Was Last Week the Bottom?

The stock market last week displayed all the classic signs of a bottom. (Of course, some, such as Jim Cramer, had already called the bottom in January.) Bear Stearns (BSC), which not too long ago sold for $170 a share, was bought by J.P. Morgan & Chase (JPM) for about $2 (at least so we thought at the time). There was panic and blood in the streets as the share prices of other financials collapsed; Lehman Brothers (LEH) was one of the hardest hit, as many thought it would be the next to fold. At the same time, in a contrarian bullish signal, Goldman Sachs (GS) announced that Abby Joseph Cohen, the perma-bull who predicted that the S&P 500 would reach 1,675 this year, would no longer be making index forecasts.

In the midst of this, the Fed charged into the breach again, taking drastic action to increase liquidity in the financial sector while also cutting interest rates by another 75 basis points (though this was less than many expected). In response, the bottom fell out of many commodity markets, including gold, grains, and coffee. Goldman Sachs and Lehman Brothers reported earnings which, though down, were above analysts' consensus estimates and led some to announce that the worst was over. Then, just this past Monday, J.P. Morgan agreed to raise its offer for Bear Stearns to $10 -- 5 times the original fire sale price. Over the past week and a half, the Dow Industrials have recovered from below 12,000 and now trade at just below 12,500.

Did we reach the bottom? Last week, I thought we were close -- we had an investment bank almost fail; the panic was there, followed by assurances from the Fed that it would be ready to step in, as often and as forcefully as necessary. Was the sale of Bear Stearns for $2 (regardless of the final settlement price) the cathartic event that signalled the end of this gloomy phase in the markets?

Unfortunately, the story is not yet over. We are not even halfway through the subprime debacle. Foreclosures are higher. Though new home sales went up, the S&P/Case-Schiller home-price index fell 10.7% year-on-year in January, its thirteenth consecutive monthly fall. Goldman Sachs analysts predicted that credit losses at Wall Street banks, brokerages, and hedge funds may reach $460 billion -- almost four times what has so far been written off the books. There is still great uncertainty in the credit markets. The big banks are even now engaging in a merry game of downgrading each other, with J.P. Morgan cutting its estimates for Merrill Lynch and the latter downgrading Bank of America.

Therefore, from my perspective, we have not reached the bottom -- though we have come much closer to it! However, I also do not lay claim to any uncanny ability to predict when or where this bottom may occur; I just do not think conditions point to a steady climb upwards from current levels. For the near to medium term, this will remain very much a stock-picker's market; I expect that most financials have somewhat further to fall, but also think that one can begin to carefully pick and choose those firms that will emerge as winners when the worst of the recession is over. This is not the time to go "all-in" on either the long or the short side, unless you have a penchant for risky bets.

Comments

[northnode]

You brought about nothing to the table. Ugh

[galewhitaker]

Aidis
I think there is an 8000 pound demon in the room that you didn't mention. Consumer spending represents at least 70% of the GDP and consumers are going to pull in their horns because they will be spending so much of their pay checks at the pump that they won't have any money left for Victorias Secrets, sushi and flat screen TVs. I think the stock brokers on CNBC who are calling the bottom everyday are long the market and they are scared to death.
Gale Whitaker

[flaco]

Its not just gas that consumers are spending on, but food at the grocery store, and heating their homes... Prices of everything are rising...

[Desperate.]

blah blah blah... now's the bottom, buy buy buy... blah blah blah... now's the bottom, buy buy buy... blah blah blah... now's the bottom, buy buy buy... blah blah blah... now's the bottom, buy buy buy...

[Voice ofReason]

I have a penchant for making money. Bottom? I don't care if we're at or close to a "bottom", risk brings reward. No pain, no gain. If you wait 1,000 points then say oh, we're at a bottom you already lost a big chunk of the move. If you're wrong, you're wrong. Ever here of stop loss orders, trailing stops or Puts?

Since I started posting here a few weeks ago I see mostly chicken little types screaming the sky is fallingm the sky is falling. Check history, that's the biggest sign of all we're at or close to the magical bottom. Started with 3,000 in 1983. Now approaching seven figures. You don't get there without assuming some risk. If you want no risk, I bet your local bank will give you a nice safe 1.2% CD.