Searching for the Bottom: Are We There Yet?

Watching financial television yesterday was the equivalent of taking a long trip with kids who are constantly asking that very question. At some point, you get the urge to yell “yes” just so they will shut up. Unfortunately, the current situation actually demands all of our attention so it’s fair to ask – have we seen the bottom?

Aside from day/swing traders, this not the question most should be asking. Trying to pick a bottom is no different than playing numbers on roulette. It’s a random event that no one can predict. The better question might be – in the next 6 months, is the market more likely to be down 20% or up 20%. With this question, you can eliminate the noise and focus on probabilities to see if they are in your favor. Trading is actually a lot like poker – if you play the odds, you will win the in the long run. But you can’t win every hand.

So, are the markets more likely to be up 20% or down 20% 6 months from now?

Let’s look at the facts-

The world is experiencing a massive unwind of debt caused by years of easy credit and backed by insufficient savings. This is a secular trend that will take years to play out. Consumers will save more and borrow less. Companies will use resources to pay down debt instead of seeking new opportunities which will limit growth and new jobs. The government will implement new policies that are less market friendly. New regulations on banking and other industries will be reactive and overly burdensome. The long term picture is not conducive for a rising stock market and the market is clearly shouting this fact.

The arrival of this unwind has also led to a cyclical retrenchment. Consumers dramatically lowered their spending and companies have lowered production in kind. Lower production means fewer jobs which goes full circle to reducing consumer spending further.

Is it any surprise the market is down 60% from its highs? Probably not, but do the markets fully reflect this information? There’s no way to know for sure. It’s probably safe to say, however, that the markets are closer to the point of recognition than even just a month ago. But even if the markets fully reflect all the negative news, there must be catalysts for stocks to go up.

The secular trend is negative and stocks probably aren’t going to return their historical average any time soon. But it doesn’t mean the economy will retrench the entire time and stocks will never rally. The economy works in cycles and it’s quite possible it is nearing an intermediate trough. Economic activity has fallen off dramatically, but there is still business being conducted. People still need to replace a dishwasher if their old one goes bad. People still need clothes as their old ones wear out. There are only so many purchases that can be put off and eventually consumer spending will see a bounce. Since businesses are operating with lower inventories, they will begin to ramp up production and hire new workers. Is it possible that the rise in commodities like oil and copper are showing these signs of stabilization? With stocks off 60% in just over a year, do they reflect any chance of a recovery in the second half of 2009?

The point of this article is not to give direct answers, but rather put everything into context. There is no doubt things are bad and quite possibly getting worse. But just as there is irrationality at the top of markets, the same thing can happen at bottoms. The key to profitability is to see beyond what everyone else is looking at.

An example – no one believes the stimulus package has any chance of working. Without endorsing or condemning, it’s a *$787 Billion* package! Some of that money will make it through the economy. To put it in perspective, the $185 billion tax rebate led to a 3% rise in GDP in the early stages of this recession. That growth happened despite the fact that a lot of that money was saved rather than spent. Is it possible we could see that at a minimum? And if so, do stocks reflect anything more than flat lining for the foreseeable future?

So, let’s ask again – are stocks more likely to be 20% higher or lower in 6 months?

Comments

[dchobo:]

when people stop asking whether it's the bottom or not, it will be the bottom.

Mar 11 06:44 AM

[Chezfrederick:]

There is too much economic damage, asset and leverage unwinding yet to take place for this to be the bottom... While markets are forward looking, you cannot fix the problems built up over the past 20 years, in the next 6-9 months... While I don;t have a cristal ball, I believe we will not see a bottom till 2010. I am sure many will diagree, but the reality is that no one knows.

The thing to keep in mind, is that there is much less downside than upside in the market today... so it's worth looking for opportunities to invest selectively.

Mar 11 07:25 AM

[Doug Poretz:]

The question that is being asked that is wrong is: how does this recession compare to other economic crises such as the Depression? That defines the current situation as simply an economic issue, but it isn't. It is a cultural/social/politi... issue and if you look closely at protest events around the world, you'll start asking a different question: how does the current situation compare to other episodes of cultural and political upheaval such as the French Revolution? If you address that question, you'll come up with a shocking answer. The news media, especially in the US, has missed the common denominator of protests from ALL parts of the world: the middle/working class is protesting with significant anger directed at their ruling governments and the upper classes whom they identify as having failed and exploited them. I have chronicled this with links to news stories, photos and videos in a very long but important article you can see for yourself here: tinyurl.com/ccsga4 -- My analysis, I believe, isn't so much a prediction or a theory, but a stunning iteration of a global political pattern that should be of major concern. Because if trends continue to go in the same direction, the bottom is very far away.

Mar 11 08:41 AM

[Doug Poretz:]

The question that is being asked that is wrong is: how does this recession compare to other economic crises such as the Depression? That defines the current situation as simply an economic issue, but it isn't. It is a cultural/social/politi... issue and if you look closely at protest events around the world, you'll start asking a different question: how does the current situation compare to other episodes of cultural and political upheaval such as the French Revolution? If you address that question, you'll come up with a shocking answer. The news media, especially in the US, has missed the common denominator of protests from ALL parts of the world: the middle/working class is protesting with significant anger directed at their ruling governments and the upper classes whom they identify as having failed and exploited them. I have chronicled this with links to news stories, photos and videos in a very long but important article you can see for yourself here: tinyurl.com/ccsga4 -- My analysis, I believe, isn't so much a prediction or a theory, but a stunning iteration of a global political pattern that should be of major concern. Because if trends continue to go in the same direction, the bottom is very far away.

Mar 11 08:41 AM

[Doug Poretz:]

The question that is being asked that is wrong is: how does this recession compare to other economic crises such as the Depression? That defines the current situation as simply an economic issue, but it isn't. It is a cultural/social/politi... issue and if you look closely at protest events around the world, you'll start asking a different question: how does the current situation compare to other episodes of cultural and political upheaval such as the French Revolution? If you address that question, you'll come up with a shocking answer. The news media, especially in the US, has missed the common denominator of protests from ALL parts of the world: the middle/working class is protesting with significant anger directed at their ruling governments and the upper classes whom they identify as having failed and exploited them. I have chronicled this with links to news stories, photos and videos in a very long but important article you can see for yourself here: tinyurl.com/ccsga4 -- My analysis, I believe, isn't so much a prediction or a theory, but a stunning iteration of a global political pattern that should be of major concern. Because if trends continue to go in the same direction, the bottom is very far away.

Mar 11 08:42 AM

[Gem Hudson:]

Building up wealth is knowing how your business work and if not known how, learn to know how. How ever your business work for you. Work out the business and a working business sell the customers they very best that their money can buy. Selling the customers their money worth is to earn the money. The wealth of the dollar is in its economics. Sell customers satisfaction guarantee and you are making the money but making nothing worth their money is not selling what they want to buy. They will be going out of business. They are out of business what making nothing good at all.

Mar 11 10:17 AM

[henarl:]

Your six month timeline is valid for an option trading program and short term profits can be made playing the volatility of this market. However, this is probably not the time yet to go all in on a buy and hold strategy.

Mar 11 02:53 PM

[kirkf:]

I think the rest of 2009 will be a traders market, and not an investors market, and that's how I intend to approach it.

What do I know? Nothing.

Which in my opinion puts me on par with all the worthless analysts spouting off their prognostications to the media everyday.

Kirk

Mar 11 07:51 PM