So Much for 2009

So much for 2009.

I just looked at the market and had a flashback.

Remember when you were a child, sitting on the merry-go-round, and everything was pleasant until that one kid thought it would be funny to push it faster and faster? And it’s tolerable for about five seconds, prior to the nausea? Then you just want to cry.

That’s how I feel now.

The maniacal laughter that usually accompanies my reading of the news headlines is currently escaping me, as there is not a shred of good news out there, save for the fact that people are paying less and less for gasoline to fuel their soon-to-be-repossessed cars as they drive to their non-existent jobs.

I wish I were kidding. Last month a close friend of mine showed up to the car dealership where he had been a salesman for five years, dressed and ready for what little work there was to perform that day, and arrived just in time to see the flatbeds pulling away with the remaining inventory.

This market is entering full panic mode.

Unintentional predictions I didn’t want to come true

If you smack someone once in the face, it will hurt. That occurred in September/October. Smack him again, and it will hurt again. This occurred in mid-November. Raise your hand back again, stare him in the eye, and he will experience fear as he once again expects the sharp pain… and will probably try to defend himself. That is happening now.

I inadvertently, sarcastically, and with no intention of accuracy called our current scenario nearly two months ago. I now present you with a direct quote from an article I wrote that was published on November 21^st:

The reality that I am staking my entire reputation on this sentence has hit me, but nevertheless I must express to you that I fully believe that we will not see the ‘Dow 5,000’ that some analysts are hinting at for shock value. Unless things get unexpectedly nasty in the next six months – and when I say “unexpectedly” nasty, I don’t mean more layoffs nasty, I mean losing Bank of America and Citigroup and two dollars-to-the-euro nasty – I just don’t believe it will happen.

Fear be damned, I’m still buying. So what if I’m still holding it in February. Find me a crystal ball and I’ll do something different.

Bank of America (BAC) and Citigroup (C). That was intended to be a joke. An exaggeration. A worst-case, borderline impossible scenario.

Crap.

Nearly every investor is sick and tired of bailout headlines, poor earnings headlines, layoff headlines, and at this point headlines in general. However, the fear and panic that we experienced before (i.e. two months ago) is being resurrected in a big, bad way right now. Banks are dropping like flies, leaving many to wonder how many, if any, major banks will be left at the end of this crisis (however far off in the future that may be). The new-found uncertainty about the viability of our entire economy is not faring well for the markets.

What makes this whole situation worse is the perception – dare I say hope – that many investors clung to that 2009 would somehow be better, more promising, and definitely more profitable than 2008. So far, we have little reason to believe such an idea.

Market prices need to watch that last step

Take a look at this chart of the S&P 500 over the past year (click to enlarge).

Anyone who reads this as a bullish chart is obviously long and attempting to rationalize his position.

What is currently taking place is 50 million investors holding their collective breath that this 800 level holds up over the next few days. I’m not going to delve into the dozen or so technical reasons that this market could absolutely s*** the bed, I’m just going to focus on one.

If the market bounces here, at or around the 800 level (which I expect it to do, to some extent), we need to see a very strong, sustainable bounce. If this thing goes up and hits its head on 900, it could fall back down the stairs.

Exasperated markets, hope, and 80s music

I don’t know where we’re going. But I sure know where we’ve been. Hanging on the promises and the songs of yesterday. I have not made up my mind.

But here we go again.

Who would have thought an adaptation of lyrics from a song by an 80s hair band would have so much significance?

I wish I didn’t have to play out these possible scenarios. Unfortunately, the past week or so has left me no such choice. People are panicking, and analysts are saying anything that comes to mind, whether it makes sense or not.

Last Tuesday, while oil was trading around $38 per barrel, I heard an analyst say we could see it go as low as $34-$35. Seriously? Who in the hell would that surprise? That’s an intraday move lately.

A little disclosure: I’m long oil. I’m also long stocks. I’m long all sorts of things and my words in that article, “so what if I’m holding in February” might just turn into April. Readers, I must say that I am confident in my assessment of possible scenarios, but not very confident in which one is going to take place. I never want to insult your intelligence by transforming into an investor’s weatherman and declare that the market “could go up or could go down”.

Unfortunately, we’re very, very near a critical direction point and that’s exactly what is going to occur.

Comments

[mrresponsible:]

STOCK MARKET DECLINES, RECESSIONS, RECOVERIES & CHARACTERISTICS
Stock Market Declines
The U.S. stock market peak in this cycle could be defined as October 2007
On average, the U.S. stock market peak to trough is 10-22 months in length. (On average, with the current official declared recession beginning December 2007, the recession trough would likely be before September, 2009. On average, markets should bottom between April & Sept., 2009
U.S. stock market bottoming process: has been 3-8 months in length since 1970. April to October, 2009.
The total time spent in bear markets has been 31% of the last 107 years.
Since 1953 the S&P stock market index bottomed 4.1 months prior to recession trough.
Recessions
Official Current Recession Declared by National Bureau of Economic Research: Beginning December 2007
Historically, the length of recessions have been:
17 months in length since 1854
14.4 months since 1902 - Average stock market decline -24.2%
22 months since 1929
10.2 months since 1945 - Average stock market decline 34%
During a couple of bear stock markets, no recessions were ever declared.
Stock Market Recoveries
Stocks and sectors provide some leadership - solid sales and earning growth and the stocks are traded well
U.S. stock Bull markets (from trough/bottom to stock market peak) have averaged 30 months in length since 1900
There have been three long bull markets that lasted 9 years, 10 years, and 15 years 8 months
An average gain of 106% for all bull cycles
An average gain of 46% after one year from the recession trough.
If it is a time when all others are fearful, maybe it is time to buy.
Broadening markets (small, mid, and large cap stocks going higher)
Margin debt as a percentage of GDP reaching the historic low range that corresponds to bottoms.
Insiders buying.
The VIX Volatility Index falling
Sequential Characteristics of Declines, Bottoms, and Recoveries
Concern - Decline of market over long period of time
Fear - Rapid acceleration in the speed of the market fall
Panic - Massive increases in volume and volatility - like convulsive seizures
when 14 of the 64 days where intraday volatility is 8%+ ... going back to 1928.
So out of 80 years, over 20% of the most volatile days have come since October 2008
Shake-out - speculators - everyone gives up - no one is saying it is a great time to buy
Capitulation - You won't know it when you see it.
The idea of capitulation could be costly as investors wait for a bus that never arrives -
best if you are a long term investor 5-10 years
Geniuses are gone
NBER declares recession is here
"Acceptance" stage of grief
Oversold conditions
Market does not go down on bad newsCheap is a Price/Earning ratio of 8 (problem 'E' is dropping) with a Price/Book ratio of less than 1.2 (currently 1.5 S&P)
Trust Building/Hope
Stock market volumes are low after a bottom.
Recovery
Average 1 year return after trough/bottom = 46%
Bounces off the bottom can be dramatic.
1973-75: Stocks up 80% within a year.
1982: Stocks up 65% within two years.
1990: Stocks up 60% in next three years; up 200% by 1998.
2002: Dow up in 2003.

Jan 20 10:09 AM

[John Lounsbury:]

John Whitehall - - -

Well written article.

You wrote: " I’m long oil. I’m also long stocks. I’m long all sorts of things"
Please, please make sure you are not long rope with a noose on the end. Eventually you will be made whole, possibly first with oil.

mrresponsible - - -

A lot of information and opinion, but missing one factor I think is important: There is nothing average about our current situation.

Jan 21 12:47 AM

[max12345:]

The worse that can happen is that we will all be left penniless and completely stripped of our life savings, and with little or no income. Which is something worrisome for some and less worrisome for others. Three years ago I bought a small farm here in Thailand (in one of the poorest parts of the country) and learned how to do rice-farming and pond-fish cultivation. (it's called deeper diversification) My professional friends thought I was nuts, but they are thinking again now. My logic then was that we were likely heading for a mega Great Depression (things looked like they were already teetering then) and that if that didn't get us Global Warming and running of out of oil certainly would, right after that. (I perversely enjoy being "bearish") Of course "the good old days" of gambling and high flying on Wall Street and mindless living may well return. Life is always a probabilistic proposition (all of the time) and usually ends by the time one reaches about 80. Unless of course one runs out of luck well before then. I am "banking on" continuing to enjoy my own life just as long as my luck continues to hold (I have had an amazing amount of it in life, and so statistically maybe it really ought to end soon) and no matter what happens..... and I advise others to do the same. My guess is that more and more "closet-bears" and closet pessimists like me will start to come out, in the coming months. Finally we may be vindicated about the incredible stupidity of mankind. (including our own too of course) ...and I do hope this message cheered up anybody foolish enough to take it too seriously.

Jan 21 01:23 AM