this because it is still applicable:

I’m going to use the Hollywood version, because I was not actually on the Titanic, nor have I done any further research on it, but I have seen the Titanic movie a lot of times.

Here’s what we’re looking at for this week, the factors, and how they will effect the market:

-Lower earnings reports (negative)

-Lower libor rates (positive)

-Higher dollar (mostly positive)

-Prospects of lowered Fed Funds rate (positive)

-Negative economic indicators (negative)

The short term may be about value (Book Value and (P/E) Price/Earnings), but the mid term is still about the economy. Those earnings numbers are projected numbers and the P/E ratio is based on those projected future earnings, which are in turn based on the future economy. The outlook is not good at all. This is not the time to buy for, according to Jim Cramer, less than 5 years as a holding period. That means he doesn’t think the economy will be out of the recession for 5 years.

This is the first article in a while that I have seen that is close to getting its arms around the situation from a logical point of view, without letting extreme emotion could the real issues. 

Let’s get a clear definition of the market being “up” or “down”. In Nassem Taleb’s book The Black Swan he talks about the fact that any minor changes are not even worth mentioning. Any changes in the market of less than 1 % (currently 100 pts) in my eyes does not make the market truly “up” or “down”, especially during the day. Consistent changes of 1% over the course of a week amounting to a total of 5% are significant. Drops during the day of 8% (800 points) during a day are significant. Drops of 200 points the open market day after 7 central banks drop interest rates .5% in concert are significant. That fact alone, without the market consideration was significant. A drop of 30% over the course of the year is significant. Watch out for the media that gets excited like this morning when the market was up around +1%. This is not significant. The Federal Treasury talking about buying up banks on a macro level is definitely significant.

It still baffles me when people want to stand behind ‘this isn’t a recession’. Well, its not technically a recession by definition, but the measurement for a recession is based on GDP and a length of time. We may not currently be in what is defined as a ‘recession’ based on these 2 factors, but we’re in more of a sudden condition, whatever it is that you want to call it. Those two metrics are heavily lagged by what is actually going on. The media has deemed it an ‘economic downturn’. Is this a new definition?

This will not be an overnight recovery. Here’s why:

-Consumers are in way over their heads in debt. This consists of credit cards, student loans, car loans, home loans, and home equity loans. The ratios are insane, and before this got really serious, the average home equity was at record lows, credit card debt levels were at record highs and saving was at a record low. Home price levels are so low that most families can’t afford to move, or will take a loss on it if they do.