If things are so bad...
Discussion
Because the world is about to end in 2009 and we are all sticking our heads into the sand and hoping that it will all go away.
Well, that is what the media and some elements of PH seem to think!
Best start buying up tinned food, because when the banking system crashes and the supermarkets cannot stock food, it will be anarchy and its every man for themselves!
Or, it could be a recession. A few people will have a hard time, the rest of us need to be careful but overall things carry on much as before and come 2010, when its over, we will all go back to our bad-old-days again.
Well, that is what the media and some elements of PH seem to think!
Best start buying up tinned food, because when the banking system crashes and the supermarkets cannot stock food, it will be anarchy and its every man for themselves!
Or, it could be a recession. A few people will have a hard time, the rest of us need to be careful but overall things carry on much as before and come 2010, when its over, we will all go back to our bad-old-days again.
Its called a bear market rally. Encouraged by the idea that dividends from some stocks offer better value then having cash at a crap interest rate, markets can go up for a while.
Does not alter the secular trend of everything being s
t. Profits will be taken and the indices will turn to crap again. It's only a matter of timing.
Does not alter the secular trend of everything being s
t. Profits will be taken and the indices will turn to crap again. It's only a matter of timing.The credit markets are currently pricing things to be worse than they were in the Great Depression. Far worse (credit spreads are wider than they have ever been in history). In the Great Depression, 1 in 6 companies declared bankruptcy. Current pricing implies (depending on your assumptions) that 40-60% will.
In the Great Depression, the US Equity market fell to 10% of its high at one stage (i.e. a 90% fall). It didn't do it in a straight line. It initially fell 35% then rose 20% wiping out roughly half the losses. It had several double digit rallies on the way down (the high to low took 3 years). Most bear markets retrace to half the high at some stage. This rarely is the end of the bear market.
So what cheery news can one deduce from this? Depends if you want to be glass half full or half empty.
Bullish:
Credit markets are far, far, far too cheap. Equities are saying it is going to be fine. Buy corporate bonds and have the security of being a bondholder with equity-type returns (why own equities when you can get 15% yields on investment grade corporate bonds). Equities might rally upto 50% from here (but are at huge risk of a crash again thereafter)
Bearish:
Equities have lots of downside - if we are 50% below peak, credit markets are saying that equity markets should fall 80% or more from here. Take advantage of any rally to sell. Companies will need to rebuild thier balance sheets by issuing more equity (if they can) improving their ability to repay bondholder. So owning equities rather than corporate bonds is a bit mad.
In the Great Depression, the US Equity market fell to 10% of its high at one stage (i.e. a 90% fall). It didn't do it in a straight line. It initially fell 35% then rose 20% wiping out roughly half the losses. It had several double digit rallies on the way down (the high to low took 3 years). Most bear markets retrace to half the high at some stage. This rarely is the end of the bear market.
So what cheery news can one deduce from this? Depends if you want to be glass half full or half empty.
Bullish:
Credit markets are far, far, far too cheap. Equities are saying it is going to be fine. Buy corporate bonds and have the security of being a bondholder with equity-type returns (why own equities when you can get 15% yields on investment grade corporate bonds). Equities might rally upto 50% from here (but are at huge risk of a crash again thereafter)
Bearish:
Equities have lots of downside - if we are 50% below peak, credit markets are saying that equity markets should fall 80% or more from here. Take advantage of any rally to sell. Companies will need to rebuild thier balance sheets by issuing more equity (if they can) improving their ability to repay bondholder. So owning equities rather than corporate bonds is a bit mad.
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