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  Posted on: Thursday, February 19, 2009
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Boom Times Were a Mirage
Predictions for 2009--Stocks - Real Estate - Commodities
Amount of Debt to Generate $1 of GDP 
S&P 500 Earnings Estimates (Reported and Operating)--past year 
NDR Chart of historical P/Es of "Reported Earnings" 
Housing Prices Are Still Far Above the Norm 
The Cycle of Deflaion (Authored by Comstock Partners, Inc.) 
NDR Chart of MF Net Purchases & Redemptions (concept Comstock 

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Since 1996, we have been discussing why the economic strength over the past 13 years was a mirage.  We couldn't get over the rise in total debt relative to GDP which just so happened to explode coincident with the greatest financial mania of all time in the late 1990s.  In fact, we were so frustrated with the financial and economic environment we stopped charging for our research at the beginning of 2000 and started posting our comments on this same website free of charge.  It seemed that we were saying the same things week after week and wrote our last piece that produced revenue in December of 1999 called "Feet Don't Fail Me Now".  This report can be found by scrolling down to the bottom of our website. 


The reason we bring this up now is because we heard Mr. Wilbur Ross, who we have respect for, discuss the period from 2000 to 2006 as a "mirage".  That period was not driven by consumer wealth but instead by consumer debt. Mr. Ross stated that, "the anomaly is not the recession we find ourselves mired in now, but the 'boom' period from 2000 to 2006".  We would not disagree with that except to expand the period of time back to 1996.  Remember, even Fed Chairman Alan Greenspan warned about "irrational exuberance" in December of 1996 before changing to embrace the financial mania of the late 1990s as normal. We showed in past reports that the period from 1997 to 2008 the amount of debt required to generate $1 of GDP grew from $2.50 to $3.50 (see attached chart).   


 Mr. Ross went on to say that median income and net worth were not expanding and, in fact, were contracting during this period.  During the period between 2000 and 2006, he referred to an economist who said that if you removed the extraction of home equity withdrawals during that same period you would have had a decline of real GDP in 3 of the years and in the other 3 years gains of only 1%.  He also believed, as we do, that the deleveraging of the debt laden middle class will be slow and painful.  There is a major dichotomy taking place presently since our government would like to stimulate the economy by encouraging consumer spending while the consumers' inclination to save and pay down debt is greater than the inclination to spend.  If the savings rate goes up (as it should in a sound economy) it only does so at the expense of the real economy.  And if they save and pay down debt with the stimulus, consumer spending and the recession will suffer, which in turn, will postpone the economic recovery.


Predictions for 2009 for Stocks - Real Estate - Commodities



We have stated many times over the past few years that the S&P 500 should trade below 700 before the secular bear market ends. We are now lowering our expectations due to the earnings revisions that are dropping almost weekly.  We expect the stock market to decline to the levels experienced during past secular bear markets of about 10 times earnings.  We believe we entered into a secular bear market at the beginning of 2000 and expect the market to trade at a price earnings multiple on trailing 12 month "reported" earnings (the only earnings that count) of about 8 to 11 times. As you can see in the attachment, the earnings estimates of the S&P 500 have been declining all year and just last week the 2009 estimate declined by a whopping $10 (from $42 to $32).  This revision has also changed our smoothed earnings (trendline) downward to about $60.  We, therefore, have to revise our target on the S&P 500, at the secular low, to at best decline to 600.   


We also expect the housing prices to decline another 20-25% before it's over.  We have used the Case-Shiller Index (a much better index to use than NAR or OFHEO) divided by household median income for some time, and will use it again as an attachment.  It is really self explanatory.  This market will not reach a bottom (after going to the unprecedented level of almost 5 times household income) until it gets back to the norm of 2.7 times or lower.  We also expect commercial real estate prices to implode as we predicted previously. 


As far as the administration's housing rescue package-we really hope that it works, but sure don't think that any market as large as the housing market ($17 trillion-down from $21 trillion) will respond well to any type of stimulus. With that said, we certainly hope that it works as well as the administration expects, and not just delay the inevitable decline as we expect.


We also expect the obscure term, "Beggar-Thy-Neighbor" (until very recently) to become part of almost everyone's vocabulary as the year progresses (see The Cycle of Deflation). Also, there will be a major capitulation in the stock market which will be expressed by mutual fund liquidations shown in attached chart.  Commodities should continue their decline as we predicted earlier (gold could be the exception).  These topics have also been in a number of past comments.   


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