Doctor Doom Nouriel Roubini: Stock Market to Go Much Lower

http://allamericaninvestor.blogspot.com/2009/03/doctor-doom-nouriel-roubini-stock.htmlThis is directly from an email I received from the RGE Monitor.

Roubini of RGE Monitor: Stock Market to Go Much Lower

Can we rule out another bear market rally some time in 2009?

No, we cannot rule out another bear market sucker’s rally in 2009, most likely in Q2 or Q3. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in U.S. and China that the policy stimulus will provide on a temporary basis. Given the severity of macro, household, financial firms and corporate imbalances in the U.S. and around the world this Q2 or Q3 sucker’s market rally will fizzle out later in the year like the previous 5 ones in the last 12 months.

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What are the downside risks to these bearish predictions for U.S. and global equities?

On the downside there is at least a third probability of an L-shaped global near depression rather than the mere current severe U-shaped recession. If a near depression were to take hold globally a 40% to 50% further fall in U.S. and global equities from current levels could not be ruled out. But in this L-shaped near depression the last thing one would have to worry about would be stock markets as more severe issues would have to be addressed.

What are the upside risks to these bearish predictions for U.S. and global equities?

On the upside, we have an aggressive policy stimulus in the U.S. and other countries that might lead to a faster sustained economic and financial markets recovery that expected here. The bullish argument for a non-bear market and early persistent recovery of global equities is based on a better than expected recovery of the U.S. and global economy.

Bottom Line: P/E and S&P Index

Earnings per share (EPS) of S&P 500 firms will be in the $ 50 to 60 range, but they could fall to $40. The price earnings (P/E) ratio may fall in the 10 to 12 range in a U-shaped recession. If earnings are closer to 50 or the P/E ratio falls to 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000.

Nouriel expounded the above topics further at the CBOE 25th Annual Risk Management Conference at Laguna Beach where he was the keynote speaker.

Read more of Nouriel’s and other RGE Monitor analysts’ views on the current economic and financial situation on www.rgemonitor.com or contact sales at info@rgemonitor.com.

Bob DeMarco is a citizen journalist, blogger, and Caregiver. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. The content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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