For those who have been following my outlook over the past two years, you know that I have been extremely bearish most of the time but have suffered from temporary insanity in trying to call interim or even ultimate bottoms. I had some success last year in doing so (certainly not with my horrible call last May!), but clearly this is a game that is rapidly losing participants. When I first realized we were in for a terrible bear market in the summer of 2007, I was worried that I didn't know how it might end. At the time, I was most concerned about housing and guessed that the end would be the nationalization of the GSEs. Nope, that wasn't it!
Over the past few months, as we have gotten by definition closer to the bottom both in time and in level, I have gained further clarity regarding how to tell that the economy is at a bottom, and it isn't anytime soon. I have identified three major signs to look for when anticipating an end to this depression:
- Home prices will actually be cheap compared to median incomes (overshoot)
- Savings rates will be approaching 10%
- Debt to Asset levels will be lower in general for companies and significantly lower for Financial companies
It's really that simple and all about deleveraging, but it takes time and will look very ugly along the way. I am sure that there are other milestones, but these are certainly among them. Even when the bottom is in for the economy, the higher tax burden to pay for the "rescue" and continued consumer aversion to spending (is that possible in America?) will constrain growth for years to come most likely.
Stocks, though, are a tougher call. They will bottom earlier than the economy, and they may have fits and starts. Bear markets typically have the most powerful rallies of any type of market in terms of percentage moves up over a short period of time. I have suggested on a few occasions that the lows could occur late in the year in a range on the S&P 500 of 625-675 (1/17 blog) with an interim bottom in the March/April time-frame (we are there). I followed up that forecast with some additional support last month. I now want to add that I have additional insight into the actual level of the interim low I expect over the next few days or weeks:
S&P 500 at 666
Yes, wouldn't that be ironic? One hell of a terrible market bottoms at the sign of the Devil (click on chart to enlarge). Maybe the apocalypticists are right! The low on Friday was 666.8 - close enough for me! Maybe we have to close there. It isn't too far away...
I have written a lot of very negative articles in the past few months and several that suggested selling specific stocks, and every single one of these stocks appears to have priced in the issues that I saw. I am hard-pressed to recommend a sale at this level in any of them except maybe Wal-Mart (NYSE:WMT), which has rallied back and could see a flight from quality. General Electric (NYSE:GE), Weight Watchers (NYSE:WTW), Kraft (KFT), and AT&T (NYSE:T) may not merit "buys", but they sure seem overdone and likely to at least retrace some of their losses.
So, while I have given up beating the rally drum (at least publicly!), I do remain hopeful that we are due for a bounce. It sure seems like everyone has given up. I continue to suggest that the market can't erode faster than time, yet it does (we are down 25% though the year is only 18% complete, suggesting at this rate that it could go below zero). I do expect that we could face more pain later this year even if we do bounce here, but I sure appreciate the potential for a 666 low!