Goodbye Bull Market, Hello Bear

Wow. Last September the Dow Jones was hitting new highs in the midst of the subprime mortgage crisis as if the problem was quickly contained. Of course, we now know that was just the beginning. As it sits at a critical level (12,500), it's time to examine why it's the end of a bull market.

End of the Bull Market

Here are the reasons for the end of the bull market in the U.S. I don't know how the U.S slowdown will reverberate across global markets, but the trend is definitely down going forward!

1. Corporate profit growth slowing
2. Housing has not seen a bottom
3. The credit crunch continues - feflating business investments
4. Consumption will inevitably slow
5. Manufacturing in U.S has already showing signs of slowing

Corporate Profit Growth Slowing

Operating earnings for the companies in the Standard & Poor’s 500-stock index are forecast by analysts at S&P to be 8 percent lower for the final three months of the year, compared with the period in 2006, after a 9 percent year-over-year drop in the third quarter.

Housing Has Not Yet Seen a Bottom

Below is a snapshot from S&P Case/Shiller index of home prices across the nation. Notice how far prices have appreciated which should given an indication of how much further they could fall (click all charts to enlarge).

The Credit Crunch Continues - A Deflationary Event

The chart below (source: Generational Dynamics) illustrates how commercial papers' ascent to astronomical levels is now followed by a precipitous drop.

Excerpt from Dec 14 2007:

Since the market [ABCP] peaked at $1,200bn in early August, it has shrunk by more than one-third. (source: FT.com).

No doubt this kind of deflationary event affects business investment going forward.

Consumption Will Inevitably Slow

Consumer debt is at a all time high and this could be partly due to the appreciation in the housing prices. So, if housing prices have dramatically fallen, could consumer debt be next? This chart says it all:

Manufacturing in the U.S Already Showing Signs of Slowing

The table below shows a trend in indicators from November to December (source: ISM manufacturing index):

Looking at the factors mentioned above, the market has only one place to go - down - despite what the Fed does with interest rates.

Hello Mr. Bear Market

What I don't know is if this will be a 'grizzly' (vicious) bear market or a 'knut' (light) bear market. Regardless of the severity, one must be prepared for the downturn that will no doubt feel like it's the end of the world.

Disclosure: none