IT’S DIFFERENT THIS TIME
20 August 2009 by Cullen Roche
9 Comments
Fantastic data out of Gluskin Sheff and David Rosenberg this morning. This recovery really is different this time. Now investors really have to ask themselves whether it should be different this time:
Source: Gluskin Sheff
Many have raised the question of a catalyst for either an up or down market.
Here is what Rosenberg thinks:
“From our lens, there is always a catalyst or a spark for the next economic expansion and bull market. In 2003, it was leverage and a housing boom. What is it today? Cash for clunkers? Digitized medical technology? Chinese consumption? Government incursion into the economy and capital market? Perhaps we should also recognize that heading into the post-recession environment of 1991, there was a tailwind from sub $20/bbl oil; and heading into the 2003 rebound, we had sub $30/bbl oil; so it may pay to ask the question as to how $70+ oil is going to play in the recovery, unless we are talking about recoveries in Saudi Arabia, Qatar and the UAE?”
This fails to recognize that the market overshot so much on the downside due to folks assuming a depression. Most of this rally has corrected that overshoot to the downside.
Eric,
Valid point. In the grand scheme of things you have to remember that we are still 33% off the all-time highs. I don’t disagree with the assertion that rally has been rational, but further gains in the near-term become questionable. Does the landscape justify a return to 2007 prices?
1. Like Eric mentioned, market overshoot on the downside due to EXTREME fear of a depression.
2. Gov is printing massive amounts of money, and props up asset/stock prices. No matter how bad the economy is, cash may not be a good investment (both Buffet and Faber think so).
Eric,
It works both ways. What if we’ve now overshot too far to the upside? Given the news and the mkts reaction, it’s more than possible; it’s probable. We’ll see if the Fib 38.2% retracement holds.
I am very vocal about market valuation. PE ratios should be thrown out the window. The only question that matters to me is this: do the underlying future cash flows of the corporations you invest in justify the increased risk involved in investing in those assets.
Thus far, I do not see the cash flows in the underlying earnings that justify such risks. Therefore, investing capital into equities at these levels with a long time horizon seems foolish to me. Give me a 50 PE or a 5 PE – if the cash flows justify the risk then I am in.
Right now, opportunities appear slim after such a large run and cash flows that don’t justify much further stock price appreciation.
Jim Rogers and Marc Faber always say that the markets can go up to 50,000 if enough money is printed and enough government liquidity is injected. The fact of the matter is, long term, cash isn’t a good investment. The central bankers have made it abundantly clear that they will devalue the currencies. So obviously stocks, commodities, etc. are better. But that is long term. And I don’t really care much for the long term…Hell central banks could decide to create a new world order currency by then! :twilight zone music blaring:
TPC: Agreed re: cash flows … BTW do you have any nice charts on historic Price/(Cash Flow)? Where are we now? Or how about the mega bear quartet with a y-axis on P/CF? ;-}
If the market already priced GDP growth does it mean that even if figures will be weaker market doing so decreased its overbought level and thus will be stronger into weaker figures ?