Henry Blodget tells the truth in the following video. The difference between the current market crash and 2008 is that the government can't do anything about it this time. Despite what IlliniProgrammer will tell you (not picking on you, dude, really) stocks aren't cheap here unless maybe you're buying utilities. Things are ugly and are looking to get uglier:
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Government manipulation of markets create inefficiencies and uncertainty. It has become a political tool and an electorial debate fodder.
Government can not regulate or legislate economic expansion in a free market... They can only temporarily stimulate before the market does what it wants to do. The only net effect policy has is the aforementioned.
free-market = survival of the fittest, so why then should the government bail out these institutions back in 2008 just let nature do its cause to eliminate inefficiencies and when the storm is gone things will look more greener.
I'm thinking the answer is [partly] Blodgett's 2nd closing point: the US looks similar to its state in 1935ish, but I'm just winging it here. Who knows, according to this guy, we're f***ed: http://www.theonion.com/articles/drunken-ben-bernanke-tells-everyone-at…
Then according to this vain, there shouldn't be tax shields for LBO deals (debt), tax shields for mortgage interest exp., discount windows for banks, random GAAP rules for publicly traded companies to declare different types of equities as income while other as AOCI, etc. Finance is all a game, finding loopholes and exploiting it as far as I can tell. So, if there is no intervention, will there even be a PE/LBO industry (As so many covet)? Seriously how much money can you really ring out of a company by "aligning management" nowadays? How many people can actually afford to buy homes or care to without the special mortgage deductions which further grease the financial system? How comes banks have such favorably rates and then charge higher rates for borrowers?
Not that I agree with the rules and/or government intervention. I think most of them are random, but I applaud the people who were smart enough to recognize this and make a killing. All I'm saying is: things are not as simplistic as people make it out to be. Even the most well thought out government policies (which most are not) have far reaching ramifications.
You make several good points and while my initial thoughts were geared more towards monetary policies of the Fed and the like, the central idea extends down to those everyday benefits we are accustomed to. I'll try to be brief...
Many fail to realize the current lending environment, with its government backing and favorable taxation, have not always been. Amazingly enough people survived. I know its difficult to imagine, but they did. Before quasi-government lender Fannie and Freddie people decided based on monthly income levels whether or not they wanted to invest in a long term asset such as a home. This decision was not made relative to the tax rebated deduction encouraging them to borrow more, only the average persons understanding of PV of future cash flows in exchange for an asset versus and infinite series of cash flows with no asset. We have no deduction for cars, but we still buy them. We have no deduction for boats, but we still buy them. We simply adjust our purchases to our income levels and the market sets the price.
Historically, the price of homes have increased significantly faster due to the abundance of resources available to borrowers under federal lending programs and tax treatments. If you think about that it only stands to reason that if there is more money available to more people, prices were likely to rise. This is a net-net. Ease of borrowing and access to capital translates to higher home prices. The same is true to the cost of an education pre and post Sallie-Mae, but I'll leave that for another time.
As to the impact on leverage under the "tax shield" treatment to debt, there are several factors you fail to consider. Yes, this would negatively impact IRR and may prevent some deals from occurring, but the same can be said of the impact of rising interest rates or the downgrade of US debt effect on borrowing rates... OCoC would be more of a concern and deal structures would likely evolve to more cash and lower leverage ratios. This scenario would be more devastating to holding companies than PE, IMO.
Your last point really makes the argument I originally intended. Why should my ability to better understand government imposed regulation and policy even be a factor? My ability to better manipulate deal structure relative to regulation is an inhibitor to a free market. I'm not saying there isn't money to be made as a result, that phenomena exists everywhere the government gets involved. Entire industries exist as the result of regulation. Massive number of environmental companies due to the EPA, certain levels of accountants due to the complexity of the US tax code. Regulation does not add to the economy it only takes away. That is not a free market principle.
As to the OP, I think we are due a healthy dose of deregulation over the span of the next decade and austerity measures relative to public sector spending and entitlements, question is timing and to what extent.
LOL, Eddie, stocks are trading at P/Es of 10. Yes, some sectors are more expensive than others, but this is not the time for the long-term investor to run for cover. This is the time to pick up boring blue-chip bellweather stocks with P/Es in the single digits.
A number of consumer staples stocks are trading at 12 P/Es and with dividend yields above 4%. Particularly European ones that sell into an international market.
A number of recycling/waste management businesses are trading in single-digit P/Es. Since when did a recession mean that we stop having garbage?
A number of telecom stocks are trading between 6x and 9x earnings and paying 6-9% dividends. If Egyptians are starving but have cell phones, methinks the world has much bigger things to worry about than whether people will cancel their phone plans.
Obviously some stocks- particularly growth stocks- may be overpriced. But if you have a sustainable noncyclical dividend north of 4-5%, that's pretty tough to argue with even in the midst of a panic.
I am also going to come out at this point and say that with P/Es of 6, a number of cyclical stocks in France and Italy that sell into an international market look cheap. Well-capitalized oil majors selling at 5.5x earnings and 7% dividends? Are you kidding me? Oil prices will be going back up at some point, and when they do, it is going to feel great to have all of those dividends coming in when you are putting $5/gallon gas into your car.
Don't bet the farm, don't even dip into your emergency savings, and be careful about irrationally exuberant high-flying growth stocks that don't pay dividends or highly leveraged firms like banks, but now is not the time to walk away from the market. Now is the time to laugh all the way to the bank as dividend yields cross 4, 5, 6, and even 7%. Cheap stock prices are GREAT news for long-term investors- they mean higher rates of return in the long run that wind up well exceeding the drop in valuation. 1/2 1.08^25 is a lot more than 11.04^25.
Eddie is probably right for the short-term. I expect prices to further contract with a 65% probability of US markets losing another 10-20%, although with lower volatility. But two or three years from now, you are going to be kicking yourself for not buying more when Europe is trading at 10x or 15x earnings vs. 5 today. For a long-term investor, the risk of NOT buying today and watching prices zoom up 20-30% is much bigger than the risk of prices temporarily dipping lower. It is time to start thinking about averaging in over time so you at least get some of the benefit of the stock market drop.
Warren Buffett and the guys at Zeal Research who called the secular bear 10 years ago and the crash 3 years ago are right. At 10x earnings, the market is fairly priced for a long-term investor, and this will be seen as the same kind of buying opportunity as 1974 and 2008 in 10 years.
The long-term investor wins if prices go up, and wins even more if prices go down, especially when we are starting with lower valuations.
It's still very early, but it looks like my (low conviction)call for vol coming down is starting to play out.
Man, it feels good to be a long-term investor. You get to confidently buy in panics without worrying about things like short squeezes, margin, and temporary price swings. Then when the market goes up (which it will), you get to come back and heckle the conviction bears. :D For instance, despite the crash, Peter Schiff is looking even more foolish than he did two years ago. Short USD, US Stocks, buy Chinese manufacturers? LOL, you've gotta be kidding me.
A smart long-term investor puts in some mild short-term hedges on a reasonable fraction of his portfolio when vol is cheap and valuations are high, but not to the point that hedging comes anywhere close to canceling out his dividends. (He also hedges his cash positions against inflation via calls on commodities when it's cheap.) But it's best for long-term investors to avoid listening to conviction permabears during a crash.
yeah except the storm might be so strong it'll blow us back to the stone age. if the markets collapsed due to lack of public confidence I doubt it'll be "greener".
If you honestly believe civilization is going to collapse, it's best to give away all of your posessions, become a Jesuit, and wait in joyful hope of the second coming as you preserve written English, math, physics, and engineering tucked away in a monastery somewhere. That is honestly going to be your best investment. Feel free to give all donations to Illini Programmer's Thrifty Quants Collection- designed to throw wild parties for Math PhDs and Engineers at cheap dive bars. (Sorry, I can't give you a tax deduction, not that you'll need it).
Short of that, look for cheap conservative investments, but don't get caught up in the panic.
Or, you can interfere and ensure it's demise.
IlliniProgrammer,
It is clear that you are a long-term investor. Which books/guides do you suggest reading to learn more about long-term investing? Also, two random questions: Do you reinvest your equity dividends, and do you own any gold or silver (physical or ETFs)?
Honestly, a basic financial accounting course is worth more than 100 books. If you can learn how the financial statements work and what they mean and look at a firm's 10K analytically and understand basic cause-and-effect on fundamentals and asset prices- and the relative strength of those causal relationships, the rest seems to follow.
I have something on the order of 1-5% of my net worth in silver and gold numismatic coins that I keep in a safe deposit box at the bank. Mostly Peace Dollars, franklin halves, walkers, standing liberty quarters, and mercury dimes, along with a couple of uncirculated gold half eagles from the late 1800s.. If you buy them wholesale or at auction (Ebay in my case), they tend to carry a premium over the precious metal that's very narrow during periods of high silver/gold prices and much wider during periods of low silver/gold prices, so they experience a little less long-run volatility than pure PM investments.
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