Friday, April 17, 2009

Carving Another 2/3 Off the Stock Market

In my post How Low Can You Go?, I presented the equivalent of Exhibits A and B in the case of a market plunge far deeper that what has been experienced so far.

I guess this would be Exhibit C then:

Federated’s Tice Says S&P 500 Is Poised to Plunge 62%

The Standard & Poor’s 500 Index’s 28 percent rise since March 9 is a “sucker’s rally,” and the overvalued measure may plunge 62 percent as earnings continue to shrink, according to David Tice of Federated Investors Inc.

Stocks are overpriced relative to earnings, which won’t rebound soon after posting the longest quarterly slump since the Great Depression, said Tice, the chief portfolio strategist for bear markets at Federated. Analysts estimate that the S&P 500 earnings decline, which has lasted for six quarters, will continue for three more quarters before profits improve, according to data compiled by Bloomberg.

The S&P 500’s five-week advance, the steepest since the 1930s, according to S&P analyst Howard Silverblatt, may carry the index 16 percent higher to 1,000 points before faltering, Tice said.

“Stocks are overpriced in terms of earnings,” he said in a Bloomberg Television interview. “We are closing down factories and retailers and businesses all over the place. How in the world are earnings going to stabilize? We just don’t see it.”

The Federated Prudent Bear Fund that Tice founded returned 27 percent last year as the S&P 500 plunged 38 percent, the most since 1937.

Tice said the benchmark index for U.S. stocks may end the year at 500, representing a 42 percent slide from today’s close of 865.30. It may eventually fall to 325, he said.

Companies in the S&P 500 trade at 1.9 times their liquidation value, according to data compiled by Bloomberg. Tice said that ratio may fall to between 1 and 0.5.

“I’ve never been more confident that this market will fall back to at least book value,” Tice said.

Now back to commentary. And this is why the rebound story is a farce. I have yet to hear from one bull as to exactly how this stabilization and recovery will be orchestrated. For fun, try it. I have, and every time I ask, I get some touchy, feely response about stimulus and the fact that America is the greatest, most innovative country on Earth, so it's inevitable.

Um, no. It's not.

Our productive capacity, organized labor system, and economy in general is structurally damaged in a profound way. Not the least of which is the leverage embedded (I'll likely be touching on that in more detail this weekend).

The past few days I have been in countless meetings with a leading edge global manufacturing client, and heard firsthand that bookings - and their bookings typically cover a WIP time of 12-18 months, so this is a serious leading indicator - are almost nonexistant. I was made aware of other grim details that I won't discuss, but none of it paints a picture where the bleeding stops in a sustainable way.

While historically the stock market does bottom between 6-9 months prior to the economy, there is no legitimate reason to believe that economic recovery is anywhere in sight.

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