Stock prices still have lower to go
It will likely be years before the market hits bottom and rebounds.
In this July 15 photograph, trader John Bowers works on the floor of the New York Stock Exchange. The market has seen gains for seven consecutive days. But will the gains continue?
Richard Drew/AP
Paris, France – Not much action in the markets yesterday. The Dow barely budged, but still ended the day in positive territory – the 7th day in a row of gains. Gold fell $6.
Investors beware!
Why? Because they are trapped. After 12 years without a real gain, they can’t afford to miss a major rally. So, they’re inclined to take chances. But is this rally worth betting on?
Nope. Not in our view.
Stocks have gone nowhere in 12 years. But it’s not ‘nowhere’ that they need to go. They need to go down. They need to complete their historic rendezvous with the bottom.
Currently, the S&P trades at about 17 times earnings. You buy a share for a dollar. You get a company earning about 5 cents a year per share. But at a real bottom, a dollar’s worth of stock ought to buy you 20 cents worth of earnings. At one point in the ’30s, there were major companies selling at barely 3 times earnings…that is, a dollar’s worth of stock earned 33 cents.
We have a long way to go. And it’s not going to be much fun for those who are holding shares and hoping they will go up. Most likely the bottom won’t come for a few years. And when it comes, people will be shocked, broke and disappointed.
Most likely, too, US incomes are going down. Much of the economic gains made over the last 20 years were phony. They were based on buying things with money that hadn’t been earned yet. There were not many people who could afford Americans’ standard of living in 2007…not even the Americans themselves.
And of course, businesses and investors made their projections for future earnings based on the same delusions. They built houses counting on rising incomes. They built malls counting on rising spending. They made their own retirement plans based on bubble-era estimates.
“Poor Johnny,” a friend reported the news on another friend. “He’s broke. You know, Johnny… He’s a developer in Florida. But what is it with those guys? They never take their money off the table. He had made a fortune. But he just kept leveraging up. You know, he’d use his apartment buildings as collateral to buy more apartment buildings. And towards the end he was buying some pretty expensive property near Miami, secured by his other property, which was valued according to some very optimistic appraisals.
“I told him he should retire. He was 62. He was on top of the world. What more did he want? Why take chances?
“Then, when the bottom fell out, the whole thing collapsed. The last thing I heard, he was looking for a job.”
We’ve already seen the peak. What’s ahead is the valley. For the next few years – maybe 5…maybe 15 – we can expect falling standards of living in the US…along with falling stock and real estate prices. Yesterday’s news, for example, told us that 1 million people are expected to lose their homes to foreclosure this year.
If you wanted more proof that the economy is not recovering, here you are:
“Retail sales fall for second month,” says Bloomberg.
Households are getting rid of debt. They’re sprucing up their balance sheets by increasing their savings rates. More savings, less debt. We have no quarrel with this process. It’s the market’s way of correcting mistakes and putting things back in order.
But it’s not without its little aches and pains. You’d expect retail sales to go down, for example.
If this were a recovery, on the other hand, you’d expect sales to be going up…to be recovering, that is. If the economy were retracing its bubble path, sales would go up and up. Instead, they’re going down and down – which is why it’s not a recovery. It’s a Great Contraction.
How long will it last?
Until it is over.
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