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      12-26-2018, 10:56 AM   #51

Drives: E46 M3, E90 M3
Join Date: Jun 2007
Location: Los Angels, Ca.

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Are the selloffs the result of a process of repricing or something of a prediction of a recession? Given the severe selloffs, it has been surprisingly orderly which means it could be pointing to those who think it is just a process of repricing. I have not sensed any "fear". Most people are still like "economy is in good shape so it's a good time to buy". So there are still a lot of optimism.

Because of corporate tax reduction from 35% to 21%, the earning in 2018 is somewhat distorted vs. the norm. Therefore the earning growth from 2018 to 2017 is a one time phenomenon that will not be repeated in 2019. If you look at the revenues of a lot of blue chip stocks in the DOW, their revenues 2018 to 2017 is only about 7%. The October high reflects the earning growth in 2018 but that earning was being distorted due to the tax cut. So stock prices are being repriced to a more normal earning growth which is probably about 5% next year.

The problem is there are a lot of variables that could have 2nd and 3rd orders affects that are very difficult to predict. Here are some of them:
1. With the recent selloffs, consumer confidence will take a hit therefore spending next year won't be as good which in turn will affect corporate earnings.
2. If we have a severe selloff, a lot of hedge funds will blow up which may start to affect the banks that it's difficult to know what will happen depending on the severe of the selloffs.
3. I have a suspect that because of the run up in stock price, a lot of companies have used their stock prices as a leverage to borrow money to invest and now that stock price have come down so much, they may not have the capitals to service their debts which in turn will affect the banks - sort of like the housing crisis. People used their house to refinance like a bank account.
4. As I have said before, the stock market is facing a FED inertia that is as soon as there is some steam in the rally, the FED will talk of raising rate which in turn will put a damper on the stock market.
5. Oil price seems to point to a slow down and if a slow down is severe enough, it could turn into a recession. I don't think stock market is priced for a recession so there will be more down side risk.

Last edited by WestRace; 12-26-2018 at 11:05 AM.