Stock Market is driven by sentiment and earnings and earnings ain’t happening…sooooo when do folks wake up and start wondering if they have taken the Blue Pill?
From one of the best asset managers in the country, Sprott Asset Management LP, comes this tidbit that maybe qualifies as a RED PILL.
We are now in the early stages of a depression. The economic indicators we follow to track real
economic activity are all signaling a slowdown of massive proportions. You wouldn’t know it
reading the mainstream papers of course – they all focus on the relative decline in the
slowdown’s intensity. Reading about the slowdown ‘slowing down’ is not the same as growth
however, and does not warrant excitement in our opinion.
Further down they explain what drives the stock market which helps those of us who learned everything we ever needed to know in kindergarten. But first a chart because I love charts. Industrial utilization isn’t looking all warm and fuzzy.
Next up Industrial Capacity Utilization…hmmm this isn’t good.
Just in case your wondering about how the rest of the world is doing wonder no more.
So back to Sprott…
Chart E plots the real P/E ratio of the S&P 500 Index fifty months out from 1929 and compares it
to the recent real P/E ratio performance from April 2008 to June 2009. We find the similarity
between the 2008 economic collapse and the 1929 economic collapse disturbing. Don’t get
sucked in… the real economy is still struggling and the market has yet to reflect this. In 1932, the
Dow Jones Industrial Average bottomed 90% below the September 1929 peak. The S&P 500
Index peaked in October 2007 at 1,576, and from our brief analysis above we can easily
calculate a drop in the S&P 500 of as much as 88% from that peak using our ‘double trouble’
scenario. At the very least, under all of our scenarios it appears that the S&P 500 Index will test
the March 2009 low of 666. Judging by the continued declines we are seeing in the real
economy, we expect that test to happen sooner rather than later.In our view, the only thing propping this market up is investor sentiment. Earnings have not
improved. Keep it simple, stupid – investing is and has always been about the real economy, and
this market is ignoring the hard data. You can invest in sentiment if you want to, but as we have
said before, we prefer to invest in real things.
Careful out there some of those green sprouts will hurt you.
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