Lack of Clarity Into Selling Causing Fear

“Davidson” makes a great point here. Things are getting a bit overdone here and the “who is selling and why” questions are the cause.

Todd,

The current selling is pushing the SP500 down to 1xBV (~550). This occurred in 1974 and 1982 when the Wicksell Rate was ~14%(3.2% Real US GDP + 11% core inflation) and represented realistic pricing of the earnings yield for the SP500. Today, we are priced at ~10% on reduced ttm SP500 earnings in an environment of a 5.4% Wicksell Rate. This is equivalent to a Real Rate of Return for SP500 of 7.5%(10%-2.4%). This figure is at a historically high level for an inflation adjusted return back through the 1940’s.

To throw out basic financial reasoning and pricing that has been in place for ~70 years as we have done today, means that some one with little discipline is selling portfolios wholesale. I suspect foreign sellers who have used too much leverage are now delevering. Our markets have no transparency to this and are trying to make sense of something for which we lack adequate information. We are trying to garner information from price movements and making many, many wrong assumptions about risk that is not likely present. GE (GE) is a prime example.

GE’s Sherin noted that $35mil of trades over 2 days caused the fear that forced GE to lose $21bil market cap this week. GE has taken an extraordinary step to open up the books later this month to show all that they do not have the issues rumored in the market. But, note that there is great leverage in the CDS market when $35 mil can be levered into a $21bil move. That is a 600 multiplier.

I believe that GE’s Immelt is an extraordinary astute and honest manager. The insider buying in this company is so high at this time that the term “of historical proportions” does not express the true meaning. I was once a GE insider and I know the culture. It is much, much better now than when under Welch and in sound hands in my opinion.

I think we are seeing much selling from sources not transparent to us and attributing this to some one knowing more than is widely available. This is the “Boogy Man in the dark room” syndrome. If we had a benchmark which is not susceptible to emotional pricing, then we could fairly compare returns on all assets and then discount for financial risk rather than be in this overblown panic. I propose the Wicksell Rate which is based on longer trending economic fundamentals and not subject to emotional volatility.

At the current level the SP500 provides extraordinary returns. I think we are seeing liquidation by foreign companies that took cash on the books and traded it in our markets to boost earnings. This occurred during the “Japanese Bubble” and was known to have been going on with the recent boom. It is my belief that these corporate treasurers are panicking and selling to recover much needed cash.

I would be buying with cash in both fists if I were not already in. Perhaps the world should step back from the precipice and see the current activity as crazy and go in the opposite direction.

I have sent you a chart via another email of the Percentage of MM Funds vs. MM Funds and Corp Equities. The panic is clear.

“Davidson”

Here is the chart: