Seven Reasons the Market Has Already Bottomed

There are many analysts who believe that the rally we have been experiencing for the past four weeks is merely a bear market rally. However, to accurately assess where the market is heading, we need to look at how current macro conditions will shape the future economy. Therefore, I have compiled a list of seven reasons why I believe that the market bottomed in early March.

1. Attractive House Prices

House prices have fallen 29% on average since their peak in July 2006. Buyers have the upper hand when dealing with sellers. There are plenty of discounts and inclusions sweetening the deal. Also, first-time home buyers get an $8000 tax credit towards the purchase of a home.

2. Historically Low Mortgage Interest Rates

The national average mortgage rate for a 30 year fixed loan is about 5%. If you pay approximately one point and have excellent credit you can lock-in a 4.5% rate on a 30 year fixed. These rates will get many potential home buyers off the fence and into home ownership. Also, many current homeowners are refinancing at these excellent rates, freeing up extra money to be pumped into the economy.

3. Reasonable Energy Costs

With gasoline prices averaging slightly over $2 a gallon nationally, consumers and businesses are not pinched like they were in the summer of 2008. Also, lower natural gas and oil prices have made utility bills much more manageable.

4. Tax Breaks/Stimulus

Although many of us are not getting a raise from our employers this year, we are getting more money in our paychecks as a result of the stimulus tax breaks. I have to give kudos to the current administration for making the tax breaks in the form of a payroll modification rather than a check. Millions of taxpayers dollars were wasted in past years when the government mailed notices and checks to our homes. Studies have also shown that tax breaks are more likely to be spent when in they're in the form of payroll modifications.

5. Low P/E Ratios

The normal or average price to earnings ratio for the S&P 500 is about 15.5. At the beginning of March '09 the ratio was 11.9, thus prompting President Obama to state that buying stocks with a long-term perspective is a good idea right now. There are many greatly valued stocks to choose from right now with relatively stable revenue and earnings.

6. Increased Merger & Acquisition Activity

Companies with strong balance sheets and plenty of cash are looking for attractively valued businesses that can be added to their own, making the aquiring company even stronger. Here is some recent activity: IBM buying Sun Microsystems; Gilead Sciences (GILD) buying CV Therapeutics; Merck (MRK) merging with Schering-Plough; Roche (RHHBY.PK) buying Genentech. I expect that more deals will be done this year as companies realize that this is the opportune time to snatch up valued businesses.

7. Currently Employed with Stable Jobs will continue to spend

Yes, unfortunately the unemployment rate recently rose to 8.5%. However, let's not forget the 91.5% that are working. Many of these working people are in stable jobs and industries and will continue to pay their mortgage or rent, utility bills, buy clothes and food, dine out occasionally, trade-in or buy a new/used car, upgrade their homes, etc. Although many have cut back on spending, I feel that their spending will begin increasing with stimulus/refinance money in their hands. Furthermore, those who are saving are pumping more money into banks which we all know need all the help they can get right now.

Conclusion:

I realize there is a plethora of negative news out there in the media, but we have to look ahead and see how the tide will change. The reasons provided above, I believe, are signs that the market has hit its low in early March. The market will not go straight up from here either. I think that we are currently due for a short-term pullback after a more than 20% gain, but I don't think the Dow will go below 6500 or even below 7000. I think that a pullback to 7200 - 7500 is more reasonable in the current environment. Many companies are running with as few employees as possible right now and I think that the stimulus will increase demand and prompt many of them to hire again. I see the light at the end of the tunnel and it is the sunshine, not the front of an oncoming train.

Comments

[investor88:]

Fair enough, support at Dow 7200 to 7500 should hold in the event of a correction. Market has fair chance of going higher in the medium term all things considered.

Apr 06 08:34 AM

[Old Trader:]

1) Yes, house prices HAVE fallen, but have they finished falling?

2) Rates are at bargain basement rates, but credit standards have tightened dramatically, making it considerably harder to get financing.

3) How much longer can we rely on lower energy prices, given the dramatic cutbacks in oil/gas production,tightening by OPEC, etc.? What will the proposed carbon tax do to utility rates?

4) What was that number? $8-$10/week? I know that every little bit helps, but come on....I suppose that WILL stimulate the economy a bit, because that amount is more likely to be spent, rather than a lump sum check of several hundred dollars, which would probably be used to pay down debt and/or stuffed into savings.

5) Which measure of earnings is being used to calculate that PE? Depending how that's calculated makes a BIG difference in determining how cheap the market is.

6) IBM/Sun....kaput, according to the latest news. Companies face the same credit woes that consumers face (tight and/or expensive credit). Granted, there will be some activity in pharma, tech, and energy, but will it be enough?

7) Everything I'm hearing/reading says the savings rate is climbing, although its still below historic lows. Even the higher-end consumer, thought to be relatively immune, is cutting back dramatically.

My conclusion would be markedly different than yours.

Apr 06 08:36 AM

[TonyCinTX:]

I won't believe we hit the bottom until the unemployment number turns around. And if we look at under-employment, meaning people technically "employed" but working half time or less or for less than half their peak salary, the equivalent unemployment rate is 15%.

I know the market will recover before the real economy does, but for now I don't think we have enough information on the depth and breadth of the unfunded corporate commitments to be calling a bottom. Let's wait and see what happens when we hear GM will officially enter Chapter 11, about 54 days from now (unless the Obama administration gives them an extra few months to come up with an impossible plan.)

Apr 06 08:37 AM

[SoCalGal:]

Even prime mortgages are now defaulting. The end is nowhere in sight.

tinyurl.com/c7laeh

Apr 06 08:48 AM

[Rhett:]

P/E ratios are high and stocks are still over-priced. Housing has a lot further to fall. You're living in a dream world. Watch the Dow go to 4000 before 2010.

Apr 06 09:07 AM

[Vox Rationalis:]

TonyCinTX wrote:

> I won't believe we hit the bottom until the unemployment number turns
> around. And if we look at under-employment, meaning people technically
> "employed" but working half time or less or for less than half their
> peak salary, the equivalent unemployment rate is 15%.

What happens to the 1983 peak unemployment rate of 10.8% if under-employment is counted?

Apr 06 09:07 AM

[socrateazz:]

THis article has more holes in it than a seive. I will not comment on all of them but will hit some of them. About the housing: When gold was at $800 an ounce about 1980 there was a belief it would hit $1000 dollars an ounce. when it had fallen 30% there was a beleif it would go back to $800. When it had droped to $200 per ounce. There was still a belief it would raise. Am not saying the price of housing has stablized. What I do say is prices are relative to changes in beliefs. If more people than last week think housing is worth more than last week, the value will raise. If fewer people think it is worth more values will fall. Could the average price of a house fall to $50,000? Possible. I say not probable. The mortgage interest rate is another interesting point. If those who want the housing is unable to buy it, does not matter what the interest rate is. All is relative. decreasing from 6% to 4% would be a 50% decrease. If from there it reduced to 2% that would be a 100% decrease. The point is: If potential buyers can not afford to buy, or they only have limited need for that realestate, then there will not be uch upward pressure. Third I truely hope Obama's economic help is actually more help than stupid beliefs creating more problems than it helps. I expect the latter. I hope I am wrong!

Apr 06 09:08 AM

[rm:]

[1. Attractive House Prices

House prices have fallen 29% on average since their peak in July 2006. ]

Using the same logic, AIG, FNMA, FHLMC, etc. are screaming buys.

I don't think the decline is over yet.

Most of those who talk about how "attractive" house prices are right now are not actually in the market looking to buy right now.

So it's apparently a good time for everyone else to buy.

Apr 06 09:16 AM

[rm:]

[Studies have also shown that tax breaks are more likely to be spent when in they're in the form of payroll modifications.]

Particularly when the amounts are so small. A big check is more likely to be carefully spent, while these little dribbles are more likely to be pissed away.

If they wanted this money to be SPENT, this is certainly a supremely effective method.

Not sure as to whether that's better for us or not, although I'm leaning towards the latter.

Apr 06 09:20 AM

[Vox Rationalis:]

Rhett wrote:

> P/E ratios are high and stocks are still over-priced. Housing has
> a lot further to fall. You're living in a dream world. Watch the
> Dow go to 4000 before 2010.

Which P/E ratios are high? Which stocks are still over-priced? Which components of the DOW are going to push it down 50% from current levels? Are you aware that the collective P/E for the 28 DJIA companies that aren't GM or C is 10.6? You expect these companies, which make up 99.5% of the index, are going to lose HALF their value from here?

Really?

Apr 06 09:38 AM

[Hillsfar:]

Cynewulf, we're here to discuss issues and point out the merits or flaws in logic. NOT degenerate into ad hominems like in Yahoo! Message Boards for stocks like GE or XOM until it's pointless to visit those places. Be respectful, please.

Cynewulf wrote: "Just look at the authors picture . He is a very very happy man ,with a very happy happy list. Maybe there is some way he can channel all that positive energy to do good in the world, rather then harm. He could become President, and laugh a lot on late night talk shows."

Apr 06 09:59 AM

[TeresaE:]

Wow, Utopian idealism seems to be the only subject that sticks in our schools.

Pipe dreams, fantasies and hope.

Apparently your Magic Bus is not capable of driving around your area and seeing the shuttered businesses and empty buildings & homes.

Those are not just closed businesses, those For Sale/Lease signs indicate YOUR lost customers.

How in the heck can there be a recovery when there are no CUSTOMERS? We were living on credit and that was taken away in 2005, to be finished off last year and this.

Good luck in your dreamworld.

Apr 06 10:01 AM

[HChang:]

I tend to agree with Old Trader. P/E is low now, that's because price has drop a lot but earning was still based on previous high. When the Q1, Q2, Q3 results are out, use those latest earning numbers, and many companies will become doubel digit P/E. I feel the article is really misleading people.
Savings rate will continue to increase from current 4% to 10% because everyone is worried they may be the next to be axe as corporate earnings plunge. My company, a 50+ years solid, tech stock has just cut away 2 layers of fats in between the base-level manager and the president. You guess the number. Spending will be subdue at best for many months to come.
Lately, even the commerical properties segment are starting to face the problem. I think the problem is spreading from sub prime to commerical to prime. That's why IMF chief said last week that many countries may need another round of stimulus package. Got the hint....i rather believed him than Bernake & team who's just trying to boost confidence like Paulson previously.

Apr 06 10:04 AM

[Larrysyr:]

After living through the 70s and 80s, I'm starting to feel some similarities.

The employment picture will continue to look bleak, but the "record" numbers of initial claims are only about 2/3 what happened in 1982 on a percentage basis. Underemployment has been a problem since at least the 70s, and it has been underreported all that time. Recovery on the jobs front will trail recovery in the larger economy.

Energy prices blasted through the roof, then declined, and have become unstable, just like the 70s and 80s.

A major component of the financial industry has had to be bailed out with huge infusions of taxpayer money. (In the 80s, it was S&Ls, to the tune of over $100 billion in 1990 dollars).

I've heard many people swear off the stock market forever. (Many went on to put retirement money into the market through 401(k)s and are once again swearing off the market forever.

The government is running unsustainable deficits and sweating over imbalances in trade.

Certainly there are differences, like inflation, but that is probably on its way, too. The similarities are beginning to feel stronger than the differences.

Apr 06 10:37 AM

[TeaLeaves:]

You corrected Obama's error. He recommended buying stocks on the basis of low "profits/earnings" ratios. And he wants to run the economy.

Apr 06 10:52 AM

[Conan the B...:]

By the time you figure out that there won't be a Fourth Lower Low, you will have missed most of the Up move.

Its not about "How Bad" earnings will be this quarter or next. Nor about how bad GDP will be this quarter.

The Market is moving Up because in 9 months, Annual and 4th qtr Earnings and GDP will be compared to the that of 2008 and 1st quarter of 2009 and so on. This will occur at the same time as the "meat" portion of the Obama Stimulus kicks in.

I know, I know...Doom and Gloom as far as the eye can see or the Mind can grasp. Gasp! Do I see Blood in the Streets?

Bears will be doing the bleeding. IMO

Apr 06 12:47 PM

[Joe Adamaitis:]

Not to climb on the pessimistic band wagon, but again, we have a heck of a lot more foreclosures coming and after reviewing the new loan programs being offered, the plans will not help nearly enough people. It will only help a handful. If someone thinks 105% of value is going ot help the thousands in Florida, Nevada and elsewhere, think again. If you think ninety percent of these people who were given piggybacks (two mortgages) are going to be helped you're smoking something funny.

I'm now speaking with folks up north who seemed to be missing the brunt of this storm and now all of a sudden, they're starting to see signs of weaknes in unemployment, housing etc. This debacle will not be over until the banks take care of the mess they created and begin lending under reasonable guidelines. Not loose, but reasonable. The pendulum has swung so far the toher way, that even the best borrowers need 45 days to get an approval and that's after a thorough cleansing by paranoid underwriters who don't know from one day to the next what new guidelines they'll be faced with.

Lastly, watch the commercial businesses. Real estate, equipment leasing etc. When small business owners can;t pay the rent or pay for their equipment, there be a ground swell of new issues to deal with. Like everyone else, I want to see the bottom, but it cannot happen until we flush the system completely and we're a long ways away. The newest band aid from Obama to help mortgage holders will not do the trick. It only extends the problem.

Apr 06 01:06 PM

[Fred Voetsch:]

Will you listen? Probably not.

1. Attractive House Prices

They are far from "attractive" but are simply back to fairly reasonable. As with any such bubble you should expect an overcorrection and lots of damage to be done so that there will not simply be a return to the type of housing market we had directly before. It has never happened. Thos in the know expect a further 20% decline in prices.

2. Historically Low Mortgage Interest Rates

This will help those who can refinance. I have almost perfect credit and have never missed a payment at anytime in my life and I probably can't get one of those incredibly low rates.

3. Reasonable Energy Costs

Actually energy costs, especially gas prices, are only lower than they were in a recent bubble. This shows your inability to think outside your recent experience.


4. Tax Breaks/Stimulus

I run a business and employ people and I will see little of this and only expect my taxes to go sky high very soon. I am hardly rich but I am a prime example of a person who generates wealth in our economy and I see a very bleak future in this regard.

Most of the "stimulus" is pork and will be wasted but I know who will be paying for it...me.

6. Increased Merger & Acquisition Activity

Sorry, the facts show that such M&A activity is WAY down and of course, this often leads to further job losses and loss of "trickle down" wealth.

7. Currently Employed with Stable Jobs will continue to spend

Savings are going up while consumers pay off debt and have their lines of credit restricted. Banks are also raising interest rates and fees, further squeezing consumers and small business. You offer no data to back up your claims but there is plenty to dispute it.

None of what you say is anything other than hope and anyone who invests or trades on the basis of hope is a fool.

Apr 06 02:09 PM

[Vox Rationalis:]

> ...anyone who invests or trades on the basis of hope is a fool.

As is anyone who invests or trades on the basis of despair.

Apr 06 02:55 PM

[AndrewBaker:]

It is becoming more evident that more people are going to lose more money when reality leads to the next drop in markets, everywhere. We are already funding this so-called rescue with our tax dollars; and soon we will be funding it with our investment dollars too.

Apr 06 03:19 PM

[@TexasER:]

I wish that you could have come up with 7 solid reasons to brighten up my Monday.

But, mortgage rates are low because the Fed is printing money. I see this as bad. Energy and house prices being low, along with low P/Es reflects weak demand, not a strong economy.

And citing a 91.5% employment rate is REALLY trying hard to spin it.

But, I appreciate you trying.

Apr 06 04:03 PM

[Blake Winston:]

...Old Trader you took the words out of my mouth...

This is a bear market rally, plain and simple. This ra-ra-cheerleading about the economy bottoming right now has to stop.

While there is some spots of O.K. news (and i do mean just O.K., not great or even really good) - the fundamentals are just not there.

This recession is about shedding capacity; we have to much - to much home building, to much cheap money flying around, to much everything.


Specifically the authors comments, " ...feel that their spending will begin increasing with stimulus/refinance money in their hands...", I disagree strongly: spending supported by government money and refinanced home equity is exactly what got us here in the first place.

Apr 06 04:46 PM

[Blackeyebart:]

Things he didn't say:
(a) There is now a comprehensive system of regulation controlling Financial Markets. It isn't perfect but within reason we can have confidence that the regulators know what they are doing and have have the power and independence to do it. The next ponzi scheme will be found out, and found out quickly.
(b) The disastrous American health care system has been fixed. Now people can confidence that if they are need help they will get it - without bankruptcy. Businesses can get back to business with lower costs and more certainty.
(c) The illegal immigration based black economy has been brought inside the net. Now 25 million extra people are pulling their weight - well perhaps not all of them - but progress is progress.
(d) The Government's action in slicing all pork from the budget, eliminating all "incentives", and simplifying the tax code has resulted in significant tax cuts for everyone.
(e) The unexpected reallocation of capital from "incentive farming" to productive investment, following the budget and tax changes, has resulted a significant boost to the American economy.
(f) The sale of the governments holdings in Banks ( ie Citibank etc)
and Insurance companies (AIG) has spectacularly reduced the budget deficit.
(g) The recent statistics showing a 50% reduction in household debt shows that there is room for expansion.
(h) The end of wars in Iraq and Afghanistan, and the success of hard negotiation and diplomacy in preventing new wars has significantly reduced military expenditure.
(i) The recent sharp drop in unemployment, shows that the recovery is taking hold.

I do agree with the writer on one thing. The best is yet to come.

Apr 06 06:16 PM

[mlonz:]

The next 2 RE selling seasons will make it look like we have hit bottom. Being on the ground, I can see fewer properties being "given" away by the banks. Buyers are talking about the 8k tax break and are more optimistic. This will temporarily result in abating the panic selling. This will result in better numbers, and down the road, higher rates which will bring about the next move down in RE prices. We are going to experience a bear market Real Estate Rally that will last a minimum of 6 months, but could last 18-24 months.

Apr 06 07:23 PM

[scotty1560:]

mlonz you have a bit of a point.
Real Estate is staircase stepping down, and for the moment at least in South Florida, there is some support.

OK, so we are in peak season for say another 3-4 weeks, then what? Very few of the sales are sellers with equity, they are mostly short sale or foreclosed. Lots of sellers just got cleaned out for hundreds of thousands of dollars in equity and improvements and taxes paid. I doubt many are in the mood to put hard earned money at risk, and they have damaged credit ratings.

Most people make less money or have no job at all, lending standards are tighter, the dollar for now is stronger. The bulls
are way early, the economic model for this country has major issues.

Apr 06 09:34 PM

[InvestBaboo:]

You can stand on both side of the fence and make a compelling bull or bear argument. When I feel good during the day I am bullish and when I feel like crap I am bearish.

So... let's look at the charts.

Yep, strong buy signals (in many cases on both daily and weekly charts) on several industries and several leading companies the list too long to list.

The rally is here to stay.

Apr 06 09:57 PM

[Totally a b...:]

you look funny, you talk funny !

same fools like you called the bottom when DOW rallied to 9000 from 7600. DOW to 10,000, DOW to 11,000 were their calls.

Watch for the market to make new lows in the coming months. You have seen nothing yet !

Apr 06 10:57 PM

[David Zanoni:]

All of you doom & gloomers are late to the bear party. You're like the doom & gloomers in Oct. 2002. Dave Z

Apr 08 09:56 PM

[David Zanoni:]

OK, doom and gloomers, go ahead remain pessimistic. We are not going to see a lower bottom than what we saw in early March 2009. The market may trade sideways for a while, but we're not going much lower than S&P 875. (as of 5/26/09)

May 27 09:16 PM