Don’t get me wrong, I love this bear market rally. It makes me feel good. Makes me feel wealthier. Makes me feel more confident. But is it warranted? Even if it isn’t, sometimes just thinking the worst has passed helps the market recover more quickly than previously thought possible.
But remember, bear market rallies are usually the largest. And if you look into it, not much has changed but psychology. Here are my top ten reasons for why the worst may still be to come.
1) People are searching for the bottom
Most bottoms occur when no one thinks it is. The bottom doesn’t occur when people think the worst is over, but when everyone wants to get out. It’s the point that there just aren’t enough sellers anymore, and the market starts to guide higher. I think that since so many people suspect this to be the bottom, it is yet to come.
2) Liquidity still hasn’t returned
Even though recent Fed moves may increase liquidity in the future, many companies are still struggling with debt loads and cash problems. Even if the sun is on the horizon, many companies will be forced into bankruptcy, delaying the bottom's appearance temporarily.
3) This is a real recession
This isn’t some made up bear market like the tech-bubble, this recession is affecting peoples lives and their habits. Comparing this recession to the tech-bubble isn’t even reasonable. I hate to say it, but this time it’s different, like it always is. Real people will be affected. Every company will be affected.
4) People think they can’t win anymore
I’ll say it, buy-and-hold is dead. In no sense am I saying it doesn’t work, but people think it doesn’t work. They’ve been handing their money over to the ‘professionals’ for years, and they don’t have much to show for it. I think the return of capital coming into the market could be light as more and more people see the stock market as rigged.
5) Valuations still need to be cut and revised
Every valuation method we use to evaluate the ‘cheapness’ of stocks is worthless. P/E’s are only valuable when you know the forward P/E’s. PEG’s need to be revised because future growth may be slower. Earnings estimates still need to be guided lower, causing inevitable hits on the stock market's performance.
6) Technicals don’t work
Isn’t that crazy, technical analysis doesn’t work anymore! Tell me one technical analyst who foresaw the recent stock market crash. The answer is zero, because you actually had to know fundamentals and things that were going on to call it. The time where people can look at charts and decide what’s going to happen is over. People will need to be more involved and maybe, just maybe, know what the company they are investing in actually does. I think the slowing participation of technical traders will decrease volatility and delay the eventual rebound.
7) America may not be invincible
Ever ask yourself the question “What happens if no one wants our debt anymore?” Some possibilities: currency crisis, war, treasury bond default, massive sell off by Russia, Japan and China of dollar reserves, bank runs, food shortages, civil unrest, snowballing bankruptcies, systemic financial meltdown; skyrocketing interest rates and inflation when foreign central banks stop buying those little pieces of paper that promise them 3% interest paid out of our children’s future earnings. This is exactly the type of environment that makes these things possible. Throw away your arrogance, America isn’t invincible, we are just as prone to these things as any other modern country.
8) People hate each other
We hate the companies that steal our money (AIG) and we hate the people that are trying to save them (congress). It strikes me as odd that the worst run bank in the world (the US government) is trying to tell other companies how to run themselves efficiently. How about a pay-cut for our congress representatives for losing us so much money? Anyway, our children will be spending a huge part of their labor to pay interest on debt created by the profligacy of our generation. The long-term horizon is fairly bleak as well if we don’t get our act together.
9) We are in a downward spiral
Lower spending equals lower employment equals lower confidence equals lower productions equals lower spending equals lower employment equals lower confidence…..
If we had been saving during the sunny times for the rainy days, this would just be a recession. Too bad everyone’s broke. Even if they wanted to save now, where’s the money coming from?
10) Everything is 10 times worse than you think
Discretionary income falls by a multiple of wealth destruction. In other words, if you lose 25% of your household income, discretionary spending can fall 80%. You do the math. Unfortunately, this type of logic applies to too many other economic factors
And I’m the biggest bull of all.