Change and Predicting the Market Bottom

Obama promised change. The majority of the U.S. wanted change. And so it came to be that Obama was elected the next President of the U.S. Yet even before he assumes office, Obama’s ‘change’ seems to be more a case of staying with known individuals versus making full-scale personnel changes. For one, Obama has nominated Tim Geithner as Treasury Secretary. This is the same person who took part in the ‘rescue’ of Bear Sterns and AIG, and was involved in the decision to allow Lehman to collapse. All of these actions have been a disaster for us as taxpayers, never mind the financial markets or the Federal Reserve as an organization. It also appears that Obama is set to announce on Monday that Robert Gates will stay on as Defense Secretary. We all know what a clear winner our efforts in Iraq and Afghanistan have been to date.

The same hesitation to changing investment strategies seems to be in play in the stock market lately. Many people were burnt by the recent crash in the market, selling far too late in the downward spiral after becoming tired of seeing their portfolios diminishing day in and day out. I’m sure many decided that they would be more cautious this time, promising to change the way they invested by doing due diligence before investing again.

So what can one read into Wall Street wrapping up its biggest five-day rally in 75 years on Friday? I believe this is a sucker’s rally. People have once again jumped into the market so as not to miss the train, throwing caution and their good intentions to the wind, believing that there is safety in numbers. After all, surely we’ve hit the bottom this time, right?

For weeks now it seems like every so-called professional under the sun has been predicting the bottom of the market. And they have been wrong every time. So was last Thursday truly the bottom? Let’s look at a chart of the Dow Jones Industrial Average (DJIA) from December 1998 through November 2008 (click to enlarge image):

It’s my belief that one should go back to when the housing bubble began to look for a bottom in the current crisis. General consensus is that the housing bubble began in earnest in the period 2000 - 2002. Throw in some accounting scandals such as Enron, Adelphia and WorldCom (as compared to Bear Stearns, Lehman (LEHMQ.PK), AIG and Citigroup (C)) and it seems like this time period is actually history repeating itself, and is thus a great place to start. The DJIA hit a low of 7,286 on October 9th, 2002. The recovery thereafter was aided by low interest rates and lax lending by financial institutions. People had the opportunity to refinance their mortgages on numerous occasions due to ever increasing home equity values, and this in turn led to increased spending which helped boost the economy. There is no home equity savior this time.

Signs abound of a bleak holiday season for retailers and there is every indication that a flurry of reports next week will show more economic distress. Commercial mortgages are next in line for the melt down, as is the auto industry. Even with money flowing into the credit markets from government intervention, who is in a position to borrow? Everyone I know is cutting back in one form or another. Yet the majority of companies have not revised their earnings forecasts to take reduced spending into account. This alone tells me that the worst is yet to come for share prices.

They say that the stock market will show signs of bottoming well before every bit of bad news is out there. I don’t think we are there yet, especially given that hedge funds may only be halfway through the process of selling securities to reduce their use of borrowed money. I also believe we still have one or two more major bailouts in store. And don’t forget a major sell-off at year end for tax-purposes. All of this makes a DJIA level of 6,500 – 6,700 very inviting in my opinion. That’s when I’ll sell my wife’s vehicle, gather all my spare change and get back into the market.

Disclosure: no positions in any stock mentioned.

Comments

[kvrdave:]

I would guess that most have sold plenty that will give them tax write-offs already. Could see another major sell off, but I doubt most will be looking for additional losses for their taxes. They'll already have plenty.

2008 Dec 01 01:46 AM

[ferguson:]

So, after you have sold your wife's vehicle and are divorced and homeless, how will you be better off?

2008 Dec 01 09:29 AM

[Crank Monkey:]

You will no longer be enslaved by material goods.

2008 Dec 01 01:55 PM

[jepittman:]

Last week's rally was on fairly low volume so the selloff will probably not take us to new lows absent more unanticipated bad news. The key word here is 'unanticipated'. Now there may be people out there who are looking for good news but I would suspect virtually everyone is bracing for news that shows how very bad the economy is. It will take one or more unanticipated events to make the value holders sell. The weak holders are long gone, Trading money is mostly out after today and shorts will be up. We may have a slow december but january brings a new year and a new administration with a promised big fiscal stimulus package. All we need for a bottom is for news to stop getting worse. That could happen within just a few weeks.

2008 Dec 01 02:30 PM

[patio:]

But it's going to get a lot worse....


On Dec 01 02:30 PM jepittman wrote:

> Last week's rally was on fairly low volume so the selloff will probably
> not take us to new lows absent more unanticipated bad news. The key
> word here is 'unanticipated'. Now there may be people out there who
> are looking for good news but I would suspect virtually everyone
> is bracing for news that shows how very bad the economy is. It will
> take one or more unanticipated events to make the value holders sell.
> The weak holders are long gone, Trading money is mostly out after
> today and shorts will be up. We may have a slow december but january
> brings a new year and a new administration with a promised big fiscal
> stimulus package. All we need for a bottom is for news to stop getting
> worse. That could happen within just a few weeks.

2008 Dec 01 04:54 PM