Pat Dorsey: Hi, I’m Pat Dorsey, Director of Equity Research at Morningstar. Another day, another 4% lost in most of the major market industries as the stock market heads back down towards the November lows. I thought it would be worth taking a look and thinking about how the economy and the markets tend to recover. Is it all it wants is a V shape, is it fits and starts and I have with me the Associate Director of Economic Analysis at Morningstar Bob Lyon to talk through some of the details. Thanks for joining me Bob.
Bob Lyon Lyon: That’s nice of you.
Pat Dorsey: So these recoveries are never in straight line right. I mean it’s usually sort of fits and starts. You maybe get a little bit of recovery and we can slam back down again before the demand anything picks up?
Bob Lyon Lyon: Absolutely. If you look back over history, one of the very interesting things that sixth of the last ten recessions, it’s been so called doubled deep recessions where we go. We start we have the one nor two quarters of done results then we go up for a quarter two and we come back down again. So it’s fair wait typical pattern. We don’t have three bad ones in a row and then ten up once in a row. It tends to be as fits and starts.
Pat Dorsey: And given that uncertainty, obviously, you’re trying to pick and exact path and it’s a bit of fool’s errand. I mean I’m kind of reminded of a point that Jerry McGrath of GMO has made a few times especially when I saw him speech here in Chicago recently that no matter you do in trying to figure the bottom you’re going to regret. He put a little bit of money and now and we go straight up. You’re going to think I should have put it all. If you don’t put anything in now and we go straight up you’re going to feel regret. And if we go down from here, you’re going to feel regret. So the best strategy as always is a little bit of a time when you think they add in your favor.
Bob Lyon: Absolutely. Never hurts to walk you lay back in slowly. He for example moved up his percentage of you every month so he’s gone from 45% equity and something like 65% equity over the last three months. So he has a worked all his money in at once. He didn’t throw it all in at one time, you’re going to be careful about your reentry points and put a little bit in over time. A lot of people expose the theory where well maybe it starts to get down to worth 700, which could be a low. Do we might potentially see that maybe then, they go all the way and that’s in kind of an historic level where people thought about getting in.
Pat Dorsey: And that’s an important to me, which is that just this markets overshoe on the upside, and markets were arguably crazily irrational as early as the late 98. And it stayed crazy irrational for the year and a half before the tech level popped. Who would have thought sis co goes from 50 times running instead of 80 and 90 times running. They can overshoot on the downside too and just because things are getting cheap it doesn’t mean they can get irrationally cheap before they come back.
Bob Lyon: Exactly, so you shouldn’t be in equities if you can’t live with the thought then you’re going to see your SNP level within 600 and 700 ranges, which should be consistent of the 73 and 81 recessions. So again, you might want to inch back in overtime. We’re not saying that’s where the markets had it maybe your balances but you shouldn’t be in equity unless you feel that you can live or something like that.
Pat Dorsey: And of course, the flip side is that if just markets overreact on the down side they tend to project out this in the good times. They project at good times they project out good times reference and in bad times, they project at bad times forever I mean we aren’t going to have sort of banks at the brink of disaster forever. We’re going to probably see consumers spending rebound at some point perhaps not the levels of the past but it doesn’t seem credible the same as this low for the foreseeable future.
Bob Lyon: That’s right I mean people kind of forget we all--nobody really saw things exactly as they lay out at the top and at the bottom. And everybody thought we would have good times for a long time yet now at the bottom everybody project bad times for a long time. But things do tend to move around I mean again you can find signs in either side and you need to keep open your mind and watch what’s happening in the market. We, for example are watching Home inventories as being one of the key things that we want to keep an eye on overtime. When that number gets below 3 Million units that’s when we start to think maybe we finally hit the bottom. Maybe we started clearing out some of the housing mess because Real Estate got us in and we’re hoping Real Estate get this out. So that’s one of the key things we’re watching.
Pat Dorsey: And that’s as far as they’re going to be factor of time if I would think because all this foreclosure mitigation that helps people stay in their homes longer. The bottom line is we can’t afford the house-you can’t afford the house and the only thing that really changes that process is the asset value coming back up again which means the economy is going to come back or inventories have to come back on or some real wage problems so that you can afford it better. And we’re not seeing a whole heck of a lot of that in the midst of the declining economy.
Bob Lyon: Yes, absolutely and I would also add one of the things will help clear up the housing problem a little bit. It’s just a passive of time as you said but also with passive of time comes population growth. Every year we kind of add 3 Million more people to the housing age purchasers so that’s something they also brings and as for now, people are moving back home but I think as we move through time people will get tired of that moved out and that’s also another factor that will clear up that inventory on time. And that’s like a key number they were watching. Certainly we’ve come a long ways for Ted’s spread was another area we’d look at. Now, it has coming over arrange were some of those problems have been solved and that’s another key. And the key is we wanted to watch and that actually has gotten to be safe to speak.
Pat Dorsey: Great stuff, thank you Bob.
Bob Lyon: Thank you Pat.
Pat Dorsey: I’m Pat Dorsey and thanks for watching.
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