Can the S&P 500 make it back to Pre-Lehman Brothers bankruptcy levels before a major correction?
The last September 14 S&P levels of around 1,200 is where the bulls now argue is the market's fair value. That target is of particular interest and importance to bulls who note that was the level prior to the Lehman Brothers failure, which was the brick that broke the market's porcelain camel's back.
Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The news caused the DJIA to closed down just over 500 points in one day. This resulted in a financial nuclear chain reaction with Lehman's counterparties and financial markets. This was a bankruptcy with world-wide implications that lead to freezing credit markets; tumbling commercial real-estate values; panic in the junk bond markets; accelerated selling in commodities stocks; and increased financial service sector lay-offs in anticipation of a world-wide recession. Let's not forget to add - fear of the next great depression.
I must confess I was of the opinion the S&P would max-out at 1,000 (at best) before enduring a reasonable pullback of around 5% in August or September. But then a Bull gored me from behind and called to my attention the impact the Lehman Brothers bankruptcy had on the market. This logic had me reconsidering my positions but then, without warning, a Bear roars - get a grip on reality, bonehead. So I recorded their 5 best shots of logic.
The bulls' logic for a return to S&P 500 pre-Lehman Brothers bankruptcy levels:
1. The so-called Libor-OIS spread, a gauge of bank reluctance to lend, has narrowed to 28 basis points from 364 basis points on Oct. 10 2008. Greenspan said in June 2008 that he wouldn’t consider credit markets back to “normal” until the Libor-OIS spread narrowed to 25 basis points. Libor-OIS also became a barometer of fears of bank insolvency.
2. The VIX index, the volatility and nicknamed fear index has been trending downward for 8 months. Before the Lehman bankruptcy the VIX was around 22 and after the bankruptcy rose to a all-time high 80 level. Today, the bulls argue, it's holding around 26 only in anticipation of a quick correction after July's large run up. They rationalize it should fall to 22 given the credit crisis is at least as good as pre-Lehman bankruptcy levels.
3. The current bare bones inventory levels will force companies to resupply now and for upcoming Christmas season. Rising consumer confidence levels, $8,000 for new home buyers, $4,500 cash for clunkers, Government Stimulus package, stabilizing unemployment levels, ISM reports, world markets, all point to rising spending and restocking.
4. The weak dollar and healthy Asian and India economies will once again improve our exports while our recession has curtained our import spending thus reducing our balance of trade deficits.
5. GDP in the 3ed and 4th quarter will show a major improvement over the 1st quarter rising from a Negative 6% to a forecasted 2.5%. This would also be a major improvement over 2008 which had a less than 1/2% GDP (after revisions). See my prior post on World Green Shoots Economic Indicators.
The bears' scream that the current 50% rally is already built on a slope of hope and it's time for a correction:
1. Real Unemployment in the USA is near 16.8% when you consider the people working part-time who were full-time and those who are not counted simply because their eligibility for benefits ran out. The first wave of big reductions in eligibility will come in September 2009. And the USA is still an economy based upon consumer spending. One in three unemployed people, or five million people, have been jobless for 27 weeks or more.
2. No job growth, no spending improvement. So what if job losses were less than expected in July or bottoming out? If employers are not hiring back workers, there will be less consumer spending overall until the jobs return. And right now the market is higher than 2002 when significantly less workers were out of work and the housing sector was booming and the financial sector was considered on solid ground.
3. Banks must make loans to people who can repay. Gone are the 2001-2005 days of no-documentation loans and instant approval and fast money for everyone. The banker bubble economics that stimulated spending and GDP is gone.
4. Everyone is deleveraging. Unlike the 1999-2002 market decline, the consumer was still spending as half as many people were unemployed and easy money and job stability encouraged spending. This pulled us out of the hole and lead to a steady market advance back to the 1999 S&P 500 1550 levels by 2007. But this time around it's the reverse - both institutions and individuals are deleveraging and reducing their spending.
5. Insider Selling is at its highest level since October 2007 (the market top). Vickers Weekly Insider Report, published by Argus Research: In their latest issue, received Monday afternoon, Vickers reported that the ratio of insider selling to insider buying last week was 4.16-to-1, the highest the ratio has been since October 2007.
At this point even many bulls expect a 3-5% pullback before resuming the climb to S&P 1,200 before year-end. The bears say that's just the beginning of a major correction as we enter the market's notoriously bearish months of September and October.
The Bulls and Bears each gave me five good reasons. Now let us hear your reasons
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