Tuesday, Aug 21, 2007
Before it keels over, a bull market typically leaves a few road signs. Here's what to keep an eye on - from Money Magazine.
CNN Money: 5 ways to know if the bull is over
A fun article that says the obvious, but it gives focus to what's important. I'm glad that it recognises the importance of oil prices.
Posted by planning4acrash @ 11:00 PM (1471 views) Add Comment
26 Comments
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1. david20040_0 said...
Oil prices, which are now below $70 and will drop further at the end of September.
2. planning4acrash said...
Only because poor liquidity means that hedge funds are selling whatever assets they can sell to get liquidity to cover losses elsewhere and they are only able to sell so much oil because demand for this commodity remains sky high, the current falls in oil prices therefore have nothing to do with oil price fundamentals but are a short term symptom of the credit crunch. Eventually hedge fund positioning bets on higher oil prices will reluctantly be unwound and fundamentals will take over. Sustained $60/barrel is more than current interest rates are designed to deal with and even $50 will probably require fiscal tightening if it keeps up because banks are banking on a $40 norm, so I totally disagree Dave.
3. planning4acrash said...
Only because poor liquidity means that hedge funds are selling whatever assets they can sell to get liquidity to cover losses elsewhere and they are only able to sell so much oil because demand for this commodity remains sky high, the current falls in oil prices therefore have nothing to do with oil price fundamentals but are a short term symptom of the credit crunch. Eventually hedge fund positioning bets on higher oil prices will reluctantly be unwound and fundamentals will take over. Sustained $60/barrel is more than current interest rates are designed to deal with and even $50 will probably require fiscal tightening if it keeps up because banks are banking on a $40 norm, so I totally disagree Dave.
4. planning4acrash said...
Please excuse the poorly formed first sentence!
5. Pecker said...
It was a long sentence!!
6. david20040_0 said...
You can disagree with me all you want but so far you have been proved wrong on numerous occassions.
House prices are still rising, fact.
7. david20040_0 said...
Oil has nothing to do with the credit crunch. Your arguments make no sense yet you have the audacity to label me as having the brains of a pea.
8. Pecker said...
planning for a crash, you have insulted peas to an extent I deem unacceptable.. apologise immediately!!!
9. planning4acrash said...
Oil has everything to do with the credit crunch, if you don't have cash and can't raise it on the money markets, you sell whatever assets you can sell to remain liquid and avoid bankruptcy. Hedgefunds have invested heavily in Oil betting on a tight market and higher prices, so are unwinding their positions to offset losses on the moneymarkets. And no, I wouldn't expect a pea to know that, even if the pea had contributed to threads that made this point!
10. whiteknight said...
david20040_0 :Sorry.. what is the rationale for oil prices going lower - i missed it?
Naturally there are a very large number of individuals unwinding leverage upside positions as pointed out by planning4acrash
But aside from that what , if any, are the drivers that make you believe the price will fall?
11. planning4acrash said...
For the record, and you should know this, because you contributed to threads where I said this, I've consistently said that I don't predict significant falls in house prices until at least spring next year and I don't really expect crash territory until Xmas 2008. Things that have happened recently are starting to make me question that. All I ever said, which has turned out spot on, is that signals will turn decidedly bearish and that IR's would be around 6% this time of 2007 and that the Autumn would show a slow but steady stream of negative news.
Are they still paying you for these posts?
12. planning4acrash said...
And Dave, remember, that BTL investors are also carrying out highly leveraged bets on rising house prices, given the low yields on rental, the unwinding of the property market is therefore just one other logical conclusion of a credit crunch, just as hedge funds must sell oil to get cash flow, so must BTL investors sell properties to make up cash shortfalls when they re-mortgage at higher rates or can't re-mortgage and end up on standard variable rates, if they are already struggling or have not priced this risk into their investment portfolio. In fact, BTL investors are in a worse position, because, unlike hedge funds, they generally don't have a balanced investment portfolio and will on the whole not considered a circumstance where they must sell quickly to get a cash injection, because, in a buyers market, they may not be able to shift properties at all and may just go under because they have nowhere to get the cash. They will not get bailed out.
13. planning4acrash said...
White Knight, you ask reasonable questions but won't get answers. David makes statements like these without basis. He has not thought about it, this is his gut instinct, but David doesn't have the capacity to recognise this, so repeats his argument again again, thinking that, if he says it enough times it will be believed, and it probably will be believed by most, so it is an exhausting, fruitless exercise if you try to debate things with him on the level of evidence and thought. Interchanges with him could actually be fruitful if he recognised when his assertions were based on past trends or gut instinct and if he recognised when he doesn't understand the economic fundamentals of the present moment, but instead, he repeats like a scratched record and discards reason if he doesn't understand it.
14. paul said...
David, stop it. Don't rise to the bait. Keep it rational.
Your optimism is starting to sound misplaced. I know someone who is looking for a position in wealth management and you would not believe the extent of the uncertainty at the moment. NO-ONE knows how exposed they are, and the issue is spreading like rot.
15. cyril said...
Hey I thought this blog was about house prices but after this latest debacle in the finance world, things have started to get a bit a techy at HPC.
I don't think houses will start to go down in absolute terms until joe public feels the pain in terms of reduced spending power/high interest rates/unemployment etc. And looking for the early signs risks all sorts of false alarms.
With the finance system in risk of meltdown, my biggest fear is that the value of money will go down and houses will turn out be a really good investment. This is because they have a real value as a place to live, and the fact that in inflationary times, earnings rise relative to the original purchase price making the mortgage easy to pay off. Damn!
16. Koala Bear said...
Houses may have real value as a place to live but have you noticed how many BTL flats are vacant? How can their earnings rise if they can't even attract tenants in the first place?
17. backseatcrasher said...
Fear not Cyril, before the value of money goes down highly leveraged house owners and the BTL brigade (why is it they think they are so much smarter than legions of investors before them- they have been on a one way bet for long enough to draw almost everybody in) will have to bail out faster than than the falling value of the pound in your pocket. And to explain further this will mean house prices falling faster.
18. planning4acrash said...
It depends, cyril. house prices can only keep going up if they are supported by liquidity and lending. Modest inflation has had the effect you talked of and this is pretty much what we've been seeing since the year 2000, CPI figures really haven't portrayed the reality and most people's inflation rate is much higher. The situation we risk here, is that the medium levels of inflation of the past few years appear to be becoming more volatile and out of control. Last time that happened was around the last crash of 1992 when unbearable inflation risks result in painful interest rates, which, in a high inflation environment, sqeezed liquidity. In reality, with a credit squeeze and high inflation, the inflation levels amplify any price fall in real terms, because a fall in real term occurs whenever prices fall beneath inflation. This is why 0% growth over a prolonged period is in fact a soft landing, i.e. bearable (no pun intended!) correction / fall in prices. Therefore, in a high inflation environment, house prices must accellerate just to stay put.
19. Realist said...
Yes David. And the markets will all be back to normal by last Weds as well.
20. mrmickey said...
cyril at the moment people are buying property as a hedge against inflation although most people probably don't realise that's what their doing. If the central banks continue to try to inflate their way out the current mess they will destroy real savings and crush the economy. If people have no job and no access to credit then there is no way property prices will continue to inflate in fact you will get deflation as people pay down debt or go bust and shrink the money supply.
21. Symo said...
Can I just clarify what is being said:
Oil will fall in value
BTLers will buy more property to cover gaps in their portfolio
Oil won't fall below $65 a barrel, simply because there is not enough of it. My employment is a supplier to the Oil and Gas industry and I haven't seen a boom in this field of engineering since errrr.........................1992. All the major players are investing heavily on new equipment which of course they offset against the prices they will be charging in the future. Check out Diesel and Gas Turbine worldwide to see the ammount that in being invested in power generation for them.
As for the BTLers. If Rent Yield < Interest Rate - Then it's a no brainer surely. My GF has been looking for a flat share recently. It's amazing how many are now available in London with owner occupiers. Typical example was one woman who was moving in with her partner and desperately trying to sell the place to pay debts off and as such could not offer more than a 3 month tenancy (Obviously the GF rejected this). Her current tenant was moving out and as such is going to be stuck with a lovely flat that no-one can afford and a defiency in her mortgage payments. This woman was also a part time student who bought two years ago (Fixed rate deal at an end perhaps??? Shome mishtake shurely??)
22. uncle tom said...
This is one those classic American articles that fails to see the wood for the trees.
There is a persistant conviction in the US that history repeats itself, and that when a couple of unrelated trends have preceded a major economic event in the past, the recurrence of that combination of trends must be highly significant. The possibility of it being coincidental never seems to be considered.
History never quite repeats itself, and the basket of ecomomic factors that we have today is unlike anything that has gone before. There is some serious uncertainty out there at the moment, and the western economies are certainly due a reality check. However, those stocks that are relatively recession proof do not look over-valued.
I'm not rushing to sell my equities right now!
23. sold 2 rent 1 said...
The article is a bit too simple.
This stocks correction will have a bottom this autumn and some IR cuts will push the market forward again into 2008.
There may be further lows in Sept/Oct.
The fundamental problem of the UK and US economies is the massive levels of debt and over dependency of consumption and imports.
The real crisis going forward is when US IRs get slashed right down to 1% again (if inflation allows this possible)
Remember there is no housing market waiting in the wings to save the day like back in 2003.
This time the housing market is part of the problem.
UT, of course history doesn't repeat, but there is a great deal we can learn from history.
The main pit fall is NOT to look further back than the 1970s which seems to be the common mistake of many commentators.
24. rickyb said...
Although stocks appear over-valued when trying to extrapolate back to the year 1800 using inflation adjustments, many would argue that the economic conditions which were prevalent during the 19th century are hardly relevant to conditions today.
25. stillthinking said...
@mrmickey. Surely if people go bust on a house that wouldn't shrink the money supply so causing deflation, because the bank has already credited the seller, so the bank basically gets stuck with paying out the cash to the seller from profits/assets whatever. If the bank can't do that and the bank is bust, then the original seller doesn't get the money from the original sale and then money has disappeared, and the money supply has shrunk. But not before.
In fact, as hedge funds are going bust, and now US mortgage companies, then this must be happening now.
26. sold 2 rent 1 said...
rickyb,
Looks at the graph
http://www.irrationalexuberance.com/shiller_downloads/ie_data.xls
Get yourself a slide ruler and see just how far earnings are above their long term avarage.
Earnings can't keeping climbing vertically. History shows that they are likely to fall off a cliff over the next 4 years (like after 2000).
The key to understanding stocks is secular cycles.
Think about a young family starting out now having massively overpaid for a nice detatched house.
How much less spending power will they have over the next 20 years compared to a similar family that bought a similar house in 1982.
If house prices head south for the next 5-6 years then any extra income they earn will go to pay off negative equity and not LCD TVs or new cars.
I expect stocks to hold up reasonably well (only down 10-20%) until next summer as the IR cuts restore some confidence.
Once the recession/depression starts then expect 2012 to be a low 70% down in real terms