- This topic has 354 replies, 59 voices, and was last updated 14 years, 9 months ago by Anonymous.
August 28, 2006 at 10:49 AM #7362
“The chart halfway down in this link, originating from Merrill Lynch economist David Rosenberg (sent to us by a friend in Chicago), shows a surprisingly high correlation (lagged that is) between the US stock market and housing (NAHB housing index vs S&P 500 lagged 12 months; a 79% correlation).”
This chart predicts the S&P500 will keep falling and hit 600 by summer 07.
Of course, it only has a history of 10 years, but it’s remarkably accurate.
This correlation makes sense, since housing leads the economy. Today, housing is the economy.
One more reason to stay out of the stock market for another year at least. Sorry, no fall rally for the mid-election year cycle folks.August 28, 2006 at 10:55 AM #33687
If you truly believe this, then wouldn’t it be even better if you put your $ in the market and buy those bear funds that short the market?August 28, 2006 at 11:56 AM #33699
I don’t short, but I truly believe this, so I put my money where my mouth is: I liquidated all my index and mutual funds, and went 95% cash in March 06, because I did not want to lose my money. I’ve been convinced since early this year that the stock market would take a dive until this housing bust is over.
BTW, this NAHB chart is new to me. It’s another piece of confirmation for exiting the stock market at this time.
I would really like to short a lot of different companies and indices, but don’t know where to find a knowledgeable professional who can assist me. I am ready to do it with professional assistance, someone who has shorted successfully.
Schahrzad BerklandAugust 28, 2006 at 12:15 PM #33708cabinboyParticipant
That plot is a bit silly. The corrleation may exist from ’96 on, but what did it look like in the last downturn? I suspect there won’t be nearly the correlation. Also, just because the S&P is dipping, that does not mean there’s no money to be made in the stock market.
Powayseller, I like your posts, but you may have reached the point where you’re a bit too in love with the outcomes you’re predicting. Your posts are packed with prediction upon prediction, each being less substantiated than the next. Most on this board agree that the the coming drops in RE prices will meet or exceed what happened in ’89-’95. This prediction comes primarily from the facts that our deviation from historic price appreciation is greater this time than the last, and the affordablity index is even lower. All reasonable. Now, opinions on this board begin to diverge as we discuss the impact that this RE drop will have on the overall economy, and most important to the individual investor, the future prices of stocks and commodities. Your doom and gloom predictions for the economy and stock prices as a whole are very aggressive, and represent a minority position even among bears (Roubini aside).
If I take Lereah’s advice and buy a home right now, I’m sure to realize a loss. If I get too influenced by your position, I’ll be 95% in cash (foreign currency, of course), and I’ll no doubt miss out on some nice gains (many mutual funds performed very well in 92-96, despite RE’s troubles). Granted, a loss is more of a bitch than an unrealized gain, but both will affect one’s living standard and retirement over time.
Be careful of falling into the same trap as the RE speculators. This board is highly populated with folks who sold RE in 2005, some by chance and some by foresight. Those that did are no more a financial genius than those that haven’t sold (though they likely do have an edge on the small % of folks who recently bought). If your portfolio of cash is not significantly larger in 2010 than it is now in 2006, you’ll have lost ground to a lot of moderates who are skilled at making money in a variety of markets outside of RE.August 28, 2006 at 12:29 PM #33713
Hi cabinboy, you wrote “(many mutual funds performed very well in 92-96, despite RE’s troubles).” Your years are troubling me somewhat. How did the mutal funds do heading into the housing downturn? Examples, please.
The correlation with NAHB was plotted only to 1996, but it is very well known about the correlation between the housing market and the economy. Edward Leamer has a report which shows that housing leads the economy. Every time housing has turned, a recession followed.
Cabinboy, how can the stock market go up when corporate profits are falling? Leamer’s report negates your story. Sorry…
Sometimes, economic cycles are such, that the best thing we can do is preserve our assets. This is such a time. This is the time to take your winnings off the table, hold in cash until we are in the middle of the recession next year, and then buy back at the bottom. When s&p is at 600, then get back in.
Do you want me to find you Leamer’s report, or could you just google it? It’s not his opinion, but a report showing how housing led the economy into every recession since WWII, with the exception of the years we propped up the economy with war spending (Korea and Vietnam). But this time, Leamer says, we don’t have the financial strength as a country, to fund a big war.August 28, 2006 at 12:39 PM #33716
[img_assist|nid=1399|title=S&P and HMI|desc=Plot of S&P 500 and NAHB/WF HMI index.|link=node|align=left|width=400|height=269]
Note the >50% drop in HMI in 1994, which preceded the huge run-up in S&P 500.
Like the “journalists” that spew real estate mis-information you need to look at the rest of the story and question the assumptions.
Note: I plotted the S&P 500 Close price adjusted for dividends and splits per Yahoo financeAugust 28, 2006 at 12:39 PM #33715
I completely agree with you cabinboy. There are always money to be made in the market, even when the indexes are going down. Big money in the market never exit the market, they just move it from one sector to another, or take some of it out and put it on the sideline for a short while, but it’ll be back in sooner or later. Just look at the last market crash in 2001, if your $ is in tech, you lost big, but if you take that $ and put it in oil, gold, RE, you’ll gain big.
powerseller, last I check, corporate profit is still huge in the oil industry. Also, the telecom industry is finally starting to make a come back too. Large cap stock hasn’t rally as much in this recent upswing to merit a major decline.August 28, 2006 at 12:41 PM #33718
During 1992-1996 S&P 500 posted about a 50% increase including dividends, so many index mutual funds must have faired well.August 28, 2006 at 12:48 PM #33719
Thanks for that chart, I was also wondering why they started in 1996.
But the fact is: every housing downturn since WWII has caused a recesion. Leamer’s work. Check it out.
Yes, you can make money in the market when it goes sideways, but only if you are very lucky. How many of us bought gold in 2000? I was smart enough to load up on index funds in 1999, and did very well. But I didn’t think about gold.
Chris J, a trader, can make money on small moves in the market, catching the rallies which occur even in a bear market. I don’t know how to do that. So I stay away from bear markets.
asianautica, How will you make money in the stock market, when everything is falling? Commodities are a bubble too. Any risk you take on could be richly rewarded, or you could lose most, even all.
Recession will lower inflation and oil prices, so oil company profits will go down. Higher costs to extract from oil shale will eat into profits too. Zeal is what I follow for commodities, as it is their forte and I know little about it.
How many people clearly said in 1999, “This tech bubble won’t last, so I’m loading up on gold, oil, and real estate”. I doubt too many. iTulip’s guy is the only one I know. Goldbugs have been goldbugs for years, so it wasn’t a clear decision made to switch from stocks to gold. The point is: the next hot thing is not obvious. In a recession, all drops: oil, real estate, telecom, stocks. It all drops. Gold rises with inflation, so I don’t expect gold to rise just because we are in a recession.
Well, if you can figure out how to make money in a falling stock market, I will put you on my list of people to call for financial advice when this is all over.August 28, 2006 at 12:49 PM #33723
I was 19 in 1999 and just started investing. All of my portfolio was in tech. I made a killing until 2001. I was not aware of any other sector at the time, so I got killed with the .com crash. That was an expensive lesson I learned, also it’s only several k, it was a lot for a 20 year old. I did more research after the crash and learned my lesson. Now, I keep an eye on all sectors. You don’t have to do day trading to make money in a down market, you just have to know which sector to be in at any point in time. After all, I’m still learning and perfecting my skills as life give me more lesson.August 28, 2006 at 12:52 PM #33724
I have no problem with the general assumption that housing downturns tend to lead recession.
My problem is in predicting a > 50% decline in the S&P 500, which I thought was the point of this thread.August 28, 2006 at 12:59 PM #33729mrquoiParticipant
You’ve checked on proshares short funds, right? SDS,SSO
If you are *certain* the S&P is going to drop then you are certain to make some nice money — in the stockmarket.
Here’s a funny thing. I know several people (liberal treehugger types) who decided to cash out of the market go into gold and euros when GWB was reelected in 2004. Though I don’t agree with the reasoning, it was a smart move in retrospect.August 28, 2006 at 1:18 PM #33732
In the 2000-2001 recession, the S&P 500 lost the following in each of quarter of 2001: -23.2%, -39.4%, -35.4%, -24.2%.
In the 1969 – 1970 downturn, the quarterly losses from Q4 1969 – Q4 1970 were: -7.5%, -10.3%, -7.5%, -11.7%, -14.5%. Not as bad that time.
I don’t have the data for the other recessions.
In any case, you two have to ask yourselves this: which stocks went up and earned more than CDs, without taking on any more risk, AT THE SAME TIME that the quarterly loss in the S&P500 was anywhere from 7.5 – 39.4%. That is a tall order. If you can pull that off, you can earn millions on Wall Street. Document your portfolio, and then show it to the traders when this is all over, so you can build your legacy. The odds are certainly against you.
I researched this spring which stocks to buy during a recession. The problem is everything is so darn overvalued right now. Storage places and pawn shops are two of the best recession proof industries, but at 25 x earnings, no way am I interested.
If we had a 35% decline in 2001, which was a very mild recession (and the 1969-70 was just a downturn not a recession), a 50% drop is very likely.
Now the ball is in your court to show how any stock can rise more than the risk-free yield on CDs, at a time when housing starts are falling over 25% year over year, which has led to a recession every time except when we were engaged in an expensive war. In the history of our markets, has this ever happened? Not to my knowledge.
What sector is going up? Where can you earn more than risk-free 5.5%? Anywhere? I have been posting about this since February at least, and I nobody has given any answers, other than shorting which I won’t do. If someone has some ideas, I am all ears…
Schahrzad BerklandAugust 28, 2006 at 1:45 PM #33739
I don’t remember where I heard/read the following info, but usually, the stocks that are safe during recessionary period are stocks of company that sell things that people need, regardless of market condition. One example is WFMI, whole food supermarket. It rises throughout the 2000-2001 recession. Another is Johnson & Johnson, it rises a little bit in 2000-2001 and rise a lot between 1970-1973. Same with Merck. So you see, yes, the index goes in cycle just like everything else in the market. However, not everything sector in the market go in the same cycle. I don’t have much data to prove my point for the 69-70 recession period, but I’m pretty sure there are sectors that went up during that recession, just like there are some in the 2000-2001 recession.August 28, 2006 at 2:05 PM #33744
an – lots of consumer companies did well during the 2000-01 recesion, bec. it was NOT a consumer recession, but a capital spending recession.
2000-2001 was a capital spending led recession, and the consumer kept on spending, so none of the consumer stocks went down, they just kept going up. That won’t happen this time. I bet JJ is overvalued, so they will go down with everyone else.
In 2000-2001, all Asian exporter stocks went down, except China, bec. it was selling mainly textiles and people were buying clothes, but not business goods. Commodity went down too. Check out Richard Duncan’s The Dollar Crisis.
an – you’re a smart guy, so I love debating with you. But here’s my problem – I am ready to start my own website, so I need to take a break from piggington to work on my own stuff.
Whole Foods is down now, I think. The others you mention – any have PEs below 12?
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