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August 15th, 2007 at 10:13 pm
alfamike- I have no idea what the market will do over the next day, two days, or two weeks. I’m not making those bets. I’m also not a permabear. I was bullish until February 27th, and was in disbelief thereafter when the collective market was so quick to write off subprime as “contained” and would not “spillover.”
It was clear to me that sooner or later the consumer will suffer significantly due to the housing market crumbling. The key is sooner or later– when it didn’t happen after a month or two of the housing slowdown, many permabulls were quick to say the consumer is not dead, and how it’s stupid to bet against the American consumer. I always believed a housing boom and a housing bust are VERY slow moving things- and it may take a year or two to spread. The boom went on for 4+ years and everyone underestimates the positive effects that boom had on the rest of the economy– now, in my view, they are underestimating the negative effect the bust will have on the economy over the next 4 years. We will be in a recession a year from now because a massive glut of unsold homes, no demand as many can no longer get approved for mortgages (and no one wants to catch a falling knife), average home prices will fall 15-20% (some markets will fall more, some less), home equity withdrawals are cut off, those who took out equity soon realize that equity is gone as their home is no longer worth what they thought it was in early 2006– and finally, the massive amount of ARM resets will squeeze consumers even more, which really have not even begun and largely won’t begin until next year. I have an ARM, which would reset to over 8% from 5.85% next February if I don’t refinance. Fortunately, I locked in a rate two weeks ago.
As for day trading, day to day VIX levels, the merits or demerits of buying puts today– I can’t claim to have any idea. The market may very well rally over the next week or month as many equities do look “cheap,” as people will say, but to me they’re cheap on inflated forward earnings. Is GS cheap at a 7.5x forward multiple? Yes, that’s a low multiple– but they sure aren’t earning $22 bucks a share next year.
The market could rally over the next six months– but I don’t think that would be justified by the looming fundamentals with the consumer. But hey, it happened from Feb 27 through July. Again– not saying load up on your puts today– I’m just saying where I believe the market will go over the next 6-18 months or more. Just my opinion.