Good News From the Economic Front

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CivilBear's Rant on Why The Markets Will Tank

Posted By: CivilBear Date: Thursday, 23 August 2001, at 12:03 a.m.

Let me preface this by confessing that I know nothing of techincals.

I also know nothing of astrological charts and nothing of wave theory.

But I do know something about economic fundamentals.

I've written professionally about financial matters for years and I do understand some troubling factors about today's economic fundamentals.

That's why I agree with Bear Forum members such as Jeff Little, who are predicting a stock market crash.

I have no idea when a crash is coming...although I believe it will happen within the next 15 months....but I do see a lot of reasons why such an apocalyptic event is inevitable.

Let me cite 25 reasons for my belief...

1: The historical norm for market P/E ratios is 14-to-1.

2. The Dow 30 P/E is currently 26-to-1.

3. The S&P500 P/E is currently 27-to-1.

4. The NASDAQ P/E is currently triple digits to one.

5. We are in the muddled aftermath of a monumental tech stock bubble, which burst at a cost of $4 trillion to 'investors' (speculators might be a more apt description).

6. Corporate profits are in a recession.

7. "Investors" continue to be in denial, continuing to pump more money into tech stocks in the hope of "getting even." I personally know several individuals who are continuing to lose their nest-eggs through daytrading, in the belief that things will turn around.

8. Earnings on S&P 500 stocks are down 17 percent in the past quarter, compared with the same quarter last year.

9. Earnings are forecast to be down almost as much this quarter, compared with the similar quarter last year. Yet the financial media continues to be bullish, constantly advising that 'we have seen the bottom.'

10. Total U.S. consumer debt outstanding is now in the $7 TRILLION range.

11. Anecdotal evidence, as well as various informational 'snapshots' from a variety of U.S. regions, shows a fall in housing prices and a reversal of the 'tight' commercial leasing trend. There remain some solid souls on Bear Forum who deny that we have seen a 'real estate bubble.' I admire their tenacity.

12. Outstanding credit card debt now averages more than $8,000 per household in the U.S.

13. Credit card debt has increased 270 percent since 1990.

14. The U.S. manufacturing sector has been declining for 11 months. Almost 900,000 of the 17.7 million people employed in the manufacturing sector have lost their jobs since last July.

15. Auto sales are finally slowing, as evidenced by Ford announcing another 5,000 layoffs.

16. Reports of the number of layoffs for this calendar year - from various sources - range from about 600,000 to more than 1 million. Those numbers vary greatly. Particularly puzzling is the government figure, which no longer counts among the unemployed those who have been out of work for three months or more. Apparently, the government believes that those people no longer want to work.

17. With unemployment rising and the public reaching a saturation point (how many S.U.V.s and electronic doodads can we want, anyway?), the question of "How long can consumer spending hold up?" looms large. After all, in the U.S. 'service' economy, consumer spending accounts for 68 percent of GDP.

18. The lowering of interest rates virtually always results in the lowering of the value of a currency. Since we've had seven interest rate cuts this year and the dollar is now weakening against the Yen and the Euro, how long can it be before the foreigners repatriate the 40 percent of funds in U.S. equities and U.S. debt instruments that they now hold?

19. Not only is the U.S. economy in borderline recession (0.7 percent GDP growth last quarter, likely to be revised downward), but the Japanese economy (the world's #2) is in a protracted recession and the European economy (the world's #3) is sliding downwards (especially Germany). In other words, there will be no knight in shining armor to come to the rescue if the U.S. economy tanks.

20. Emerging economies - Argentina is at the top of the list, followed by such nations as Turkey, Singapore, Brazil, etc. - are in serious trouble. Argentina, which represents 20 percent of emerging market debt, is currently in danger of defaulting on loans.

21. Bullish sentiment in the U.S. (as measured by investment newsletters) remains high. Denial is not just a river in Egypt. With the bulls still convinced that a recovery is just around the corner, can we have really seen the market bottom?

22. Rallies in the market are almost always attributed to 'technicals', rather than 'fundamental economic factors.'

23. Years of malinvestment (investors putting their money in 'no earnings' companies' and corporations putting their money in ridiculous expansion - citing one example: only 2.5 percent of fiber optic cable in the ground is actually being used.)

24. The recognition of the 'debt bubble' by the largest creditors in the U.S. - the major credit card companies and the banks that deal with consumer loans. This is evidenced by the fact that these creditors successfully lobbied the U.S. Congress to pass the toughest bankruptcy bill in American history this March. The bill is being fast-tracked into law and will be on the books this fall.

25. Perhaps the most troubling of all is the attitude of the American consumer. This person believes that he or she is entitled to everything NOW. Instant gratification is the mantra. There is no purpose in 'saving' for things - as evidenced by the fact that there has been a 'negative savings rate' in the U.S. for more than a year now. We want it and we want it now! We will mortgage our futures by refinancing our homes and (FACT!) owning a smaller percentage of equity in our homes than ever before in U.S. history. We will keep up with the Joneses and we will maintain our lifestyles on credit. .....And we will see precisely how draconian these new bankruptcy laws are, once we lose our jobs and discover we're only one paycheck away from throwing in the towel.

.....Meanwhile, I read the bullish posts of thoughtful Bear Forum members such as ClosetBull, Trader Bear and BearTrap and I wonder whether I'm on the same planet as these obviously intelligent posters. Can they be right and might I be a refugee from the Twilight Zone?

Time...as we all say...will tell.

But as one who is a firm believer in economic fundamentals, I cannot see a bullish scenario resulting from the reality of today.

Instead, I see a market downturn of massive proportions. My guess is that it will happen in the September/October time frame this year. If not, we'll see it in 2002. OCICBW.

Cheers, CivilBear

-------------------------------

FWIW, that's all it's worth.

-- (hennypenny@tcw.penny), August 23, 2001

Answers

Where the lair of you Ursidae? Might make a visit.

-- Carlos (riffraff@cybertime.net), August 23, 2001.

hennypenny,

Please enlighten us as to which (if any) of CivilBear's 25 points are incorrect.

-- J (Y2J@home.comm), August 23, 2001.

None are incorrect. I despise the happy smiley faces of the news media that say things are great, and now's the time to invest your money in the stock market. I have a friend who inherited some big bucks and immediately plunged it into the market. He's lost over 50% of it, I think he was greedy, but dumb is a better description of him.

-- (hennypenny@tcw.penny), August 23, 2001.

hennypenny,

I took your, "Good News From the Economic Front" thread title, and your, "FWIW, that's all it's worth" snippet of commentary, as sarcasm.

My mistake. My apologies.

-- J (Y2J@home.comm), August 23, 2001.

I happen to agree that there are plenty of reasons to think things will get worse before they get better - but there is an old Wall Street saying: don't fight the Fed.

If the Fed can't ignite this soggy tinder with seven or eight interest rate cuts (or ten or twelve), then things are badly broken and a depression is not out of the question.

-- Miserable SOB (misery@misery.com), August 23, 2001.



Miserable SOB,

Yes, your advice about not fighting the Fed is usually right. However, I caught a gentleman money manager named Holland (Michael, maybe?) on cable last night who pointed out that since January, when the Fed cut rates for the first of seven times (so far), that the Nasqaq was down 25%, and the Dow and S&P were both off over 10%, if my memory serves.

As far as your ten or twelve interest rate cut comment and things being "badly broken", Japan wholeheartedly agrees. : )

-- J (Y2J@home.comm), August 23, 2001.

OK hennypenny. Ursidae was too obscure. Please, where do these Bear folk chat?

-- Carlos (riffraff@cybertime.net), August 23, 2001.

Carlos, because I enjoy your posts, here's the link:

http://www.bearforum.com/cgi-bin/bbs.pl

This is a really cool forum with very knowledgable people giving their expertise on the current market. The majority of posters are bear-minded people who make money trading off of bear markets. This forum is informative with links to articles and other sites not noted in main stream networks. Enjoy....

-- (hennypenny@tcw.penny), August 24, 2001.


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