Kudlow et all have been trying to pin the last several weeks' downturn in the Dow and S&P on Obama (who still doesn't have full staff at Treasury and is largely going off of the remnants of the last admin and its sick infatuation with supply-side economics.
Roubini tells it differently:
How Low Can the Stock Markets Go? Much Lower
http://www.rgemonitor.com/roubini-monitor/255909/how_low_can_the_stock_markets_go__much_lowerIf you take a macro approach earnings per share (EPS) of S&P 500 firms will be – quite realistically in 2009 - in the $ 50 to 60 range (I say realistically as some may even argue that in a severe recession they could fall to $40). Then, the question is what the multiple, i.e. the price earnings (P/E) ratio will be on such earnings. It is realistic to expect that the multiple may fall in the 10 to 12 range in a U-shaped recession. Then, even in the best scenario (earnings at 60 and P/E at 12) the S&P index would be at 720. If either earnings are closer to 50 or the P/E ratio is lower at 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. And using a similar logic we argued that global equities – following the US - had another 20% plus downside risk.
These predictions were made when the S&P 500 was close to 900 and the DIJA was close at 9000. This basic macro approach was the reason why we argued that the latest bear market sucker’s rally – the one going from late November 2008 to early January 2009 – would fizzle out and new lows would be reached. Indeed, like previous bear market rallies of the last year this one went bust – falling over 20% - and the DJIA and the S&P broke below the 7000 and 700 upper limit of our range for US equities. With the DJIA and the S&P now well below the “7” range the next test for the markets may be 6000 and 600 for the two indices.
I have also argued that another bear market rally may occur some time in Q2 or Q3 of this year and may end up like the previous six. Indeed in the last 12-18 every time something dramatic happens (that leads to a lower stock market low) and the government reacts to it with a more aggressive policy action optimists come out and say that this is the dramatic and cathartic event that suggests that a bottom has been reached: they said that after Bear Stearns, after the collapse and rescue of Fannie and Freddie, after Lehman, after AIG, after the TARP was announced, after the G7 communique’, after the $800 fiscal stimulus package was announced last November (the onset of the latest sucker’s rally).
And after a while markets are again “shocked shocked” (to paraphrase the French police inspector in Casablanca) to discover that the macro news are much worse than expected in the US and abroad, that earnings news are much worse than expected not just for financials, realtors, home builders and consumer discretionary firms but also for most other non-financial firms, and that financial markets/firms shocks/news are worse than expected.
Rest of article requires (free) registration.