Wednesday, October 15, 2008

Reality Check

After being able to smile that the system at least will survive on Monday, today and yesterday posted a reality check. Things are sick and continue to deteriorate. This will feed on itself. Regardless of what happens the fact that we would come back and retest the bottom was almost a given. If you truly believe we are at a bottom, I don't but not really shorting either, then you buy at the open tomorrow with a stop around 830 on the S&P. Now is the gut check for those calling for a bottom. Now is when you buy.

I am surprised that we didn't rally more than we did, maybe still will but the fact of the matter is the trust has been broken and it is going to take time to heal that trust chasm. You don't have mindless rules on short selling, guarantees of a passage of a bailout bill and then failure to pass, and then forced dilution without ownership votes without huge damage to trust about the system. It is like a spouse committing adultery. The marriage may technically survive but the relationship will be sick for a long time.

A positive outcome at this point is a severe recession or a slight depression. A negative outcome is a severe depression or inflationary spiral similar to Iceland. The governments of the world are trying to desperately inflate but I think if they succeed that the spiral could be so violent and much faster than what government officials envisioned causing it to spiral out of control.

I have said it before, our system is a system of creation and destruction. Destruction was not allowed in 98 or 01. It makes this destruction cycle much worse when the problem gets to big to manipulate.

Bearish estimates on S&P earnings for 2009 is 65 (I still think could be slightly bullish). Assume 65. Put a 15x multiple on that and fair value is 975. The market is below fair value but does growth prospects from 2010 onward really justify a 15x multiple? Put a 10x multiple on that and you are looking at 650 on the S&P. Another 30% drop from here.

1 comment:

travis said...

What are the bullish estimates on 09 earnings?