Monday, July 27, 2009

Equity market arithmatic

Talk of an equity resurgance, "record month, record quarter, etc.", rings hollow. Here's a simple reason.

If Janey owned a basket of $50,000 in equities in January 2008, it is likely that she owned only $25000 of equities in February 2009. That's assuming that her basket did not include hugely owned stocks like Citicorp, AIG, or Las Vegas Sands that went to almost zero, in which case her basket might be worth $20,000 or less. So all in all that's a 50% loss in the value of her equity savings, or more if she had some of the widely held bellweathers of the past. Now what does it take to dig out of the hole

Arithmetic says a %50 gain recoups just half of her losses, you know, a %50 loss requires double that percentage to regain the former value. So when the chair sitting grinners on CNBC say, at various intervals, that equities had a record quarter, or a record string of days of gains, it's irrelevant.

The market has been through a remarkably stressed and loss producing period. Any comparison now to normal "rebounds" is as meaningless as a comparison to most previous downturns. It will take a, or would I like to say there is much more room for, much more meaningful advance in equities to signal any real recovery.


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