Dow

Graham_Devon

mewbie wrote: »

I was referring to holding a pair of coconuts and leading you to great adventures.

If I'm being led to great adventures, I'll hold one coconut....I'm thinking ahead!

Forget riding to camelot anyway. I'm sliding down the line of dow chart, with that kind of decline I'll get there quicker

Should we invite stevie? It might be a few days until he comes back to post in this thread mind, so could be a slight delay.

bubblesmoney

Equities are residual securities – in other words, they get what's left over after debt and operating costs are paid – so they're first to feel the effects of any decline in profits or asset prices. Hence, equities are the asset class likely to suffer most under debt deflation.

Recent history bears this out: in 1990, Japan entered a debt deflation from which it has yet to emerge. Japan's stock market reached its peak in 1989 and its nadir in 2003. In the intervening period, nominal GDP grew ~.5% per year and real GDP grew ~1% per year. Despite this slight growth, Japanese equities fell 80% over the same period, or 11.5% per year.Japan had lower debt to GDP in 1990 than the U.S. does now. Japan also had the benefit that its debt deflation was solitary: the rest of the world had escaped deflation, so the Japanese depression was ameliorated by continued strong exports.

By contrast, today there are many countries besides the United States that suffer from incipient debt deflation. So it's possible that the U.S. market will fall even more than Japan's did, although there also are mitigating factors (the Japanese market traded at a higher valuation in 1990 than the US market at its recent peak).
A few other points to consider:
• To some extent, debt reduction will involve substitution of equity capital for debt capital (e.g. , companies issuing stock and using the proceeds to pay down debt). Because of equities' residual nature, they tend to carry higher returns than debt. Hence, equity-for-debt substitution will increase companies' cost of capital. The flip side of this is declining asset prices.Equity-for-debt substitution will be merely one of many factors behind debt reduction and declining asset prices. Nevertheless, it should have an outsized impact on investor psychology due to the speed with which it changes capital structure and cost of capital (versus gradual paydown of debt) and its increasing prominence in the public securities markets.
• If businesses are forced to give debt reduction priority, dividends to equity holders will be pushed out into the future, reducing the present value of equity dividend streams.
• If equities were cheap by historical standards, they might make for a good investment in spite of debt deflation. Unfortunately, they aren't.One of my favorite valuation tools is the ratio of stock market capitalization to GDP. The advantage of this is that GDP is much less volatile than other economic series such as corporate earnings. Since the 1920s, the stock market has traded at an average market cap to GDP ratio of 60%. During major recessions, the ratio has frequently gone below 35%. By contrast, as of today (June 26th), the ratio is 85%. Even at the market's March lows it remained above 60%. It's absurd to see equities trade at an above-average multiple in the face of both a severe recession and a secular rise in the cost of capital.

from zerohedge

from the looks of it the present rises and volatility are on small volumes run by program trading desks to the detriment of smaller individual investors and not based on fundamentals increasing valuations.

sabretoothtigger

equities are the asset class likely to suffer most under debt deflation.

Sure and bonds would gain I think, vice versa for inflation. Not that either situation in extreme is beneficial or efficient afaik
I think it'll be better to have assets, japan is not our situation and I think japan did leave their deflation earlier this decade. They outperformed the ftse for a couple years

$SPY - "is this pattern TOO OBVIOUS, it is only bearish if support breaks $$"

I agree with the last paragraph and its not the first time Ive heard that forward PE is too high. Either companies will earn more then forecast or they are highly valued at present already

bubblesmoney

sabretoothtigger wrote: »

I agree with the last paragraph and its not the first time Ive heard that forward PE is too high. Either companies will earn more then forecast or they are highly valued at present already

PE claimed / projected might be very different from actual PE if one knocks off all the gains made from accounting fudges and also the scale of yet to come losses that have been pushed back a bit by present bailouts and rescue packages. i think a big pinch of salt is needed when looking at PEs and loads of companies will just stagnate for quite a few years. when i payoff my mortgage i will be looking to see if there are any good buys around, which i am hopeful there will be atleast a few around.

chucky

Graham_Devon wrote: »

Should we invite stevie? It might be a few days until he comes back to post in this thread mind, so could be a slight delay.

Dow down 0.97% at close last night.

i know it's not easy for you to understand how this all works but bear with it

StevieJ

chucky wrote: »

Dow down 0.97% at close last night.

i know it's not easy for you to understand how this all works but bear with it

Good of Dev to keep the thread going BTW Ftse in healthy start, these markets don't wish to lay down.

chucky

StevieJ wrote: »

Good of Dev to keep the thread going BTW Ftse in healthy start, these markets don't wish to lay down.

FTSE very good start - not sure it will continue through the day though.

have missed on loads in the last few weeks - Bodycote, BG, NCC and even the risky WTN.L. hopefully they'll come back to the right entry point.

StevieJ

chucky wrote: »

FTSE very good start - not sure it will continue through the day though.

have missed on loads in the last few weeks - Bodycote, BG, NCC and even the risky WTN.L. hopefully they'll come back to the right entry point.

I think good sales from the high street M&S has cheered the market up.

chucky

StevieJ wrote: »

I think good sales from the high street M&S has cheered the market up.

market is nervous today - those US unemployment figures this afternoon will make or break... i think it won't be good news for the markets...

i think tomorrow will be a good time to buy some cheap shares...

sabretoothtigger

Nah I bet it'll drift till autumn just like it drifted in december till jan brought volume & pressure.
Then if that happens it might mean cheap shares depending on if thats even possible with uncertain earnings.

Theres always cheap shares somewhere if you can guess whose fortunes are turning. My general bet is foreign earnings and commoditys but I expect 'price improvements'