The Fed has adjusted their target for the federal funds rate to a range from 0% to 0.25%. (For all practical purposes, the rates have already been at zero.) We are now at ZIRP, and aimed squarely down the path of global depression.
My approximate targets for the S&P 500 are now 1200 and 400, in that order.
update, 2008-12-23: consider 1200 a stretch goal, and highly optional.
What is especially precious about the Madoff case is that apparently many of his investors realized something fishy was going on. Knowing the returns were too good to be true and the numbers didn’t add up, they concluded that Madoff was using his market maker business to conduct illegal insider trading. Well, they got it partially correct.
(This post is not intended to malign the naive ones, just the greedy ones.)
China’s statistical bureau reported that industrial production for November grew 5.4% year-over-year according to Bloomberg. The more interesting quote from the article is this:
Electricity output fell by 9.6 percent from a year earlier. Pig-iron production fell 16.2 percent. Raw steel declined 12.4 percent. Steel products tumbled 11 percent.
To echo the concerns of another CR reader, what is the break-even number for China due to the increase in urban population? More critically, the drop in electrical output does not jive with the production numbers. I would be very concerned.
The China number means nobody is buying here. Who finances our government? I just had this mental picture of the US economy flying through the air. It’s a 4 engine jet and we lost number 1 and 2 engines awhile back. Now number 3 just flamed out.
– nova, 2008-12-14
On a side note, it appears that North Korea has closed down both the northern and southern borders. 150,000 Chinese troops are now massed along the northern border, most likely as a prophylaxis against the collapse of the Kim regime. Given North Korea’s precarious position and nuclear status, it is safe to assume that most players in the region are very interested in stabilizing the country and securing any loose buckets of instant sunshine.
Excerpts from Jim Rogers, famed investor and co-founder with George Soros of the Quantum Fund, speaking at the Reuters Investment Outlook 2009 Summit:
“Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt.”
“What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent,” he said. “What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.”
“Governments are making mistakes. They’re saying to all the banks, you don’t have to tell us your situation. You can continue to use your balance sheet that is phony…. All these guys are bankrupt, they’re still worrying about their bonuses, they’re still trying to pay their dividends, and the whole system is weakened.”
Volatility is not risk; still water does not imply a lack of crocodiles.
With plenty of people angry about the auto-maker bailout, I’m personally disappointed that the terms of the deal were not also applied to the TARP. It’s generally a good deal, unlike the windfall of un-encumbered cash the financials got to spend on bonuses and buyouts.
In the next few days, probably sometime next week, I will likely open some long positions in the market. I expect to hold them for a few months at most. There are signs that the market is finally ready to put in a solid rally, and it should be nice and vicious. A stretch goal for this would be 1200 on the S&P 500, but 1100 or 1150 should be easily reachable.
I’m also seeing good arguments for a much lower target for this market. For anyone who didn’t do the math, the traditional bottoming PE of 7, applied to the S&P, would suggest a value around 425. Russell Napier looks at Tobin’s Q ratio to suggest a bottom at 400 around 2014. (In the article a Mr. Brusca feels that this argument is dependent on deflation taking hold, an outcome he feels incredibly unlikely. I point this out because my expectation has been, and continues to be, for deflation. We have experienced the largest credit bubble in history, and as it bursts, trillions of dollars in “wealth” will evaporate from the system.) 400 is an awfully steep decline, but if you take another peek at the S&P long-term chart displayed a few posts back, a nice bear market rally approaching 1200 would put in a very nice right shoulder to form a massive head-and-shoulders pattern with a target around 400. Astute readers will note that Mr. Napier suggests the Fed’s attempts to fight deflation could produce a significant rally (a year or two), much longer than I’m currently expecting, but perfectly in line with such a scenario.