Down goes the Dow

Ghost of Igloi wrote:

Futures hit limit down in five minutes.

This is what I anticipated. It seems that everyone I hear on CNBC or stock reports is saying stay the course, but that assumes this is a normal event.

In any event like this, there's a bell curve of outcomes ranging from best case to most likely case to worst case. It seems to me that everyone I hear on TV is on the best case slope of that bell curve. We need to take a hard look at the most likely middle of the bell curve, which is...

No vaccine in the foreseeable future.

Many Americans continue to ignore the guidelines of social distancing.

The rate of progression slows, but the number of cases continues to grow at a slower compounded rate.

Promising treatments reduce death rates, ICU rates, and hospitalization rate of increase, but the total number of deaths, ICU admissions, and hospitalizations continue to increase rapidly.

Some hospitals will run out of beds/supplies in early April. If you think the news is ugly now, wait two weeks.

Some governors will declare martial law. If you're outside and not a first responder or essential, you're detained/arrested.

Look at where we were one week ago. Now, take a hard look at where we are today. Now, look at Italy and imagine that we get there in the next 2-3 weeks.

I don't see Dow 18,000 as remotely close to the bottom. If you're in the market, I would suggest getting out and waiting until the market bottoms and goes back up for several days in a row.

Ghost of Igloi wrote:

old math professor wrote:

My educated guess is that overvaluation didn't cause this crash, but overvaluation certainly has something to do with the acceleration.

Actually it is opposite of your analysis. Covid 19 was the accelerator, overvaluation will take the market to fair value. That is why we have considerable work on the downside.

Non-sense. We are not headed to fair value as defined by some metric of market valuation. We are headed to a new equilibrium that factors in all the detrimental impacts of the world pandemic, both real and perceived (but probably more so in the case of the latter).

Racket wrote:

Ghost of Igloi wrote:

Actually it is opposite of your analysis. Covid 19 was the accelerator, overvaluation will take the market to fair value. That is why we have considerable work on the downside.

Literally impossible to know at this point but what does "overvaluation" even mean? What sets proper value if not the market? Seems very much like a crank theory

Racket,

Interestingly Wall Street uses inflated version of the same concept. That is what Forward PE is. Firms extrapolate future earnings on a non-GAAP basis and apply a PE multiple to arrive at a target. Wall Street firms were using a hugely fictional Forward PE of $175 and applying a 20 PE multiple to arrive at a 3,600 year end price target. Highest earnings previous 52 weeks EPS was about a GAAP $136, while the historical multiple averages about 16. Therefore, $136 x 16 = 2,176. Interestingly, spot on with the limit down for S&P 500 futures.

Where are we going then? Earnings should easily decline to $100/share, times historical multiple of 16, gives you a downside target of S&P 500 of 1,600. Typically in a severe bear market the hit to earnings can be much higher, as well as a contraction to the PE multiple. One should think of the PE multiple as a reflection of investor’s willingness to pull back or advance risk taking. It is very easy to see GAAP EPS collapsing to $80, PE multiple to 12, for a 960 S&P 500.

One last point, markets don’t just mean revert, they mean invert. More than likely the downside possibility exceeds what most investors can currently envision.

Igy

seattle prattle wrote:

Ghost of Igloi wrote:

Actually it is opposite of your analysis. Covid 19 was the accelerator, overvaluation will take the market to fair value. That is why we have considerable work on the downside.

Non-sense. We are not headed to fair value as defined by some metric of market valuation. We are headed to a new equilibrium that factors in all the detrimental impacts of the world pandemic, both real and perceived (but probably more so in the case of the latter).

Your view is wrong of course. No different than Lehman Brothers bankruptcy pin. Investors believing in false narratives are the history of financial markets. Overvaluation, indebtedness, central bank manipulation, and a stock market that was turned into a gambling platform. Probably a set-up more similar to 1929 than any previous period. Corporate greed, investor delusion, meets a black swan.

Ghost of Igloi wrote:

X-Runner wrote:

In this case it isn’t about overvaluation.

It’s about the fact that all of the markets are tied together.

If you have major segments like travel and entertainment go to zero revenue, it brings everything else down.

It has nothing to do with how they were valued before this.

You are ill informed and need to learn more about the subject before you post.

What part did I get wrong?

You seem to be implying that if the markets were valued appropriately lower initially, they can absorb a large portion of the economy stopping and others would lose no value.

Sorry. It’s all tied together.

Take mortgage companies.

If a ton of restaurant workers lose they’re job, they can’t pay their mortgage.

Values in mortgage investments would then drop.

Then mortgage companies would back off spending and hurt some other segment of the economy.

The markets may or may not have been overvalued, but regardless they would drop as the economy grinds to a halt.

Correct me if i am wrong, but futures appear to be trading again, even though triggered earlier.

X-Runner wrote:

Ghost of Igloi wrote:

You are ill informed and need to learn more about the subject before you post.

What part did I get wrong?

You seem to be implying that if the markets were valued appropriately lower initially, they can absorb a large portion of the economy stopping and others would lose no value.

Sorry. It’s all tied together.

Take mortgage companies.

If a ton of restaurant workers lose they’re job, they can’t pay their mortgage.

Values in mortgage investments would then drop.

Then mortgage companies would back off spending and hurt some other segment of the economy.

The markets may or may not have been overvalued, but regardless they would drop as the economy grinds to a halt.

Let’s use a similar analogy to your mortgage example. Investor A buys a rental house for $130,000 in 2010, collects rent at $800/month, gradually raising that rent to $1,200/month over the next ten years. In February Investor A sell same property to B for $220,000, then increases the rent to $1,400/month. Investor B has little cushion. Recession, Covid 19, the AC/Heating breaks, you name it. It is a bad investment. Investor A bought right, Investor B paid too much.

Start your education by reading the Intelligent Investor. Price matters.

Can trade below the trigger.

then i guess i don't understand what the trigger is.

* does that mean that if trade price rises back so that it is less than a 5% drop, it can resume, and only stays frozen if trade prices persistent at or more than a 5% drop?

fisky wrote:. In any event like this, there's a bell curve of outcomes ranging from best case to most likely case to worst case.

Actually this is the key flawed assumption. Nothing in the markets varies as a bell curve, or normal distribution, which tapers exponentially on either side. Most metrics vary according to different probability distributions with so called fat tails, and deteriorate on one or both side may ch more slowly, with unusually large variations happening much more frequently than assumed by the bell curve.

Trigger is limit down or up. In this case hit -5% down, so can trade at any level less than -5% down.

Levels on futures back to my first post to DGTD:

https://twitter.com/NorthmanTrader/status/1241867520388354052

Ghost of Igloi wrote:

Math man wrote:

I’ve been asking Igy to explain some of Hussman’s math for quite awhile now. He has been unable to do so. No wonder as it is voodoo math.

I don’t need to explain anything. It is a similar metric to Buffett and Schiller. Hussman is very open to questions on Twitter, but you don’t have the balls to embarrass yourself.

Hussman has been asked on Twitter numerous times to explain his calculations. Like you, he has avoided the question.

Ghost of Igloi wrote:

X-Runner wrote:

In this case it isn’t about overvaluation.

It’s about the fact that all of the markets are tied together.

If you have major segments like travel and entertainment go to zero revenue, it brings everything else down.

It has nothing to do with how they were valued before this.

You are ill informed and need to learn more about the subject before you post.

Could you maybe tell us what s/he got wrong instead of automatically dismissing someone because they disagree with you?

fisky wrote:

Look at where we were one week ago. Now, take a hard look at where we are today. Now, look at Italy and imagine that we get there in the next 2-3 weeks.

something like 100 dead one week ago, 400 now. 5500 dead in three weeks? Okay.

I'm a 100 trillion dollar economy and I just took a hard look at 5500 dead people. Why should I worry? I bury them and move on. Next week if there's 10,000, I bury them too.

The damage is in the reaction, the insistence on tackling a disease with measures that make everything worse. This refusal to accept the inevitable progression of a relatively minor illness is obsessive and self-destructive.

Futures fairly stable at approx. down 3% to 4%. I was expecting it would be worse than that. We'll see what tomorrow brings.

Bad Wigins wrote:

fisky wrote:

Look at where we were one week ago. Now, take a hard look at where we are today. Now, look at Italy and imagine that we get there in the next 2-3 weeks.

something like 100 dead one week ago, 400 now. 5500 dead in three weeks? Okay.

I'm a 100 trillion dollar economy and I just took a hard look at 5500 dead people. Why should I worry? I bury them and move on. Next week if there's 10,000, I bury them too.

The damage is in the reaction, the insistence on tackling a disease with measures that make everything worse. This refusal to accept the inevitable progression of a relatively minor illness is obsessive and self-destructive.

I actually agree with this to a degree. The average age of the people in Italy who have died from it so far is 79.5, and pretty much the only people under age 50 who are dying have severe underlying medical issues. Not saying we shouldn't care, but this pandemic the world is freaking out about seems to kill *almost* exclusively people who likely have fewer than 5 years left anyway. Sounds kind of cold, but at what point do you draw the line and say destroying the world economy, having millions lose their jobs, etc, is not worth trying to save the lives of 30,000 (0.01% of the US population) 80 year olds?

I'm not saying CV isn't serious because it is, but I think the reaction might be getting to the point of being more destructive than the virus itself. Of course time will tell though.

Maserati wrote:What matters in any particular situation is interested people’s attitudes toward the valuation, particularly whether the valuation matters or not to them, and if they think it matters to other relevant people.

mas,

I realize this comment was in relation to the markets generally, and US markets in particular maybe, but I'm wondering if you have any thoughts on currencies, the potential for regional hyperinflation and associated currency devaluation, and potential to make or lose money in FOREX?