Tuesday, October 7, 2008

Bloomberg: 2000s Stock Market Worse than 1930s

I think with 2 crashes now in less than a decade we are going to lose a generation of investors. I can't really blame them. This Wild West "almost anything goes" environment has been a lot like our greater economy the past 10 years - the benefits accrue to just a few and the masses miss out during great transfers of wealth. Each IPO is literally a transfer of wealth to a few insiders from the masses - which generally people are ok with as long as the investors can make a buck - but it is quite egregious. As is buying back shares with the company's money, while spitting out new shares concurrently to the executives. To whit of the culture, see Lehman Brothers memo - when people asked if executives should forego bonuses - it was laughed at (literally).
  • Days from becoming the largest bankruptcy in US history, Lehman Brothers steered millions to departing executives even while pleading for a federal rescue, US Congress has been told.
  • Waxman quoted Fuld as saying in one document, "Don't worry'' to the suggestion that executives go without bonuses. That suggestion came from Lehman's money management subsidiary, Neuberger Berman. Waxman quoted George H Walker, President Bush's cousin and a Lehman executive who oversaw some Neuberger Berman employees, as responding with a dismissive tone to the idea of going without bonuses. Sorry team,'' he wrote to the executive committee, according to Waxman. "I'm not sure what's in the water at 605 Third Avenue today.... I'm embarrassed and I apologise.''
When a Goldman Sachs (GS) can position its traders to short say (ahem) solar stocks, and then its analyst downgrades the sector and stocks across the board lose 20% in a day, well that's shooting fish in a barrel. Not that this would ever happen with the "Chinese Wall" between the analysts and the traders. Nah. Never. When put buying spikes ahead of bad news (no leaks there) and the SEC never looks into it; or vice versa ahead of a buyout. Naked shorting not enforced for years, until the top investment bank is targeted after benefiting from it along with their customers for years. This stuff has been going on since I've been in the market but it has accelerated the past 6-7-8 years. It is one thing knowing the house is going to win 55% of the time (one can live with that), but this past decade as certain huge players dominate more and more of the scene and apparently the information flow/advantages are so skewed - while creating excesses that topple the market every 5 years - is really going to make "the game" not worth it for the masses. If you did the Vanguard "low cost" index fund you have a big "L" on your forehead the past decade. And throw in a real estate mania in between the 2 market run ups/crashes and you just have a prescription for lost savings by the masses.

In March I posted a piece from the Wall Street Journal called the Lost Decade [Mar 26 - WSJ: Stocks Tarnished by Lost Decade] Essentially through that point stocks had returned 0% since 2000. I wrote

For the great many who live normal lives and investing is simply something they do through most large cap mutual funds (many of which are simply S&P 500 clones disguised to rake in large fees) in their regular accounts or 401ks, it's been a tough decade. And that's not adjusted for inflation in which real returns are clearly negative. Last, that's in dollar terms; the story has been a disaster for foreign investors who have had to put up with the dollar decimation to boot (on top of inflation adjusted real returns). So while the stock market does well over "long periods" of times, I'd consider a decade to be a serious amount of time - and this has been a bad decade. Unless you had the stomach (following huge losses in 2001/2002) or simply had good timing to start following the stock market in 2003, there has simply been no easy way to make money using traditional indexes. And NASDAQ investors? Still down in a big way.

I am mulling if we have another lost decade coming in front of us - don't think it can happen? Japan has been in bear market since 1989. We are NOT Japan, but we do have some of the same bubbles/mistakes (easy money, low interest rates, housing bubble, etc). While we used to allow creative destruction in the past 3-6 months we've seemed to have shifted to a more socialistic model where losses are socialized... sort of what we criticized Japan for doing.

Boy that socialization of losses comment was after just Bear Stearns - talk about foreshadowing.

Obviously things have gotten much worse since - heck March was "good times" in relative terms. The market actually topped out 1 year ago today (S&P 500) and in that short time has lost a third of its value. Breathtaking. Bloomberg has an article updating on where we stand and it is ugly - if the decade ended now (obviously we have 2 years to go) this would be a worse decade than the Great Depression decade - the 1930s. Now, that's a stark reminder of just how awful the market has been for much of this decade. But not for everyone - just for many of those who play by the rules... I honestly wonder how Peter Lynch would handle this decade when many of the names in his book of "buy what you know" have done, at best, nothing - if not gone down precipitously.
  • Even the 1930s are looking better for U.S. stock investors after the credit crisis wiped out more than $6 trillion from equities in the past year. The Standard & Poor's 500 Index lost 18 percent since the start of 2000 after sinking 11 percent this month, total return data compiled by Bloomberg show. The decline would be the first for a decade in 70 years and exceeds the 8.9 percent plunge in the 1930s, following the stock market crash of 1929, data compiled by New York University's Stern School of Business show.
  • The S&P 500 stood at a record 1,565.15 one year ago, the peak of a five-year bull market that helped investors recoup losses from the dot-com bust at the start of the decade. Since then, the measure tumbled 32 percent, including dividends, as the collapse of the U.S. housing market upended the economy, froze credit markets and saddled financial firms with almost $600 billion in mortgage-related writedowns and credit losses.
  • While stocks lost money, 10-year Treasury bonds returned 86 percent this decade, data compiled by Bloomberg and Aswath Damodaran, a finance professor at New York University, show. (that's sad)
  • Earnings at S&P 500 companies fell 5.6 percent in the third quarter from a year earlier, according to consensus analyst estimates compiled by Bloomberg. That would be the fifth straight quarterly decline and match a streak ended in March 2002.
  • ``You don't cure a blast wound with a band-aid,'' said Stovall, the 82-year-old World War II veteran who has worked in the financial industry for more than 50 years. ``It's quite possible that the residue of all this damage could extend well through 2009.''
  • The S&P 500 fell during the first three years of this decade, its longest streak of annual declines since 1939 to 1941. Investors were battered by the bursting of the technology bubble that pushed share prices to their highest level relative to earnings, and the bankruptcies of Enron Corp. and WorldCom Inc., two of the largest U.S. companies by market value.
  • Arthur Cashin, a member of the New York Stock Exchange for 44 years, says the speed and scope of the latest global sell-off makes the financial meltdown more dangerous and harder to contain than any previous crisis after $25 trillion of market value was wiped out worldwide. The credit crunch ``has become a financial forest fire,'' he said. ``I have never seen it happening contemporaneously all around the globe where everyone is impacted.''

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