Wednesday, January 7, 2009

Today's selloff is not worrisome

This market is going to be climbing walls of worry for a long time. Selloffs like today will follow periods of rising prices, and that's only natural.

The important thing is that the fundamentals continue to point in a positive direction: swap spreads, credit spreads, and corporate bond yields are all down significantly from their recent all-time highs; implied volatility in bond and equity options is down significantly; energy prices are down hugely; most commodity prices are up from their recent lows; and all measures of money supply are rising at a breakneck pace and stand at all-time highs.

What's more, there has been a dramatic repricing of assets. Housing prices are down everywhere, and financing costs are down as well. Equities are historically cheap no matter how you calculate it. The rewards to taking risk have almost never been so high. The vast majority of the subprime and subprime-related losses have been recognized and absorbed.

Fiscal policy is going to turn out to be far less damaging to the economy than was feared just a few months ago. Obama has changed his mind on all sorts of issues. Things could be better, but they could have been far worse. Stay optimistic, stay bullish.

13 comments:

Chris said...

Scott,

I appreciate reading your blog. You have a talent for making relatively complex concepts understandable to novice economic observers like me. It also helps that you provide an optimistic and encouraging outlook, boosting confidence at a time when we're in short supply. I wish more public commentators and media-heads were like you. Thanks!

Scott Grannis said...

Thanks for your support!

Chris said...

One other thing . . . I mavel at the charts you post. There is tremendous value for readers to observe the movement of these variables in easy-to-understand graphs. Coming from someone who frequents the world of online economic commentary, I have found no match for your charts. Thank you for posting these for all of us to see.

Scott Grannis said...

Thanks again. As you might imagine, I take pride in my charts, and I agree with you that the vast majority of charts out there are deficient. I won't give away my secret except to say that I do them all on my Mac laptop.

atempe said...

Scott,
With a bleak corporate earnings expected over the next couple of quarters. With Q 4 being especially bad. How do expect bad earnings to effect the equity markets? Thanks.

Bernard said...

Some calculate the forward PE on the S&P around 22 based on analysts earnings projections of $42.26 as of Jan 2. Thats after coming done from $81 projected in March 2008 and a historical 15. DOesn't seem cheap to me?

"the US stock market falls an average of 43% during recessions. The stock market was not discounting a recession last January or even in May, even after a serious financial crisis."

"In 2001, as-reported earnings were $24.67. Operating earnings in 2002 were $27.57. Does anyone think the current recession will be milder than the last one?"

I would question the markets ability to forecast at the moment although I do share your opinion regarding other risk measures showing improvement from recent extremes.

Gene Prescott said...

((Thanks again. As you might imagine, I take pride in my charts, and I agree with you that the vast majority of charts out there are deficient. I won't give away my secret except to say that I do them all on my Mac laptop.))

Scott, I too enjoy your charts. I would note that Edward Tufte (a stickler for exactness in visual communications) would suggest including the full range of numbers on the scales so that the change amounts are in better visual perspective.

Jeff said...

Scott:

I too enjoy your posts and view point. I'm curious as to your thoughts on the comments made by Nouriel Roubini. This NY professor claims to have called this downturn and forsees a lot more pain going forward....not a recession that is closer to the end than beginning. I'm sure you are aware of his writings and viewpoints and I would love to hear your comments.

Scott Grannis said...

atempe: My thesis is that the market expects earnings to be absolutely dreadfully bad. So we would need to see a catastrophically bad series of earnings reports for the market to be disappointed. I don't think things are that bad, so I'm optimistic relative to the market's deep pessimism.

Scott Grannis said...

Bernard: I try to not focus on reported earnings. I think the best measure of profits is "economic" profits as reported in the National Income and Products Accounts. By that measure, profits today are about twice as high as they were by the end of the 2001 recession, yet stock prices are about the same. That tells me that stocks are cheap.

Scott Grannis said...

Gene: thanks for your comments. I am an admirer of Tufte's work. When I choose the scale on charts I try to balance his recommendation with the need to show what is happening. If data move between 150 and 200 all the time, why have the scale go from 0 to 200? You have to trust me to not choose a scale that gives a distorted or biased picture.

Scott Grannis said...

Jeff: Roubini is notorious. He was bearish for many years and finally got it right. I'm not sure that makes him the genius that everyone thinks he his, and I'm not sure that he has any insights that are convincing. He may go down in flames with his call that we are only in the early stages of a depression.

Gene Prescott said...

((If data move between 150 and 200 all the time, why have the scale go from 0 to 200? You have to trust me to not choose a scale that gives a distorted or biased picture.))

Scott, I don't want to appear argumentative as I find your charts very useful. However to answer your question (my interpretation of Tufte) the reason is that on a chart showing only 150-200 a move from 150 to 200 looks visually like 100% .... whereas the same move when chart is 0-200 looks visually like 25%. Of course if you read the numbers you can interpolate correctly. Tufte opines the visual should also convey 25% .... a reason they do not in print media is space and newsprint .... but digitally it is only disk space and bandwidth which are near free.