After yesterday’s 72 minute 72 SPX point meltup, most investors breathed a huge sigh of relief. Doug Kass said that we’d seen the lows for the year and we all had a drink and a good nights sleep. But alas, relaxing was not meant to be for very long.
We came in today to see futures lower by a bit but as we got closer to the open, rumors of a French bank going under caused any bid to be withdrawn. We promptly, and to a good deal of surprise, gave back the entire 400 point gain in the first minutes of trading. We have not broken yesterday’s lows of DOW 10600, SPX 1101 and Nasdaq COMP 2333. But the drop is certainly disheartening.
We cointinue to bounce around, up 100, down 100, fueled by algo’s running wild. But on further and closer examination it appears now that we are past the “panic stage” stocks are walking themselves lower.
Our political unease, the worldwide banking crisis and the continuing weak economy are forcing equities through a “PE contracting event”. That simply means that every dollar of earnings is worth less to the earnings multiple. For example, if a stock should trade at a P/E of 12, after this adjustment, it will trade at a P/E of 10, with the exact same level of earnings. This is called a P/E contracting event and it happens when the growth environment come into question. It makes it hard to buy because nobody is yet sure what the “correct” multiple is for each dollar of earnings in this environment.
This is not a pleasant scenario for investors and it can be blamed on a variety of factors. But I’m not here to blame, rather to now help figure out when this phase ends. I know that we are all hoping for a return of the good times where everyone just bought the dip. The bond market has already made its move to reflect this reality by taking interest rates to post-crash lows. This is now a sea change of events for the stock market and is a difficult adjustment.
Look, reality is setting in quickly. Once QE2 is given back fully, the risk in the market will be lower. Until then we must continue to play defense.
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I think you mean DOW 10,600.
I appreciate the post; well articulated.
fixed! thanks….
absolutely agree,be in no hurry to buy anything. were not done yet
u da man, Bleier! love the radio gig 😉
ok… here’swhatwergonnado!
We’ll take the panic baskets of the rich and give them to the poor, ain’t that right booboo?
booboo (Biden)
“When the stock market crashed, Franklin D. Roosevelt got on the television and didn’t just talk about the, you know, the princes of greed,” and shortly after I told a man in the wheelchair to stand up, and told him it’s about the 3 letter word J-O-B-S jobs!
What was the DOW at when QE2 began?
Scott, could this PE contracting event be associated in any way with QE1 or QE2? Since the QE 1/2 artificially kept prices high? Or is that just a dumas question?
But when he asks, he must believe and not doubt, because he who doubts is like a wave of the sea, blown and tossed by the wind”
(James 1:6, NIV)