Investing in a Post Crash Economy

Barry Ritholtz, CEO Fusion IQCitywire NY June 22, 2011

Today’s Powerpoint Presentation:

10 Steps to a Financial Crisis

Source: Bailout Nation

Source: Bailout Nation

The Credit Bubble and

Housing Boom’s Shaky

Foundation

Source: Ritholtz.com, RAB Capital

US Homebuilder’s Construction Binge

4 Million excess homes = 2010Household formation = 0.9 million / yearHomes built = 0.6 million /year Current rate = 12 years to absorb excess

Source: Ritholtz.com, NDR

Residential Real Estate Relative to Median Income, Rent

Source: Ritholtz.com, BIS

Residential Real Estate Boom Was Global

Emailer: Why don’t you think Fannie, Freddie, CRA was to blame?

Source: Ritholtz.com, Calculated Risk

Time Until Full Employment Recovery Post-Recession

Economists are looking at the wrong data set: Instead of “ALL CYCLICAL

RECESSIONS, try substituting CREDIT CRISIS RECESSIONS.

Hence, why they seem to be perplexed by weak job creation and soft GDP.

100 Years of Secular Markets, P/E Expansion & Contraction

Source: Ritholtz.com, Crestmont Research

100 Year Dow Industrial Chart

Source: Ritholtz.com, Bloomberg

1966-82 Cyclical Markets

Source: Ritholtz.com, Bloomberg

S&P500: 2009-11 Compared to 1973-74

Source: Ritholtz.com, TheChartstore.com

Recession Bear Market vs. Armageddon

Source: Ritholtz.com, Bloomberg

Source: Ritholtz.com, TheChartstore.com

“100-Year Floods” seems to come along far more often than their name implies

Duration and Intensity of Bear Market Rallies

Rally averages over 12 and 24 months, going back to 1929

After 12 months, returns range from 21.4% (1987) to 121.4% (1932), followed by 81.4% (1935). Remove the post-depression outliers, and 1982 becomes the next most intense move at 58.3%.

That is, until the 2009 rally. After 12 months, it stood at 68.6%. The average of these rallies at the 1 year mark was 47.3%.

From one to two years, the rallies strengthened to 56.1%. Note that the two post-depression rallies eventually give up all their gains. (See S&P 90, lower right)

2009 is now the outlier. After just 23 months, this market is up nearly 100%. 1974 is the runner up at 65.7%.

How intense is this rally? The current run is 50% greater than the next closest one, and nearly 2X the 2 year average.

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How much of this is attributable to the Fed? We can only guess, but if only half of the excess gains over prior rally averages are attributable to the Fed, it means that the US Central Bank has artificially created several trillion dollars in market capitalization.

Source: Ritholtz.com, Investech Research

S&P 90 Roundtrips:

1932Bottom June 4th 1932 $4.21 Peak September 10 1923 $9.49Low March 4, 1933 $5.47

Peak July 22 1933 $12.44

1935 Bottom March 23 1935 $8.02Peak March 13 1937 $18.84Low April 2 1938 $8.36

Composite 19 Secular Bear Markets

Source: Ritholtz.com, Morgan Stanley Europe

Source: Ritholtz.com, Morgan Stanley Europe

War & Peace + Inflation + Secular Bull = 500% Gains

Source: Ritholtz.com, Stock Trader’s Almanac

Looking Backwards: Downsizing America

Source: Ritholtz.com, February 2009

How Does the ‘09 Rally Stack Up Against ‘82 Bull Market?

Lose the News: Beware the Recency Effect

Source: Ritholtz.com, WSJ

WSJ: 2007 WSJ: 2010

Do Markets Forecast the Economy? (No)

Source: Ritholtz.com, Bloomberg

Analysts Are (Still) Too Bullish

Source: Ritholtz.com, McKinsey

“Analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent… On average, analysts’ forecasts have been almost 100 percent too high”

-McKinsey study

Congress for Sale: 2009 Lobbying $3.49 Billion

Source: Ritholtz.com, Time

• Derivative trading banks spent $28 M to save $5-7 billion collateral allocations

$ = Annual profits $3 billion (risk remains on the taxpayers)

• Auto Dealers spent < $10M dollars ($6.3m lobbying, + $3.4m campaign contributions)

$ = Saved undisclosed added interest, fee kickbacks, other over-priced loans worth $20 billion annually to dealers.

Barry L. Ritholtz

CEO, Director of Equity ResearchFusion IQ

535 Fifth AvenueNew York, NY 10017

212-661-2022516-669-0369

britholtz@FusionInvest.comThe Big Picture

http://www.ritholtz.com/blog

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