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Friday, October 24, 2008


limit down

i had wondered if we wouldn't have to have one of those crushing days that tripped circuit breakers to draw a line beneath what has become the most awful market crash since 1929. today, we may get it.

you know things have gone completely awry when albert edwards is starting to get bullish. echoing jeremy grantham, however, edwards expects to hit 500 in the s&p next year as the lights go out.

UPDATE: there are rumors the general motors is on the brink of bankruptcy. GM isn't trading that way early, however, off 41 cents to $5.69 at this writing.

UPDATE: nouriel roubini cites the flood of hedge fund and mutual fund redemption orders as a likely route to shutting the united states capital markets for a week or two in coming days. the head of GLG reminds of several others who have prognosticated that a third to as much as one-half of the hedge fund universe will be going away.

UPDATE: we didn't get it -- market closed (-3.5%) pretty much across the board -- and that's a pity because i still suspect that final hair-tearing, eye-scratching, screaming-at-the-monitor downdraft is lurking. the VIX momentarily touched 90 (!) today, and you'd think that would be enough, wouldn't you? but i can't help feeling there's another shoe still to drop. in the meantime, sleep with one eye open -- there's a monday up next, and crashing markets love a monday.


so how bad is this going to get GM?

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depends on whether you mean market or economy, dj.

economy will i think be some quarters of strong recession followed by anemic or no recovery -- probably the most severe economic test for the country since the 1930s. moreover, one should not entirely discount the possibility that things could actually get worse than that -- i know that sounds like hyperbole, but the initial conditions (debt-to-GDP, asset-prices-to-income, gini coefficient and many others) suggest that if the unwind gets well and truly out of control it could result in conditions as bad or worse. that would probably entail a currency collapse as well.

as far as the market goes, i think we're patterning the 1929/1987 fractal generator -- implying a low in the next week or two around s&p 750. (the 2002 low was 777 -- we'll test that, i think.) that's another 15% down, of course.

but that may only be a trading low, from which we might expect a multimonth rally. eventually, economic conditions, deleveraging and multiple contraction could mean s&p reaching down to 500 or so -- that would be around 8x trailing ten-year earnings, which is where the market normally ends up after protracted bear markets.

all this is speculative, of course. but it will be hard, that much seems certain.

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gm -

man, when i said nothing makes sense anymore, i didn't think it would include yesterday's markets. especially with a vix at 90.

i agree: monday could be a biggie. especially with everyone howling at the moon, so to speak.

oh well, here's something to ponder in the interim:

the final bubble?

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dr. steenbarger is noting the expanding weakness in this last week -- i hate to even say this, but the consolidation since oct 10 looks very much like a bear triangle which broke down thursday. that would suggest a measured continuation to 750 in the s&p as well.

the hedge funds are simply not done unwinding yet, and you can bet many more margin calls will be issued as broker/dealers squeeze requirements.

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the final bubble?

that was the lesson of smoot-hawley, wasn't it dc? reactionaries are going to start blaming china regardless of what happens, and (though we are at primary fault for what has befallen us) not entirely without a case. democratic ascendance will mean empowerment for labor -- and while that is needed (for this country needs badly to get real incomes rising again to bolster economic activity) it will mean trade barriers.

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ala steenbarger (good one), i agree with you: new lows in the near-term do seem inevitable. what's frightening is where and when the hell the bottom's going to be. mish is saying 450-600. right now you could add a zero to the range for dow 4500-6000. (and there is more of your continued hedge fund unwind, eh?) finally, kevin depew says stocks aren't going to be attractive for 4-6 years.

democratic ascendance is a necessity in my book too. and all that krap will pretty much just be "history repeats itself". (the ptb pretty much know what's ahead - how about biden's claim of a quick crisis for obama?)

i think it's also pretty telling that precious metal fabrication of coins and such seems to be drying up "until further notice".

no matter what, it's going to be one hell of a ride.

but, lest we forget, as the zen master always says - "we'll see".

for now, time for a sleeping pill.

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to go with this dourness, however -- blodgett cites cbuffett and grantham correctly in this excellent overview at clusterstock. laddering into stocks from a high-cash position (which is hopefully where good folks are) at these prices and lower should bring good things.

my view is a bit more sour on the long term -- the risk of holding stocks is high enough that investors should really hold their fire until we see the whites of their eyes. buying around 15x adjusted trailing earnings is insufficient risk control in the long view, imo -- we are likely to get 10x or less as time goes on, and that will be time to get greedy. one has to remember that stocks carve out as much time and price beneath average as above it -- there's no need to hurry from here.

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good follow-up discussion and strategy, gm - thanks.

blodgett piece was good too.

man, what a ride.

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