4 Signs That the Market Has Hit Bottom

I already wrote what would be the most important "tell" that we reached the bottom here: a headline in a major newspaper or, better yet, on the front page, proclaiming Great Depression 2.0. But I also wanted to come up with some other "tells".

Any crisis, including depression, however bad it is for many people, does some good work of cleaning up the economy from inefficient businesses and sometimes, from whole industries. The structural crisis definitely puts industries out. We already have one dead industry as a result of the current crisis: newspapers. They might not recognize that, but they are all dead, maybe with some small exceptions. And those exceptions are probably in local, freely distributed press, not in nationwide monsters. New York Times (NYT), Washington Post (WPO) and USA Today probably think they can save themselves by using the internet better, but they are wrong. The internet business model is completely different and they have no idea how to use it.

But Great Depressions have to kill more than one industry. Well, investment banks of the old style are dead, but they just changed their skins and continue as kind-of general purpose banks. No, we need something else. Don't know what it is yet. But one more failing industry would be a good tell of a bottom.

Commodity prices fell hard in 2008, but there is still room. The news that fertilizer prices are likely to go down is welcome, but we need most commodities prices to fall about 50% from here to get to the bottom. Oil might be an exception. I know, and have written about it several times, that the current price of oil doesn't reflect the current cost of production. It's a tail of last year's pop of the oil speculation bubble. But sooner or later oil should stabilize at around 50 dollars per barrel. Although we might get big surprises on the way, including downward ones. But if oil drops to 30, it would be a sign of a close bottom as well.

China. It's one of the biggest imbalances in the world by itself. It's an export oriented country, which is bad in a depression. A country that is producing half of the steel in the world and nobody ever tried to explain why. Lots of inefficient state owned enterprises. Still very inefficient agriculture. China might have a very bright future, but I don't believe such a future is near. Of course, I don't believe that China will be a savior of the world economy. Reports of crisis in China would be one more sign of the bottom for me.

Emerging countries defaults. We need several of them. Apart from basket cases, like Venezuela or Zimbabwe, there are a lot of other candidates: Baltic states, Ukraine, half of Latin America, three quarters of Africa. The default of Ecuador last year doesn't count as they have money but they just don't want to pay.

I don't expect to see all these "tells" at or near the market bottom. But of the four listed, I expect at least two.

Having said all of the above and giving my readers more doom and gloom feelings, I have the feeling that the market is about to turn in the coming days. I have no idea why such a gut feeling formed and I don't believe that it's a global bottom. But I feel some kind of local bottom is overdue. Do I believe this feeling? Common sense tells me "NO". Analysis of the market tells me "NO". I don't know if I would act on this feeling. But honesty requires that I share this feeling with my readers.

Comments

[MichaelJ007:]

I like your tells. The US will need to do some clean up of inefficient businesses as well- after we stop shoveling $ into them. I'll jump in the water after the banks and the US auto industry either collapse or recover, if the US taxpayer can afford the latter. till then i'll just keep dipping my feet.

Mar 09 09:05 AM

[Fabien Hug:]

I absolutely don't share your feeling but then what I am so often wrong.

Mar 09 09:53 AM

[WebWatcher:]

what is your point? what is your logic here?

Mar 09 09:55 AM

[Alex Filonov:]

The point is: before market hits the bottom, the worst news should be in the open. We can't wait for improvements in economy, because market turns first. Usually the worst news signal the market bottom.

On Mar 09 09:55 AM WebWatcher wrote:

> what is your point? what is your logic here?

Mar 09 10:06 AM

[Larrysyr:]

Some interesting points. I have a few questions.

Why do you say TWO industries need to be killed off? Is there any particular significance? Which industries were killed in the 30s?

Calling market turns is perilous work. If your gut is right, don't forget to publicize it mercilessly. I prefer to act like the NBER and wait a year or two before "predicting" the turn.

Mar 09 10:24 AM

[kelm:]

It is good to think through these items. We will see sovereign debt defaults and we will see many corporate bond defaults before this is over.

We will also see civil unrest in many countries at least in the form of demonstrations. This will become more apparent with then coming of summer in the northern hemisphere.

As for commodity prices I do not necessarily share your view. What we have seen is supply constriction occurring globally as mines and smelting facilities are closed and oil producers cut back production. It seems entirely possible that prices rise due to supply destruction while demand continues to decline. The inability of companies to finance operations prevents them from re-opening mines and facilities previously closed as prices rise.

Mar 09 10:28 AM

[fahrender:]

i believe that any kind of bottom over the next year to year and a half, local or otherwise, will crumble within months. my prediction is for prolonged misery alleviated by periodic rallies.

Mar 09 11:00 AM

[henarl:]

How about this for a bottom signal: The Treasury no longer gets any bids on their bond auctions.

Mar 09 12:20 PM

[Mad Hedge F...:]

The warning sign are there. Looks like there is a massive short covering play setting up in the financial sector. There was big hedge fund buying of calls and call spreads in the Financials Select Sector SPDR ETF (XLF) at the end of last week. The healthy components of this basket, like JP Morgan (JPM) (12%), Goldman Sachs (GS) (7%), and Wells Fargo (WFC) (6%), are at record low valuations. The sick one like Citigroup (C) and Bank of America (BAC) are essentially at zero. This makes your downside risk very low. Watch this space.

Mar 09 01:02 PM