Daily Investment Interpretations

October 23, 2008

2008-10-23: Another wild day at the bourse. The S&P 500 swung from a high of 922.77 to a low of 858.44 and then rose to close up 11.33 (1.26%) at 908.11. The NASDAQ fell more than 100 points but closed down 11.84 points (0.73%) at 1,603.91. The Dow varied over a 500-point range, closing up 172.04 (2.02%) at 8,691.25. The VIX was today's real newsmaker, spiking to an all-time high of 96.4 before closing at 67.8. 
    So far, the S&P and the Dow, with intraday lows of 858.44 and 8,243.87, respectively, are still holding above their October 10th lows of 839.8 and 7,884.82, but the NASDAQ Composite broached its October 10th low point of 1,542.45 today with a new low of 1,533,35.
    Oil rose $0.45 to $68.30 a barrel; gold fell $20.50 to $714.70. (Institutions are liquidating gold to raise cash.)
    The news today was abominable, with layoffs, pullbacks, and other financial woes erupting worldwide. 
    Alan Greenspan, testifying before Congress today, said, "those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief." (Greenspan switches on CDS) There's a back-story here. Half a century ago, when he was 25 years old, Alan Greenspan was introduced to the radical ultra-conservative, Ayn Rand. What happened then is what seems to me to be not uncommon: a charismatic guru indoctrinates a young and impressionable acolyte. An Wahhabi Islamic cleric was said to have convinced the young Osama bin Laden in his formative years that an American presence on holy Arabian soil was arrant sacrilege. Paul Wolfowitz and Richard Perle are alleged to have been influenced by Leo Strauss, Albert Wohlstetter, and subsequently, Senator Henry "Scoop" Jackson, for whom they worked as Congressional Aides. This would seem to be mirrored in the Bush Administration's neoconservative foreign and domestic policies. And so it was with Alan Greenspan. Ayn Rand opened Dr. Greenspan's eyes to topics and issues beyond economics, such as history and the human condition. The young Alan Greenspan also absorbed, or resonated with Ayn Rand's ideas about laissez faire capitalism, and her cult of "me-first", and of personal self-fulfillment at any cost. Ayn Rand subscribed to the libertarian model of virtually no government involvement with individuals or industries, and Dr. Greenspan carried this into Federal Reserve policy. My own perception has been that capitalism is based upon "eat-or-be-eaten" competition. If a corporation refuses to adopt a highly profitable, new (sometimes dodgy) strategy espoused by its competition, it must either follow suit or fall by the wayside. This means that corporations must constantly push the envelope, getting away with as much as they can. Also, in this day and age, the men who run corporations only need to hold the CEO slot for the few years it takes to fashion their golden parachutes, and then they can bail out. Because of this, it seems to me that, like an elementary-school classroom, capitalism requires external controls. There can certainly be too much control, but it's my impression that there can also be too little. Apparently, Dr. Greenspan believed that industry would somehow regulate itself.  But he's intellectually honest enough to publicly admit that his model was wrong.
    Mark Hulbert observes that after a year-long bear market, the current S&P 500 Price/Earnings ratio is still 18.1: Mark Hulbert: Valuations are low only if you have short memory. That's a long way from the single-digit P/E ratios found at the bottom of secular (~16-year) bull markets. The S&P 500 would have to reach 400-450 to mark a super-bull market turning point. Ouch! 
    A considerably more optimistic picture emerges from Peter Brimelow's article, Stocks' bottom may be in sight. Mr. Brimelow's conclusions are based upon Dr. Jeremy Siegel's work at the University of Pennsylvania's Wharton School of Business. The two charts below show updates to Dr. Siegel's famous chart showing the long-term, inflation-adjusted return of the stock market from 1801 to October 10, 2008. As depicted in the second chart, the broad stock market has fallen to an inflation-adjusted low not seen since the bear markets of 1982 and 1974. Of course, the 1974 bear market, severe though it was, didn't mark a secular bear market bottom; that didn't occur until August, 1982 (when as Mr. Hulbert explains, the P/E ratio fell below 8). But at least, the 1974 trough signified a cyclical bear market low.

I have more to tell, but it's bedtime. "Tomorrow will be another day."