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The stock market is crashing....

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professor_frink said:
markets are similar to 87 crash reports sunday times


http://www.timesonline.co.uk/article/0,,2095-2189601,00.html
Click to expand...

Ahead of the Curve

86-ing the '87 Theory


By Donald Luskin Published: May 26, 2006


THE S&P 500 HAS lost 3.9% since the high achieved on May 5. And already the bears who have gotten it wrong ever since the bottom in October 2002 have proclaimed "I told you so."

That's right. A measly 3.9% drop ”” following a 70.6% gain from the 2002 bottom. Couldn't it just be an orderly correction? No! The bears are calling it the precursor of a global recession and some are even warning that it will lead to a stock market crash like the one in 1987.

The bears claim that all the conditions are right for a crash. Rising interest rates. Rising inflation. Falling dollar. Rising trade deficit. Brand new Federal Reserve chairman. All these things, they say, are just the same today as they were in 1987, before the biggest stock-market crash of all time. The bears are saying it's a case of "ominous parallels."

I'll admit that there are some similarities between now and 1987. But the bears aren't telling you about the differences ”” and in this case, the differences make all the difference.

For those of you too young to know about 1987 (or too old to remember), let me tell you the most important thing about it. On Monday, Oct. 19, the S&P 500 fell a stomach-curdling 20.5% in a single, horrific day.

That's one for the history books, to be sure. But the history books tend to ignore the environment in which the crash occurred. The crash was a reaction to a sudden and unjustified speculative run-up in stock prices. You can't understand the crash unless you understand the run-up that preceded it.

In 1986, the forward earnings consensus for the S&P 500 fell by 3.5% ”” yet the S&P 500 itself grew 14.6%.

By Aug. 25, 1987, the high-water mark of that year, S&P 500 forward earnings had picked up strongly, rising 12.5% year-to-date. But stocks returned an astonishing 39% over the same period of less than eight months.

Stocks got way out ahead of fundamentals. Compare that with today.

Remember how I started out saying that the S&P 500 had gained 70.6% from the October 2002 bottom? It's taken 42 months to do that ”” and over that period, forward earnings have grown by 62.5%. In this bull market, stocks have grown pretty proportionately to earnings.

In other words, stocks in 1987 were riding for a fall because they weren't supported by earnings growth. Today, stocks are on firm footing.

Another big difference between 1987 and today is the bond market, which has an important impact on stock valuations. Stocks and bonds have to compete for investors' dollars. So when bond yields rise, all else equal, stocks become less valuable because their earnings and dividends become relatively unattractive.

In 1987, bond yields soared. By the day of the crash in October, yields had risen 300 basis points year-to-date. Considering that stocks had risen more than three times as much as forward earnings, this move in interest rates left stocks very nearly as overvalued as they were at the very top of the "bubble" market in 1999 and 2000.

Yes, bond yields have risen this year, too. And that's the cornerstone of the bear case that we're heading for a crash.

But put away your crash helmet. Yields have only risen about 100 basis points from the lows of last year. And even at that, the 10-year Treasury yield is still a low 5%, compared with more than 10% the day of the crash in 1987.

With bond yields as low as they still are today, and earnings having grown so much, stocks now are quite undervalued by historical norms. Barring some unforeseen catastrophe like a massive terrorist attack, a stock-market crash from these levels is simply not possible. I'm still bullish, friends.

What about all the other "ominous parallels"? Frankly, I don't see what all the fuss is about. Other than the stock-market crash, whatever else was going on in 1987 must not have been that bad, because economic growth that year ”” and for the two years following ”” was very strong.

Annualized quarterly real gross domestic product growth in 1987 averaged 4.5%. The market crash in the fourth quarter seems to have had even less impact on subsequent economic performance than Hurricanes Katrina and Rita have had recently. Quarterly annualized growth in 1988 averaged 3.7%. Over the nine quarters following 1987, growth averaged a respectable 3.3%.

If a crash is out of the question, and if we can look forward to that kind of growth, then my question for the bears is this: Wouldn't it be a good thing if today really was like 1987?

http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20060526
 
nizar said:
Ahead of the Curve

86-ing the '87 Theory


By Donald Luskin Published: May 26, 2006


THE S&P 500 HAS lost 3.9% since the high...
Click to expand...

I agree with the article that a '87 style crash is not on the cards. The mechanisms for that sort of panic are just not in place.

However the mechanisms for recession/depression definately are in place. I'm thinking more along the lines of a '70's style bear.

When? Wouldn't have a clue. The printing presses are running full bore in a desperate attempt to stave it off. Ultimately, such attempts are futile. It would have been better to let it go after 9/11 like it wanted to. Much healthier in the long term.
 
There are now 22 seperate countires who's market is current > 10% off their highs. The largest of which is Dubai which has fallen 64%, but 6 of which are strong western countries. 9 of these are off > 20%. Every time the US lifts interest rates to 6% the market drops and has done so without failure. Rates hit 6% earlier this month. Also consider that the Hedge Funds and large speculators now have the largest long position in S&P futures and the hedgers have the largest short positions. Take a read at www.bullishreview.com
 
Nick Radge said:
Every time the US lifts interest rates to 6% the market drops and has done so without failure. Rates hit 6% earlier this month.
Click to expand...

The US is still some way off 6%
It rose its rates earlier this month to 4.75% and another possibly on the cards for June and then maybe stop?

What do u mean by the market drops?
YOu mean it begins the start of a bear market?
 
Apologies. The Discount Rate hit 6% on May 10.

There is a correlation between the 6% level and downturns in the US indices. I will find the reference for you and post.
 
nizar said:
Ahead of the Curve

86-ing the '87 Theory


By Donald Luskin Published: May 26, 2006


THE S&P 500 HAS lost 3.9% since the high achieved on May 5. And already the bears who have gotten it wrong ever since the bottom in October 2002 have proclaimed "I told you so."

That's right. A measly 3.9% drop ”” following a 70.6% gain from the 2002 bottom. Couldn't it just be an orderly correction? No! The bears are calling it the precursor of a global recession and some are even warning that it will lead to a stock market crash like the one in 1987.

The bears claim that all the conditions are right for a crash. Rising interest rates. Rising inflation. Falling dollar. Rising trade deficit. Brand new Federal Reserve chairman. All these things, they say, are just the same today as they were in 1987, before the biggest stock-market crash of all time. The bears are saying it's a case of "ominous parallels."

I'll admit that there are some similarities between now and 1987. But the bears aren't telling you about the differences ”” and in this case, the differences make all the difference.

For those of you too young to know about 1987 (or too old to remember), let me tell you the most important thing about it. On Monday, Oct. 19, the S&P 500 fell a stomach-curdling 20.5% in a single, horrific day.

That's one for the history books, to be sure. But the history books tend to ignore the environment in which the crash occurred. The crash was a reaction to a sudden and unjustified speculative run-up in stock prices. You can't understand the crash unless you understand the run-up that preceded it.

In 1986, the forward earnings consensus for the S&P 500 fell by 3.5% ”” yet the S&P 500 itself grew 14.6%.

By Aug. 25, 1987, the high-water mark of that year, S&P 500 forward earnings had picked up strongly, rising 12.5% year-to-date. But stocks returned an astonishing 39% over the same period of less than eight months.

Stocks got way out ahead of fundamentals. Compare that with today.

Remember how I started out saying that the S&P 500 had gained 70.6% from the October 2002 bottom? It's taken 42 months to do that ”” and over that period, forward earnings have grown by 62.5%. In this bull market, stocks have grown pretty proportionately to earnings.

In other words, stocks in 1987 were riding for a fall because they weren't supported by earnings growth. Today, stocks are on firm footing.

Another big difference between 1987 and today is the bond market, which has an important impact on stock valuations. Stocks and bonds have to compete for investors' dollars. So when bond yields rise, all else equal, stocks become less valuable because their earnings and dividends become relatively unattractive.

In 1987, bond yields soared. By the day of the crash in October, yields had risen 300 basis points year-to-date. Considering that stocks had risen more than three times as much as forward earnings, this move in interest rates left stocks very nearly as overvalued as they were at the very top of the "bubble" market in 1999 and 2000.

Yes, bond yields have risen this year, too. And that's the cornerstone of the bear case that we're heading for a crash.

But put away your crash helmet. Yields have only risen about 100 basis points from the lows of last year. And even at that, the 10-year Treasury yield is still a low 5%, compared with more than 10% the day of the crash in 1987.

With bond yields as low as they still are today, and earnings having grown so much, stocks now are quite undervalued by historical norms. Barring some unforeseen catastrophe like a massive terrorist attack, a stock-market crash from these levels is simply not possible. I'm still bullish, friends.

What about all the other "ominous parallels"? Frankly, I don't see what all the fuss is about. Other than the stock-market crash, whatever else was going on in 1987 must not have been that bad, because economic growth that year ”” and for the two years following ”” was very strong.

Annualized quarterly real gross domestic product growth in 1987 averaged 4.5%. The market crash in the fourth quarter seems to have had even less impact on subsequent economic performance than Hurricanes Katrina and Rita have had recently. Quarterly annualized growth in 1988 averaged 3.7%. Over the nine quarters following 1987, growth averaged a respectable 3.3%.

If a crash is out of the question, and if we can look forward to that kind of growth, then my question for the bears is this: Wouldn't it be a good thing if today really was like 1987?

http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20060526
Click to expand...

2007 or 2008 latest (after Beijing Olympics) thats when the crash will occur, All Ords Terminal Value 6000+, will drop to 4000+ over a few months. DOW Terminal Value 12000+ drop to 10000+ over a few months. Commodity prices will also crash, especially metals. Oil and Uranium may fall but not crash

Then a very slow rise to stable from there for a 1-2 yrs at least

thx

MS
 
michael_selway said:
2007 or 2008 latest (after Beijing Olympics) thats when the crash will occur, All Ords Terminal Value 6000+, will drop to 4000+ over a few months. DOW Terminal Value 12000+ drop to 10000+ over a few months. Commodity prices will also crash, especially metals. Oil and Uranium may fall but not crash

Then a very slow rise to stable from there for a 1-2 yrs at least

thx

MS
Click to expand...



Did Jesus tell you that?
 
Ageo said:
oh how did i miss it!
:eek:



That explains it thow as im a skorpio :D
Click to expand...

I've consulted my tea-leaves and crystal ball and they again don't agree :banghead: so I went and asked my gut :) and it says that XJO will probably settle somewhere in the 4800-5000 range in the forseeable future, which is what my gut posted a few weeks ago.

cheers

bullmarket :)
 
Well my screen is telling me the SPI is < 5000 again... 4984 to be precise.

...round and round and round she goes, where she stops, nobody knows! :D
 
bullmarket said:
I've consulted my tea-leaves and crystal ball and they again don't agree :banghead: so I went and asked my gut :) and it says that XJO will probably settle somewhere in the 4800-5000 range in the forseeable future, which is what my gut posted a few weeks ago.

cheers

bullmarket :)
Click to expand...

Love to see your gut typing :D

Seriously, I am getting more bearish every day. The status quo seldom remains and the world stockmarkets feel fragile and will not handle well a nasty shock from somewhere be it oil, bird virus, inflation, Iran moving into Iraq, Bush resigning, who knows?
 
IMO... data to be released later this week will be key to the FED making their decision to lift rates or keep them the same, and it will be key to figuring out if this correction has come to an end or not... if the data comes out good ie. indicating that the FED may not lift rates (eg. economy is slowing), and DOW/s&p500 reaction is good, than possibly correction for us is over, as dollar would decline and gold up also... :2twocents

but if the other way around, then this correction still has a while to go...
 
nizar said:
IMO... data to be released later this week will be key to the FED making their decision to lift rates or keep them the same, and it will be key to figuring out if this correction has come to an end or not... if the data comes out good ie. indicating that the FED may not lift rates (eg. economy is slowing), and DOW/s&p500 reaction is good, than possibly correction for us is over, as dollar would decline and gold up also... :2twocents

but if the other way around, then this correction still has a while to go...
Click to expand...


I hope this correction continues as this hasnt brought prices down enough. :D

1 more month will be nice and then let the bulls take over
 
Ageo said:
I hope this correction continues as this hasnt brought prices down enough. :D
Click to expand...

I agree!

Lets take it down to 3300 for some real value :D
 
There may be some interesting ideas in depression2007, but I'm not sure about 'truth'. :rolleyes: It may be his truth, but truth is soley the perception of the perceiver. Perception is reality, which then supports his idea about believing what you hear and being conditioned. So, in fact, if his argument is true, he is only stating his perception of his reality, not the actual truth.

His statement about the period 84-87 being a massive growth period when the US became a debting nation actually supports the present concern about the US economy. Wasn't there a crash in 87? Although, the reasons for the crash are unclear to me. Perhaps it was just perception that caused it. Or automatic stop losses...

Fundamentals play no part in the financial markets? What the? :eek: While market psychology is an factor, I think PE ratios, amongst other tangible things, have some part to play as well. Some listed companies actually make money and when they don't they go bankrupt, are suspended, and are no longer businesses.

No taxes? What? :confused: How do we pay for the Queen to visit every 20 years and wave to us? He lost me there. That's reality!

But that's just my perception of his article. :2twocents
 
my perception of that article was that it was an advertisement for his book and newsletter.
Michael, if you are looking for some information that discusses this type of thing, and doesn't involve a book or paid subscription then try this one-

http://www.financialsense.com

Heaps of good info to be had :)
 

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