From Roubini Global Econmonitor ( www.rgemonitor.com )
The recent and sharp declines in the value of the shares in the U.S. and the world, does not imply a consequent rise immediately and, indeed, no risk of further declines in the stock market. The short race to the top (the "bear market rallies") are intended to be sporadic and isolated, crushed under the weight of news deteriorating macro-economic trend of companies and financial markets.
Following a macroscopic approach, earnings per share of companies in the S & P 500 could be realistically between 50 and $ 60 (some claim that could go up to $ 40). The question is what will be the multiplier, that is the price / earnings (P / E - Price / Earnings) on those gains. It is fair to say that this multiplier will fall to a value of 10-12 in a recession of medium length (U-shaped). So even in the best possible scenario (gains of 60 and P / E 12), the S & P would reach 720. If the earnings are closer to $ 50 and the P / E less than 10, the S & P bit will drop below 600 or even below 500 points. According to the same concept as the Dow Jones at the most to stop or even go down to 7,000 up to 6,000 or 5,000. Using the same reasoning, global equity values \u200b\u200b(following those in the U.S.) are likely to fall by another 20%.
These forecasts were drawn up when the S & P was still close to 900 points and the DJIA (Dow Jones Industrial Average) was close to 9000: the overall analysis that has resulted is the reason why we have argued that the last "bear market sucker's rally" (literally "rush of the nerds", the quick growth of stock prices tied to purchases of investors overly optimistic and intended to be "scrubbed"), between November 2008 and January 2009, would be exhausted and would been achieved new negative peaks. Indeed. Like the previous rallies, this one has fallen by more than 20%, with the DJIA el S & P fell below the 7,000 and 700 points respectively. Now that both are well below the level "7", the next test will come when will drop below the values \u200b\u200bof 6,000 and 600 for the two indexes.
A new bear market rally could be repeated in the second and third quarters of this year and will end like the previous six. Over the past 12-18 months, whenever there was a dramatic event (which has dragged the indices to new lows) and the government has responded with a more aggressive policy, the optimists have gone out into the open by declaring that yet another dramatic and cathartic event in question was the achievement of the lowest point from which to start shooting real: they said it after Bear Stearns, after the collapse and rescue of Fannie Mae and Freddie Mac, after Lehman Brothers After AIG, after the announcement of the TARP (Trouble Asset Relief Program), after the G7 communiqué, after the fiscal stimulus of $ 800 billion (which marked the start of the latest sucker's rally).
And after a while the markets were again shocked to find that macroeconomic news was much worse than expected in both the U.S. and abroad. That the gains were much lower than expected non- just for financial operators, estate agents, builders and businesses directly to consumers but also for companies not related to the financial sector and markets, the performance of investment groups and general news are worse than expected.
As we have said many times there are many negative news associated with these companies / financial markets news that more and more financial institutions are effectively insolvent and should be acquired by governments, news very leveraged institutions like hedge funds, will untying and then sell the property in non-liquid-liquid markets, news that even the less leveraged investors (retail, mutual fund, etc.), which lost over 50% of shareholder value, they want to reduce their equity exposure, and news that a number of emerging economies is now on the verge of a financial crisis contagious.
Why even the small emerging market economies affect the price of risk values \u200b\u200bat the global level? Take, for example, Iceland, a small island with 300,000 inhabitants in the middle of the Atlantic: the local banks have borrowed money from abroad to a value equal to 12 times the GDP of the country el'hanno invested in toxic assets. Now the banks are bankrupt and the state has failed, because the banks were too big to be salavate In the same way banks sell assets illiquid illiquid in global markets have a ripple effect on markets.
Clearly we can not rule out a bear market sucker's rally in Q2 or Q3 2009. In order to pull the news will be improvements in economic growth in the U.S. and China due to stimulation approved by the respective governments. But soon after (in Q4) the effects of tax cuts and ad investment on infrastructure will collapse, because most of the work on infrastructure needs at least a year only to be started (to be completed require much more time). Similarly, in China, the fiscal stimulus will provide a false increase in productive activities while the unlisted sector quoted manufacturing industry will continue to decline. Given the severity of the macroeconomic imbalances, real estate, financial and corporate in the U.S. and around the world this sucker's rally will run out as the five that preceded it.
What are the major risks, according to these pessimistic forecasts for the U.S. and global stock prices? The most dangerous scenario, as we have already said, that of a quasi-long-term depression, much more severe recession of the mid-term where we are today. If you experience a near-depression we could not exclude a further decline of 40-50% of U.S. equity and global values. But in this near-depression markets equity would be the last concern: there would be major problems to be faced as unemployment rates over 15% and a multi-year period of stagnation / deflation.
The best scenario is that of a sustained recovery to occur faster than our forecast, thanks to the stimulus in the U.S. and other countries. A sustained recovery (contrappopposta a temporary recovery) is unlikely but the argument optimistic (bullish) aimed to counter a pessimistic market (bearish) is based on a resilience of U.S. and global economies than expected.
The problem is that, with the U.S. economy and global in serious difficulty and with the deflationary forces at work, it's hard to believe that there might be a massive recovery in 2010 that boosted the face gudagni: even if optimistic that we are in a recession in the medium term, growth will be less than the U.S. in 2010 '1% and the eurozone will be around 0%. Then, with a growth so slow the deflationary pressure is still there, putting further pressure on profits and on the ability of companies to fix prices and therefore margins. In this scenario, a rapid and sustained growth of stock prices is highly unlikely.
is true that generally the share price looks ahead and tends to reach the minimum level of about 6-9 months before the end of the recession, seeing the light at the end of the tunnel. So the optimists who see a recovery in the second half of 2009 argue that the recovery should start. But this recession could not be completed in 24 months (December 2009). It is more likely that unemployment will increase in 2010 to more than 10% and that growth is so slow (0-1%) which will remain in a technical recession for most of 2010. So the stock indices touching their lowest value in late 2009 or even 2010.
also do not always look at stock prices ahead of 6-9 months. In the last recession, the business has reached the lowest point in November of 2001 and the GDP growth was already strong in 2002. But the stock market continued to fall until the first quarter of 2003. So not only the trend in equity markets have not been able to precede the resumption but even arrived 18 months later. A similar scenario could happen again this time: the real economy out of recession in 2010 but the growth is so weak that the deflationary forces maintain a further block the ability of corporations to fix prices and then determine the profit margins, with several false starts dell'ottimistico bullish market.
Most likely we will have to fasten your seatbelt and get ready to new lows of U.S. stocks and global in the next 12-18 months. A strong recovery can take place when we can see clear signs that this global recession in the medium term not turning into a quasi-depresisone long term. Until then we can expect volatile equity performance and fragmented, with minimum reached new heights in the coming months and throughout the course of 2009.
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