Friday, December 12, 2008

Now is the winter of my discontent.

I just can't believe humans are willing to pay 18 times past earnings on the market going into the second worst economic collapse ever. I just can't believe it. Shorting is frustrating sometimes, but then that's what gives us our money-making opportunities, isn't it?

This exactly parallels my summer of discontent (hence the title) where I put a significant amount of my net worth in shorting Allied Capital and had to sit and watch people throw dollar after dollar into a company that was clearly a fraud. I wrote a post back then describing how I'd lost one year's worth of annual salary but how I was staying calm and more steadfast than ever because I knew my reasoning was right and I knew the prices would show that in the end.

Of course here we sit, where Allied traded for $15 that July day and today trades at $1.81. The same thing will happen with the retailers and with the stock market as a whole for that matter. You just have to sit and watch everyone throw money in, not knowing what they're doing, before you watch the retailers collapse on their next earnings releases. The same with the rest of the economy.

There must be five end-of-times reports coming out per day lately and yet the market keeps going up and up on the smallest perceived positive. There's nothing you can do but wait.

3 comments:

Walter said...

As Lloyd Bridges said in the movie "Airplane"...

I picked the wrong week to quit smoking...

ebo said...

Hey Rick,

I was hoping you could help me figure something out. I realize that the average recessionary P/E for the S&P is between 10 and 12. I'm having trouble seeing why it was so high during the last mild recession. I looked at the historic P/E (http://www2.standardandpoors.com/spf/xls/index/sp500pe_ratio.xls), and was shocked to see that it was over 40 during during that period.

Why is this? When we speak of 10 to 12 P/Es, are we talking of normalized earnings? What were normalized earnings in 2000-2001?

I would really appreciate any insight you may have on this! Thanks, Eric

Rick said...

Hi Eric,

My answer is that I don't know. Earnings took a significant dip after the September 11, 2001 terrorist attacks which sent the P/E ratios out of whack. It's kind of like when you see a company take a one-time charge and see their P/E go to 700. Stock prices were falling heavily, but earnings fell faster, and I think people saw that some of the earnings decline was due to short-term reactions to 9/11 and would not last. This recession was also unique in that it was more concentrated, where as a recession like the early 1970s or today impacts everyone. In the early 2000s we saw the S&P 500 drop 50%, but take a look at the NASDAQ, which dropped from 5,000 to almost 1,000. That isn't even representative of the tech sector...it's just tech heavy compared to the other indexes.

I think we could make the case now that people chose to overpay for businesses during that time since the markets are not much higher than they were AFTER the drops in the 2000s. But people were making the case that although tech companies got too expensive the country is still growing and advancing. You can't make that argument today.