Financial Armageddon
Posted by Frugal on October 8th, 2008
Global markets are way oversold. Do NOT panic.
Most stocks are 30% to 50% down in 1 to 3 weeks. But remember that the world has not changed much (yet). In fact, I would argue that there is a financial armageddon in financial sectors, BUT life will go on. Everyone will still need to consume most of the necessities in life.
I believe that there will be a global melt-up at some point, but I don’t know from which level it will rise, nor from how high it could rise to.
My tentative guess would be down on this Friday, big up next Monday, big finish towards next Friday, and then big down towards the end of October. Your guess would be as good as mine. But seriously, the world is NOT collapsing. Or at least not yet. In fact, if energy sectors and prices go down too low, we will REALLY have a problem going forward maybe starting the end of 2009 to 2010. High energy prices encourage exploration and production. And I’m sure we will need that supply down the road.
The magnitude of fall around global markets is equivalent to 1987. I believe it will rise eventually.
Just a disclaimer. I don’t know to which level it will rise. I think it’s probably okay to say that stocks will go up by 25% to 30% from the absolute bottom when it appears. But if we go down another 15% from today’s level, you may gain only 10% by buying today. ( 1-15% ) * (1+30%) = 110%. I believe it may go up by 40+% for certain sectors. But again it depends on where the low is. If you can catch the bottom, you will do great. If you catch the falling knife however, you will definitely get hurt. Volatility is the rule of the day.
And by the way, use index or ETF if you want to play in this market. Now is not the time for stock picking. There is always a slim chance that you will pick the wrong stock. And picking the wrong stock in a highly volatile market will kill you.
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October 8th, 2008 at 11:40 am
Frugal,
Have you considered a timing system such as decisionmoose.com?
October 8th, 2008 at 8:44 pm
yup, good call. tremendous opportunity out there right now. hedge funds are puking their holdings up as they fight to raise cash for redemptions and i’m even hearing some rumors of a big fund liquidating. main thing is that this is forced selling, especially in energy equities and natural resource plays. if you want some ideas, just check out some of the most common hedge fund holdings from various funds on my blog, like Atticus Capital: http://www.marketfolly.com/2008/10/hedge-fund-tracking-atticus-capitals.html
October 9th, 2008 at 12:36 pm
Frugal,
Your suggestion is the “value trap” problem that many investors fall into. You see the market down 30% and think its a great buying opportunity.
And most times this is correct. But it is a great buying opportunity only if earnings going forward can be sustained. But in this case, they cannot. It is flatly impossible; with Treasury borrowing money like a madman, tacking on more than 20% to the national debt in the space of months, carrying costs will inevitably rise as will taxes. Both of these have a multiplier effect (in the wrong direction) on corporate profits, and in addition the “faux profits” from financial engineering have all disappeared at the same time.
The S&P 500′s profit, in terms of gross dollars, are almost certainly going to come in by 50% from the highs, and that assumes we get a garden-variety recession and not something worse. This of course puts “Fair Value” on the SPX down around 750, or another 25% down from here.
This is a much higher probability occurance than you are giving credit to because you aren’t looking at the whole picture.
October 9th, 2008 at 2:52 pm
Market Folly,
Thanks for the link, pretty interesting stuff.
October 9th, 2008 at 7:33 pm
Frugal,
Pls provide your comments (your opinion) if you believe it is the BOTTOM or there is more to come…
I’ve been following your blog for a few years now and I won’t hold you for your opinions.
But, I think your views are always pretty darn close…
Also, which countries’ economies will “follow” the US financial meltdown? China? Australia? Others?
Thanks again for your writings. I will be on your blog everyday these difficult times….
Rgds,
Mike
October 9th, 2008 at 11:47 pm
My $0.02:
-Market will plunge again tomorrow (Friday 10/10)
-Market will be lower than today by end of October
I can’t give opinion yet on gain/loss from 11/1-12/31. Keep in mind that October is earnings season. Financial earnings seasons is clustered b/w 10/14 and 10/21. I expect detailed damage to be revealed.
If you have made money on DXD, SDS, and QID in recent weeks/months like I have, now may be the time to add EFU or close out and move to EFU. The strategy here is to take advantage of the US market leading the European market (which works in both directions of course). Same can be said of Asia too. SKF was a test of my patience but has blown my expectations out of the water and was a great play. Probably still is through end of October.
October 10th, 2008 at 9:52 am
Thanks for your comments Romeo61. It does sound like you made some great plays in the sharp down trending markets.
After today’s market conditions, it does seem like the bottom, no?