Why the Bear Market Bottom Is Not Yet In 15 comments
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To be a true optimist about share prices this summer, you have to hold that last December was the bear market bottom, and that the rally since then still has further to go. Both assumptions can easily be challenged.
If you turn to the conclusions of the classic Anatomy of the Bear: Lessons from Wall Street’s four Great Bottoms, by Russell Napier, then it is fairly clear that last autumn was not a bottom, even if we take this bear market back to 2000 and the dot-com bust.
Bear market cycles
Nine years is short for a bear market as these cycles can last up to 14 years. When Napier wrote his book in 2005 he said we would need to see four things before a true market bottom emerged: a bond market crash, a recession, lower interest rates and a general price disturbance (inflation or deflation) leading to a final bottom in share prices.
Given that in the past four years we have only seen two out of these four factors – recession and low interest rates – at least two more things still have still to happen based on the historical precedents of the 1921, 1932, 1949 and 1982 stock market bottoms.
‘Equities will have to fall below fair value and the likely catalyst will be a bout of deflation or, more likely, inflation. There will have to be a bear market in bonds and a recession,’ concluded Napier.
Before the bear market is over, the DJIA is likely to decline by at least 60 per cent – perhaps something more than 80 per cent (given the current level of earnings and replacement value of assets.
Hyperinflation scenario
That would take the Dow down to 2,800-5,600 points, sometime between 2009-2014, according to Napier. Recently the hyperinflationists like Dr. Marc Faber and Jim Rogers have suggested that inflation is likely to come to the rescue of share prices and support the Dow in an economic recession.
Share prices would therefore be supported in nominal if not real value terms. Yet there is nothing from the experience of the 1970s to support this theory. You have to look at the Weimar Republic or Zimbabwe for a precedent.
It could be that the US economy deteriorates to such a degree but surely we would first see a re-run of the 1970s? And that would allow time for Napier’s bottom to be formed in US markets. Unless you think it is different this time, Napier will be right. History is always a good precedent.
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This article has 15 comments:
What I am not seeing from you guys is a little treatment on the toxicicity issue. All those trillions of derivative highly leveraged products that are coming off the table. The last I heard, and who knows what to beleive is that the face value of this stuff is north of 600 trillion. Well, as this stuff at the minimum deleverages we are talkiing a huge sump hole of monster proportions eating up dollars.
Despite the bailouts, i.e., not enough money created to keep the dike from leaking, the main basis for dollar strength and deflation lies right there, YET, non of you guys talk about this. Also not talked about is the impact of effectively 'nationalizing' industries and the impact on the economy of such new government boondoggles such as cap and trade on the economy.
It seems to me in all my reads on the internet that the mantra is to study the market and nothing else. ELSE has a huge impact on where we are going, so get off the damn technicals and market talk and begin to look at the peripheral items such as our crazy leftist government who thinks that only the public sector can solve our problems by prolificate spending on boondogles like this damnable Obamanistic governmet health care thing which may cost as much as three trillion. Just where do these morons think this money is coming from?
On Jul 05 03:53 PM Spartacuss wrote:
> Your post was interesting in that it highlights that something is
> certainly rotten in Denmark as the saying goes.
>
> What I am not seeing from you guys is a little treatment on the toxicicity
> issue. All those trillions of derivative highly leveraged products
> that are coming off the table. The last I heard, and who knows what
> to beleive is that the face value of this stuff is north of 600 trillion.
> Well, as this stuff at the minimum deleverages we are talkiing a
> huge sump hole of monster proportions eating up dollars.
>
> Despite the bailouts, i.e., not enough money created to keep the
> dike from leaking, the main basis for dollar strength and deflation
> lies right there, YET, non of you guys talk about this. Also not
> talked about is the impact of effectively 'nationalizing' industries
> and the impact on the economy of such new government boondoggles
> such as cap and trade on the economy.
>
> It seems to me in all my reads on the internet that the mantra is
> to study the market and nothing else. ELSE has a huge impact on where
> we are going, so get off the damn technicals and market talk and
> begin to look at the peripheral items such as our crazy leftist government
> who thinks that only the public sector can solve our problems by
> prolificate spending on boondogles like this damnable Obamanistic
> governmet health care thing which may cost as much as three trillion.
> Just where do these morons think this money is coming from?
"Untrusting" has you pinned on health care. Why don't you back up your rhetoric with some numbers and explain to "Untrusting" why the U.S. needs to keep its current (disastrous) health care system? While you are at it, please explain why so many other nations are able to provide complete medical coverage at a reasonable cost to their citizens, but the "greatest nation in the world" cannot. We are waiting.
On Jul 05 03:53 PM Spartacuss wrote:
> Your post was interesting in that it highlights that something is
> certainly rotten in Denmark as the saying goes.
>
> What I am not seeing from you guys is a little treatment on the toxicicity
> issue. All those trillions of derivative highly leveraged products
> that are coming off the table. The last I heard, and who knows what
> to beleive is that the face value of this stuff is north of 600 trillion.
> Well, as this stuff at the minimum deleverages we are talkiing a
> huge sump hole of monster proportions eating up dollars.
>
> Despite the bailouts, i.e., not enough money created to keep the
> dike from leaking, the main basis for dollar strength and deflation
> lies right there, YET, non of you guys talk about this. Also not
> talked about is the impact of effectively 'nationalizing' industries
> and the impact on the economy of such new government boondoggles
> such as cap and trade on the economy.
>
> It seems to me in all my reads on the internet that the mantra is
> to study the market and nothing else. ELSE has a huge impact on where
> we are going, so get off the damn technicals and market talk and
> begin to look at the peripheral items such as our crazy leftist
> government who thinks that only the public sector can solve our problems
> by prolificate spending on boondogles like this damnable Obamanistic
> governmet health care thing which may cost as much as three trillion.
> Just where do these morons think this money is coming from?
The answer is that Spartacuss can't, so he won't. The facts and costs simply do not support the current private health care model/ system in the US. The US simply needs to "impose" a single payer national health care system for basic health care - with a non-profit approach just like the rest of the developed world. It is absurd to think that the US can compete with the rest of the world when US health care costs are at least 2-4+x as much as anywhere else. To assume that would be as nonsensical as saying US consumers can pay 2-4x the cost of any other good or service such as oil, mortgage rates, car prices, or anything else. Of course we cannot. It really has nothing to do with "socialism", but it sure has a lot to do with the overall competitive position of the US and US business in the world marketplace. Even the US healthcare industry itself, except the health insurers of course, are overwhelmingly beginning to acknowledge this.
On Jul 05 08:36 PM mountain view wrote:
> Spartacus(s):
>
> "Untrusting" has you pinned on health care. Why don't you back up
> your rhetoric with some numbers and explain to "Untrusting" why the
> U.S. needs to keep its current (disastrous) health care system? While
> you are at it, please explain why so many other nations are able
> to provide complete medical coverage at a reasonable cost to their
> citizens, but the "greatest nation in the world" cannot. We are waiting.
>
now, we have to do the same thing for medicine. no fault insurance will compensate injured parties and remove the bulk of lawyers' fees. don't forget that lawyers get paid on both sides of a claim, so they add huge costs. that's why you see so many ads from ambulance chasers. having a bad medical result is awful, but being sued can be worse, for all of us.
it increases medical costs, increasing the number of unnecessary procedures, tests and presciptions. it also takes years off doctor's lives, as they lose sleep and lose focus, trying to protect themselves from bogus claims. we do have to change healthcare in america. we have to start showing some appreciation for the life and death decisions our physicians make, every day. isn't that enough stress?
if president obama was serious about reducing the burden of healthcare costs, he'd remove the nonproductive attorneys from the mix. creating another government program to provide national healthcare is not the answer. government should create an atmosphere that allows business and medicine to function with minimal impediments.
is there any mention of the incredible toxic debt presently not on
balance sheets of banking systems particularly. I also agree with
Mr. Robert Prechter that even though the fed will print goo-gobs of
paper, it will not be enough and will be too late in coming for the
central banking system here to prevent an all consuming defla-
tionary depression.
Amen!
E. Tippett
Chicago, Illinois
I also see that we are clearly in a bear market similar to 1929-1942 or 1966-1982 and that means the the stock market should drop to well under its trend average, which I believe to be around 6,000. I start at 1900 at Dow 36 and with a historic growth rate of 4.8% you see the DJIA pass above the trendline during bull markets and below during bear markets. Panics such as the crash of 1929 and 1987 all start above the trendline and end below it.
Now let's look at valuations: Take out the terrible Q4 of 2008 and we see that the S&P has normalized (reported) earnings of about $30. Possibly lower and possibly higher but $30 is a reasonable estimate based on what we are seeing NOW. Reported earnings MUST be used because they are what is historically relevant. 30 in earnings times an expected P/E ratio of 6 gives us an S&P 500 of 180. Yes 180. That's a worst case scenario, IMO, but it shows how a high we are given historical prices during eras of slow growth.
That we will get to much lower prices is just a matter of time. The question is: will you and I be smart enough and disciplined enough to buy when even Warren Buffet is panicking? ...and will we have any money left to invest?
I'm adding to positions of SRS at 20 and SDS at 58
> Suncatcher: thanks. The one author which has a certain perspective
> VS the 2 Actual Investors who seem to think otherwise.
>
> Theory VS reality. Meanwhile this author who lumps all Bear Markets
> under the same Pen and doesn't seem to understand the difference
> between Secular and Cyclical Bear/Bull Markets but continues his
> merry way totally oblivious.
>
> The Secular Bear of 1966-1982, had 3 distinct cyclical bull markets
> before it ended in 1982. Each of those revisited the 1,000 point
> mark on the Dow before the final punch out in 1982.
>
> If the Same Pattern is followed, this Bear gets another Bull which
> begets another Bear and so on. In addition to Rogers and Faber, you
> have Mobius and Leuthold, None of them say that A new Secular Bull
> has begun but agree that this is Cyclical.
>
> Napier wrote about a Secular Bear Market, too bad Mister Cooper doesn't
> understand that Cyclical Bulls markets are found within the parameters
> of a Secular Bear.
The difference between then and now is that the high of 1966 was only 2.6x the high of 1929 while the high of 2007 was 14x the high of 1966. The higher they rise, the farther they fall.
The seventies was obviously more of a consolidation since the market was not terribly overpriced in 1966. In either 1929, 2000 or 2007 one can make a case for a stock market in need of a major revaluation.
One should look at the current circumstances in relation to history in order to see where THIS market is going. Likely this bear will be its own, as they all are.
Your Comment " Likely this bear will be its own, as they all are."
Freya gave an excellent review of the Last Secular Bear. That's all she did "to lend a Perspective of what happened". She also pointed out the Logical Flaws to "Mr." Cooper's so called Logic which you Must have agreed with since you didn't zero in on it.
Meanwhile, since you have brought it Up, lets go into Your data. Napier is Talking about 2000 not 2007. The "Consolidation" of the 1970's, as you call it, began after the 1969 Nifty Fifty Bubble Not the 1966 Top.
The 70's were marked by the Following: Bubbles in commodities in general, Gold and Oil in particular. A war, a Housing Bubble and Interest rates which were rising rapidly. I'm sure I can find more similarities but I so Particularly liked your "I agree with" that I'll continue on the rest of Your points.
None Of Them mean Squat.
There is No Way To Compare what happened 3 Decades ago to What happened 7 Decades ago to What is occurring Now.
Technologies have changed, Transportation Methods have changed, the World's Growth Engines have Changed. And what People Consider to be Fair Value has changed.
You are Trying to tie what is happening Now to what happened then but conclude with "this bear will be its own, like they all are."
I agree with This, the rest of your points Vanish when tied to your own Words.
You seem to out of touch and confused because a simple glance at a year chart for S&P, DOW, Nasdaq plainly shows the 2 most recent bottoms where in March 09 and Nov. 08, there was no bottom in December. I suggest you find something else to talk about if this is the best you can do.
On Jul 07 02:41 AM harammph wrote:
> Fred: Agree with you wholeheartedly. Which is why I Consider the
> Article to be particularly obnoxious.
>
> Your Comment " Likely this bear will be its own, as they all are."
>
>
> Freya gave an excellent review of the Last Secular Bear. That's all
> she did "to lend a Perspective of what happened". She also pointed
> out the Logical Flaws to "Mr." Cooper's so called Logic which you
> Must have agreed with since you didn't zero in on it.
>
> Meanwhile, since you have brought it Up, lets go into Your data.
> Napier is Talking about 2000 not 2007. The "Consolidation" of the
> 1970's, as you call it, began after the 1969 Nifty Fifty Bubble Not
> the 1966 Top.
>
> The 70's were marked by the Following: Bubbles in commodities in
> general, Gold and Oil in particular. A war, a Housing Bubble and
> Interest rates which were rising rapidly. I'm sure I can find more
> similarities but I so Particularly liked your "I agree with" that
> I'll continue on the rest of Your points.
>
> None Of Them mean Squat.
>
> There is No Way To Compare what happened 3 Decades ago to What happened
> 7 Decades ago to What is occurring Now.
>
> Technologies have changed, Transportation Methods have changed, the
> World's Growth Engines have Changed. And what People Consider to
> be Fair Value has changed.
>
> You are Trying to tie what is happening Now to what happened then
> but conclude with "this bear will be its own, like they all are."
>
>
> I agree with This, the rest of your points Vanish when tied to your
> own Words.
Will this admittedly powerful cyclical rally be any different from past examples which usually end with a blow-off and resumed down trend? That is open to debate - I have no issue with your cyclical point and can not really see why you made it in the first place to be honest.