10 Reasons Why We Still Haven't Hit Bottom 93 comments
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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.
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I'd like your opinion on the almost immediate reversal of opinion by nearly all pundits and market participants. We went from hearing doom and gloom from everyone and then over the course of a weekend everything changed.
With shorts being squeezed and people jumping back into the market what will happen when Q1 earnings and GDP disappoint?
6 years is not too much experience.
It'll be interesting to read this article a year from now.
I copied it and will republish 1-2 years from now.
1. Bearish posts on Seeking Alpha are coming thick and fast.
2. Everyone is saying "buy and hold is dead."
3. The press is full of "sky is falling" stories .
4. The Fed is swamping the market with liquidity yet no one is saying "you can't fight the Fed" anymore.
5. Most investors have given up hope.
6. House building has ground to a near-halt.
7. Oil prices are moving up again.
8. Australian coal contracts settled much higher than analysts expected.
9. The US dollar is finally weakening and will fall further as the fear driven "flight to safety" reverses. Cheaper dollar will improve US exports.
10. Everyone is in cash, and the market quite often moves in a direction to hurt the most people.
The homes being bought right now, are being bought at auctions.
Banks will not sell toxic assets because in two weeks M2M will be gone. They'll value them any way they like going forward, but they still won't lend.
Obama's plan to help 9 million homeowners with their mortgages will fail because the new mortgages will reset their interest rates in 5 years. It's the worst plan ever because it works just like Sub-Prime, Alt A, and Option Arms. We needed fixed rate mortgages at 4%, and instead we got the same scam that got us here.
What industries, activities, projects, programs, goals, and all in total are going to produce and generate general prosperity in America in the coming years on the macro economic scale necessary to accomplish this for the majority of the American people, and esp. your children and mine?
While technology, medicine, information, alternative energy, etc. etc. will certainly play their part, they have demonstrated that they alone cannot carry the day to the depth and degree necessary and required for general prosperity.
It seems to me that we must reasses our entire framework and begin to adjust immediately to meet new requirements or we are going to plunge and condemn an entire generation into a plight of poverty, uncertainty, and undeserved misery.
Ultimately, the stock market will reflect whatever degree of success we have or don't have in this regard.
How have we performed in the last ten years?
Better that this had been forseen and prepared for a generation or more ago. Are we up to the task?
(1) Commercial Real Estate is about to collapse. Watch out for GGP and Simon Property next week.
(2) House prices are still going down and will continue
(3) GM and Chrysler are teetering on Bankruptcy and very few people are buying a new car.
(4) FDIC are about to run out of cash. Most of the big banks ARE insolvent (off balance sheets exposure in the trillions) and one of them will eventually go down.
(5) Quantitative Easing is a final act of the desperate. If the Fed has to resort to QE then we are really in trouble.
(6) Tax Hikes are in the future
(7) etc, etc
It is not different this time - its just that we are in a 1929 - 1938 like depression, rather than a recession.
The market used to reflect what was actually happening, or expected to happen. The bailouts, stimulus plans, and fed reserve panic fixes are warping the markets as well as the value of the dollar.
You want to make some money trading in this market, think about where the corrupt politicians are going to strike next. Right now, Ford, GM and Chrysler are prime.
Forget fundamentals or technicals, look for where Goldman Sachs and their politicians are going to manipulate things next.
I agree with following, and the 5 year interest rate reset absolutely reeks. It really doesn't even pretend to be a genuine attempt, does it?
Fitz919 wrote:
The bottom will be well below Dow 6,000. It could be this year or next year. The pain is only beginning. We will soon have too many homeless to count. The downward spiral is articulated perfectly.
On Mar 21 11:28 PM SeekingTruth wrote:
> It seems to me that we must reasses our entire framework and begin
> to adjust immediately to meet new requirements or we are going to
> plunge and condemn an entire generation into a plight of poverty,
> uncertainty, and undeserved misery.
>
If everyone understood these points we would already be at the bottom on the road to recovery.
It will take 10 years before the political resolve is there to address the crisis in the way that it needs to be addressed, and by then then things will be a hell of a lot worse. Moreover, Bush will have been forgotten and Obama will be getting most of the blame.
On point #2, the Fed can't fix liquidity on the lending side, they can only make money so cheap that they give it away to anyone with a pulse. Which is partially how we reached this point. Maybe the market will bottom when the government, not the investor, capitulates.
1) It may not be the best time to buy stocks but it is a good time. Where was the fear at Dow 14000+ and where is the opportunistic aggression of a Dow 7200.
2) I could be wrong but I see 4% Mortgages creating some RE purchases and increasing disposable income through Mortgage refinancings.
3) Credit cards dont alarm me as the first 15% loss is probably a loss of interest and fees rather than capital.
4) World leaders are acting more or less in concert and are actively engaged. When that happens things ususally improve.
5) Business activity and earnings from a macro sense appear to be bottoming. I dont see fewer homes being sold or fewer cars being sold in the future.
Finally I have to add that I have never found a time not to invest. Whatever you earn save some for yourself and invest it. It always is a great time to invest in the best and worst of market scenarios.
From: "TIAA-CREF" <tiaa-cref@messagin...
To: bpayne37@comcast.net
Sent: Friday, March 20, 2009 2:01:57 PM GMT -08:00 Tijuana / Baja California
Subject: A Message from TIAA-CREF CEO Roger Ferguson
A Message from TIAA-CREF CEO Roger Ferguson
Dear TIAA-CREF Participant:
The economic downturn continues to challenge investors. Whether you are currently receiving annuity income or are years away from retirement, you may wonder about the economy's long-term prospects and the implications for your financial plan.
I am writing to share my views and to remind you that TIAA-CREF is here to help you keep your financial plan on track.
Recession to Linger
It is likely that effects of the recession will be with us for much of the year. Equity markets will remain volatile, residential housing markets will continue to struggle, and unemployment will rise through 2009 and into 2010.
Many economists, including our own, estimate that U.S. Gross Domestic Product (GDP) will decline this year. We believe that even with considerable fiscal stimulus, GDP could fall 3% or more in 2009. Others will obviously have different views regarding the degree of contraction, but all readily acknowledge the difficulties we face in the U.S. and around the world.
While a sustained rally is unlikely in the near term, markets will eventually recover. Here are some signs of recovery that we hope to see: corporate earnings growth; rising consumption; stable housing prices; fully liquid credit markets offering an environment in which AAA-rated companies are able to borrow at normal rates; and renewed investor confidence.
What Can You Do in the Interim?
More than you might realize.
If you are still years from retirement, I encourage you to take this opportunity to review your long-term plan and ensure that your portfolio is positioned to take advantage of the recovery. If your holdings have fallen in value, try not to make those "paper losses" permanent by selling when the market is down. Consider your risk tolerance, desired cash balance, ability to invest using the dollar-cost averaging method, and other factors before you sell. Remember, too, that market declines may present opportunities to purchase quality assets now at prices that may represent excellent value in years to come. That is another reason why contributing regularly to an employer-sponsored plan is such an important aspect of a secure financial future.
If you have already retired, you too may be able to take steps to enhance your financial security. For example, you may wish to review your allocation to ensure that your portfolio is properly diversified, and consider rebalancing in order to maintain a prudent mix of investments consistent with your goals and appetite for risk.
TIAA-CREF specialists are here to help. They will take the necessary time to answer questions you may have, and to help you make sure that your plans remain on track — one reason, perhaps, why 245,000 people moved their money to TIAA-CREF last year. Please call our Telephone Counseling Center toll-free at 1 800 842-2776 to speak with a consultant or schedule an appointment, or call your TIAA-CREF advisor directly. If you prefer, we are also happy to work with your independent financial advisor to help meet your needs.
I also encourage you to visit our website, tiaa-cref.org, where you will find information on market volatility, highlights of TIAA-CREF's financial strength, and resources that could help you strengthen your portfolio.
Performance for the Long Run
You may wonder how TIAA-CREF is weathering these challenging times. As a major institutional investor, we are not immune from the general downturn in prevailing interest rates or the overall decline in the markets. However I am pleased to tell you that the company remains financially strong and stable, thanks to sober risk management and a long-term investment philosophy.
We ended 2008 with $363 billion in assets under management. While this represents a decrease of about 17% from the prior year, many other financial companies experienced much steeper declines.
The CREF Accounts, which are fully invested in the markets, experienced the greatest impact from volatility, declining 34.4% during 2008, based on total assets under management for the combined accounts.i This corresponds to the major declines in the markets; for example, the S&P 500 Index decreased 38.5% last year.
TIAA-CREF's variable annuity accounts and mutual funds have performed very well relative to peers, according to Morningstar. More than three-quarters (76%) of TIAA-CREF's variable annuities and mutual funds exceeded their category median over the three-year period ended December 31, 2008.ii
In addition, data from Morningstar shows that 99% of TIAA-CREF's variable annuity accounts and mutual funds had an overall rating of three, four or five stars across all asset classes (as of December 31, 2008). Morningstar ratings are based on risk-adjusted returns.iii
Our investment approach and risk management practices have also served us well on the fixed income side, enabling us to avoid exposure to the types of highly leveraged securities that have produced large losses for some financial companies. Unlike other firms, we have not had to avail ourselves of federal government funding. And although we are a market participant, and therefore susceptible to the illiquidity and dramatic pricing moves that sometimes affect fixed income products, our capital base is strong. The crediting rate for TIAA Traditional has remained highly competitive, despite recent reductions that reflect a generally lower interest-rate environment. The TIAA Traditional crediting rate has been higher than the average 10-year Treasury yield and the general rate of inflation for most of the past 28 years. We continue to maintain a strong capital position to support our contractual obligations, income guaranteesiv, and long-term commitment to you.
In Closing
The economic crisis is providing an opportunity for Americans to think anew about retirement security. It is also highlighting the advantages of TIAA-CREF. Dr. William Greenough, who developed the variable annuity – the foundation of CREF – and who chaired our organization for many years, once said:
"We should try to design a retirement plan to work well in times of peace and war, inflation and deflation, depression and prosperity, and all of the other words used to describe and explain the volatile nature of the American economy…"
Dr. Greenough said that in 1954.
We know how challenging this economy can be. I can assure you that we will continue to uphold our mission, managing prudently, maintaining our long-term perspective, and building on our financial strength so that we may continue to serve you.
Sincerely,
Roger W. Ferguson, Jr.
President and Chief Executive Officer"
Who is right?