Prediction: The Worst Market Crash Ever!!!

[Mark Heide]

A while back I had estimated that the DOW should be worth approximately 7200 and the S&P 500 should be 775. But, now I think that it could even go much lower due to many factors. I have no estimate for the NASDAQ, who knows how low it will be since it is primarily made up of the businesses of the '90s.

First the employment report came out on Friday indicating a 3/10% gain in personal income. What is disturbing about this figure is the gain was based on employee overtime. Companies are still announcing layoffs and most have hiring freezes. SBC announced they will be cutting 11,000 jobs, so we see a further decline in the telecommunications industry. I've never seen the employment situation for new hires this bad.

The company I used to work for was deeply involved in the dot com venture capital business that eventually made them file for bankruptcy. They ended up liquidating and selling our services division to their competitor, who eventually consolidated and closed us down 6 months ago. Since, I had worked there for over 11 years I fortunately received a decent severance package, but the same is not true for my former coworkers.

My friend Bill who is a Network Engineer with years of experience called me Friday morning to tell me he has a new job. He now works for the federal government as a Security Screener at Midway airport for less than half the money he used to make as a Network Engineer. The whole point here is that there is very little hiring for technology jobs. Furthermore, other people I have talked to that are working are putting in a lot of overtime, or the work is just not getting done. Companies are afraid to hire due to the economic conditions and uncertainty. But, some recruiters are expecting the hiring business to improve in November.

My biggest complaint about our economy is the role the federal government is playing. So far, they have done nothing to stimulate job growth. They need to pass legislation to give companies tax incentives for hiring. This will help stimulate job growth. I believe this is the key for economic recovery. Right now, our government is preoccupied with elections and possible war with Iran.

Speaking of Iran, the supply of oil is another problem. Right now the price of oil has a war premium priced into it, and could possibly go up to $40 a barrel if we do go to war. I currently believe that the price right now is too high making it expensive for companies to manufacture and transport goods. This cuts profit from companies and is a contributing factor to slow growth. An analyst that was featured on WebFN this week stated that every $10 per barrel of oil costs us 1% of GDP.

I know that a lot of financial analysts are expecting the fed to cut interest rates, but I see no point to it. Companies are not taking out loans for growth and expansion. All the cuts so far have not had much impact on business. Although, cuts have helped consumers refinance and buy big ticket items such as new homes and vehicles, but this is not helping the market.

Consumer debt is at an all time high. How long will it be before they stop spending?

The risks of investing in the market are extremely high. I expect the market to erratically fluctuate until the situation with Iran is resolved. My advice for reentering the market is to look for companies that are not exposed to technology and telecomm. Furthermore, because this is a bear market, the best investments will be value investments. Look to buy companies with reasonable P/Es for their industry. I see no reason to invest in growth stocks when economic growth is near a snails pace. Lastly, due to the volatility you may want to wait out the Iraq situation. Invest at your own risk. I'll stay out of the market for now.

Good Luck

Mark

[adios]

"A while back I had estimated that the DOW should be worth approximately 7200 and the S&P 500 should be 775. But, now I think that it could even go much lower due to many factors. I have no estimate for the NASDAQ, who knows how low it will be since it is primarily made up of the businesses of the '90s."

A quick comment on valuations. Due to the wide, and I mean really wide, range of values for the equity risk premium prices can flucuate a tremendous amount. All it means to me is that prices are often determined by investor emotion. However, when companies sell at their net cash value or below and I'm not talking about book value either, it's hard for me to say that they are overvalued. True some may burn through all their cash but quite a few of these companies have very slow cash burn rates if they have any at all. I can see this response is getting kind of long and it wasn't meant to be. More on this in a separate post.

"First the employment report came out on Friday indicating a 3/10% gain in personal income. What is disturbing about this figure is the gain was based on employee overtime. Companies are still announcing layoffs and most have hiring freezes. SBC announced they will be cutting 11,000 jobs, so we see a further decline in the telecommunications industry. I've never seen the employment situation for new hires this bad."

Data from previous recessions would show that the unemployment rate peaked after the recovery was under way. Traditionally speaking, unemployment rates are actually low. Is the USA ecomony running at full production? No, however, if you look at the consummer (I know the real estate bubble blah, blah, blah), and the service sector, the economy is actually doing ok. The industrial sector is doing horribly but it represents something around 27% of production I believe. Business investment will drive job growth and business investment is slowly improving. Economic uncertainty i.e. economic risk has made companies cautious.

"The company I used to work for was deeply involved in the dot com venture capital business that eventually made them file for bankruptcy. They ended up liquidating and selling our services division to their competitor, who eventually consolidated and closed us down 6 months ago. Since, I had worked there for over 11 years I fortunately received a decent severance package, but the same is not true for my former coworkers."

I believe that the dot.com phenomona was a fraud perpetuated by Wall Street investment banks.

"My friend Bill who is a Network Engineer with years of experience called me Friday morning to tell me he has a new job. He now works for the federal government as a Security Screener at Midway airport for less than half the money he used to make as a Network Engineer. The whole point here is that there is very little hiring for technology jobs. Furthermore, other people I have talked to that are working are putting in a lot of overtime, or the work is just not getting done. Companies are afraid to hire due to the economic conditions and uncertainty. But, some recruiters are expecting the hiring business to improve in November."

I've worked in the technology area for many years and it is cyclical. Technical innovation drives growth in technology spending.

"My biggest complaint about our economy is the role the federal government is playing. So far, they have done nothing to stimulate job growth. They need to pass legislation to give companies tax incentives for hiring. This will help stimulate job growth. I believe this is the key for economic recovery. Right now, our government is preoccupied with elections and possible war with Iran."

I believe there has been legislation passed and enacted allowing for accelerated depreciation of a lot of cap ex spending. Fiscal stimulus takes time to work through the system. BTW I'm fairly certain that IRS depreciation schedules for IT equipment coupled with IT product price deflation is contributing greatly to the problems in IT spending.

"Speaking of Iran, the supply of oil is another problem. Right now the price of oil has a war premium priced into it, and could possibly go up to $40 a barrel if we do go to war. I currently believe that the price right now is too high making it expensive for companies to manufacture and transport goods. This cuts profit from companies and is a contributing factor to slow growth. An analyst that was featured on WebFN this week stated that every $10 per barrel of oil costs us 1% of GDP."

Ok.

"I know that a lot of financial analysts are expecting the fed to cut interest rates, but I see no point to it. Companies are not taking out loans for growth and expansion. All the cuts so far have not had much impact on business. Although, cuts have helped consumers refinance and buy big ticket items such as new homes and vehicles, but this is not helping the market."

I think it's more creditors are being tight with money for business borrowing rather than a reluctance to borrow by businesses. Estimates for GDP growth in the 3rd quarter are between 2% and 3%. Don't think we'll see further cuts if this continues.

"Consumer debt is at an all time high. How long will it be before they stop spending? "

In real terms or nominal terms? I really don't know. As far as the consummer throwing in the towel completely, past history and economic theory would say no.

"The risks of investing in the market are extremely high. I expect the market to erratically fluctuate until the situation with Iran is resolved. My advice for reentering the market is to look for companies that are not exposed to technology and telecomm. Furthermore, because this is a bear market, the best investments will be value investments. Look to buy companies with reasonable P/Es for their industry. I see no reason to invest in growth stocks when economic growth is near a snails pace. Lastly, due to the volatility you may want to wait out the Iraq situation. Invest at your own risk. I'll stay out of the market for now."

This is where I disagree. As prices fall I can't see how the risk of investing increases. IMO it decreases. More on the subject of PE's later.

[Wildbill]

While many of your points are quite valid, I think you are jumping a little too far off the boat here. Yes the economy isn't at full capacity or really all that near it, but lets not confuse this with bad times. Unemployment is not too far from what economists thought was equilibrium not that long ago. I think the nature of the job cuts is such that we are finding intractable unemployment developing for the short term. What is wrong is that a lot of the people that are getting laid off are rather talented individuals that have a lot of specialized skills. That is great for the economy, but not so great for the person involved. These people have jobs to go to, but often you find that many of these people are very specific or picky about what they want to do. Call it the downside of the free agent nation. Instead of looking for a good job or career, the free agent wants something that will specifically fill his/her needs in personal development and interest...at an attractive salary to boot. In the meantime a lot of these people have a decent cash horde left over and are in no hurry to take anything less than what they want. This leads to the perception that unemployment is terrible, but indeed it is not. It is quite clear this is a major problem because look at where a lot of the umemployment is bad now. San Jose is over 7%, Seattle and Portland are seeing drastic increases in unemployment, DC suburbs are seeing growing problems...simply put the tech centers are slumping because of this problem. Of course it gets worse since tech is where a lot of the trouble exists, but in reality tech is not a huge piece of our nation's industry or GDP. Its a major driver of other things, but simple things like healthcare and construction employ and provide money to a lot more people than high tech ever will. These fields are steadily growing in most areas and recessions aren't all that common for either. As for the income growth numbers, I think you buy into the bias that seems to come out with every report. There is always some "BUT" thrown into it by the media spinmasters. If the income growth is coming from OT, so what??? If the income growth was coming because Bill Gates gave away money then so be it, the bottom line is more money in people's pockets. These are the same spinmasters that talk about how the unemployment rate went down, BUT the economy seems to be at a standstill. What??? How do these two facts get to be compatible? They have nothing to do with each other. This is like the fallacy that if Wall Street is doing bad the economy is doing bad or companies are losing money. There is no direct connection, especially when you always try to make something bad out of something good. Just start paying a little more attention to how they so wonderfully do this. People have called me a fool, but just watch it for yourself. You will be amazed at how much negative spin they try to slip into any bit of news that has the inkling of being seen as positive or even neutral. Just think about it "retail sales are up, BUT its the 0% interest factor" or how about "the ISM number (manufacturing catch-all number) is at 52.3, which indicates manufacturing is GROWING, yet its lower than it was X periods ago", and my favorite "the trade deficit is improving, BUT only because the dollar has devalued over the last 3 months". I mean come on, does every bit of good news have to have a disclaimer on it? Notice the spin, notice the media's seeming infatuation with bad news?

Further, I think your consumer debt number is quite misleading and quite a few economists have pointed out this very fact. Two issues have made this seem a lot worse than it is. One is the quest for miles or points, the use of credit cards has seen huge growth by people using them merely to gain points or even just plain ole float. They pay them off monthly or at times carry a balance, but its not credit being used on anything more than groceries and haircuts among other things. The second is that credit includes effects of home values. As home values go up mortgages and equity lines of credit increase. Also in times like these, people worry about emergencies and set up equity lines of credit "just in case". With home values up, these lines of credit are far higher than they were even a couple years ago. Add to this people that increase their loans by cashing out some funds when doing a refi and you are certainly going to see higher debt usage. While these amounts may not grow, they all are probably here to stay at these levels and analysis has to be done with this in mind.

As for the Fed, I am not one that believes they are set to cut rates. I think they all quietly realize that any moves they make are unlikely to produce a desired result. What moves they have left have to be saved for a true need and what the economy faces right now is not a true need. Sluggish growth may not make people happy and sure it sucks to be unemployed in good or bad times, but I just can't see how this media induced gloom can be misconstrued into desperate times. The situation just isn't that bad. Some areas are hurting, but most are holding their own. So much is focused on the bad, but the reality isn't that at all. Even if the economy saw 2% growth over the next year, we almost certainly would be better off because inflation will be nowhere near that amount. To really get booming, to really see a growth spurt the solution is quite simple to state, but hard to get; the rest of the industrialized world needs to grow or at least keep pace with the 2-3% growth. That is something that seems far off for now.

[Mark Heide]

Wildbill,

I don't follow what is discussed by the major news media, basically because they are in it for its entertainment value. Here's a link to the Help Wanted Index:

http://www.conference-board.org/economics/helpwanted.cfm


Good Luck

Mark

[Mark Heide]

Tom,

I'm still saying that the market is generally overvalued in some sectors. Futhermore, there is much that is undervalued, and I do agree with you that the market trades on emotion.

I still believe that all the hot air out of the technology bubble has not escaped. There are many companies still sitting on cash they made during the boom, but have little growth or slow growth prospects for the future. So, they can not justify the prices they are selling for based on future growth over the next two years. I am refering to companies that have high P/Es, for example companies like CSCO (even though this one is starting to decline).

I will agree with you that the market was more risky at the beginning of the year than it is now. But, the volitility index is high indicating that there will be much emotional trading in the market. I believe that the right time to get back into the market is when the volitility index normalizes somewhat. Plus, I follow the bear/bull index and currently it is approximately 50/50. When there appears to be more bear in the market, I believe this will be a time to buy those undervalued stocks. I posted my stock picks under my response to PokerBabe.

I'd like you to elaborate more on the P/E. I've generally associated P/Es valued at 25 or more to be a growth stock, and for the normal range to be between 15 to 20.

Good Luck

Mark

[Wildbill]

Help wanted index is how you make a prediction that the market is headed for its worst crash ever? Come on, there has to be more to it than that! If this indicator showed a huge decline, it might be saying something significant. All this says is that demand for workers is softening slightly, almost to a statistically unimportant degree. I don't doubt there is a lack of strength in hiring and I did say I think unemployment will be a problem for all those in the very narrowly based category you referred to, but in the end economists have shown that the actual unemployment rate is based on what generally are the best indicators that stand the test of time. Others tend to get revised to reflect the unemployment rate more often than not.

I am glad you don't follow the media's news, problem is most everyone else does. It is a big problem because those least capable of understanding the true flows of the economy are the most gullible to this unleashed attack. It is causing continuously declining consumer confidence numbers in the face of increase consumer spending. These numbers don't make sense, consumers if they really felt their prospects were getting worse would almost certainly stop spending at their current rates. Pundits keep pointing to the inevitable crash of consumer spending. Will it come? Well it won't if consumer fundamentals keep improving or stay stable. This whole gulf of one number not correlating to the other is caused by the media and its love affair right now with dour economic news. The media just loves bad news right now. I am rarely one to pull out the liberal agenda of the media, but I can't help but avoid it right now. As the elections near, it seems quite clear discrediting the Republicans and creating momentum for change to liberal ideas has to at least be somewhat behind this. The concept of getting more liberals in office to "protect" consumers from corporate America and its crooks seems to be the overriding interest. You get that by convincing people times are bad and will get worse unless you elect people that are going to pass dozens of proposals all aimed at "protecting" you. What garbage! I vote on both sides of the ticket, much like most Americans. I think Republicans are full of it as much as any Democrat would, yet I think the media and their urge to elect people that share their view of the world is disgusting right now and its in many ways hurting the economy.

[Mark Heide]

Wildbill,

My title for the post probably is inappropriate, but I wanted to stimulate discussion here concerning specifics about the economic conditions. Thanks for your response.

Good Luck

Mark