The many moments of any bear market definitely demand being able to stand coolly in the face of danger and turn it aside. Those who are not students of market history, but who have followed our advice to hedge on the short side, must be terrified when the market roars 420 points in a single day. But did you know that the 6 biggest up-days in history all occurred in the middle of bear markets?
Volatility increases in bear markets. There are soaring “up” days when the punditocracy declares “the bottom is in” and happy days are here again. There are also numbing down days that sap the spirit of those still long. In a bull market, you only have to buy and hold; in a bear market, you have to be a matador. The bear will come at you from one side or on one day and the bull will come the next. Parry, sidestep, or thrust, you must be a cool observer in the arena and not be spooked one way or another, one day or another.
We are still in a bear market. Every day, wishful thinkers and those who benefit financially from your buying will tell you it’s over for this reason or that. Bear markets, however, do not end on good news. They do not end because The Fed lowers rates (although that is a harbinger of the end.) They do not end because Bear Stearns (NYSE:BSC), which sold for over $100 a share late in 2007, suddenly gets a $10 a share offer rather than the $2 a share JP Morgan (NYSE:JPM) originally offered. (What does Morgan care? The US taxpayer is on the hook for $29 billion of the $30 billion in potential “losses” at Bear Stearns. JPM can afford to be magnanimous!)
Bear markets go through the same process, albeit a bit abbreviated, that we do when told we are about to die of an unexpected and terminal illness. First comes denial — and we’ve seen plenty of that from those paid to talk happy talk. Then comes fear. We’re about halfway there. Then comes resignation/acceptance. In humans, this can be a calming time. In the markets, it is a final throwing in the towel. When every news hour dwells on the market’s woes and every pundit has a longer list of short sales than buys, that is when I will close the last of our short positions. And, boy, will we have some bargains to choose from...
Until resignation descends upon us, what will continue to build the fear? Well, here are a couple things:
Forget getting a sub-prime mortgage. They aren’t making any more of them. Expect Alt-A mortgages to be the next failure. Expect to pay $100 a barrel in dollar terms for oil. Expect that $3 is the new floor for gasoline. Both may come down for a week or so but summer driving season and air conditioning season are upon us. Expect a whole bunch of banks to need bailing out. Money center banks reached for yield and are paying for it. But next are the good little regional banks that specialized in construction loans to small contractors. Expect housing sales to decline further — especially when you see the revised numbers that always come out, buried on page 8, a month or so after the initial figures. Expect to see the number of home foreclosures increase as prices fall and more “owners” who were only owners at higher prices walk away from their underwater loans.
Expect increasing unemployment and lower sales of durable goods. If you don’t have a job or a house-piggy bank to plunder, you aren’t buying a new car, TV or appliances this quarter. (Which means manufacturers, US or foreign, of such items need fewer workers, adding to the spiral of the unemployed.) The same trickles down to service industries, too. Use an accountant for taxes last year? Hmmm. Maybe we’ll use software this year. As a result, even service jobs are declining. (But government continues to grow like a cancer, adding nearly 40,000 in the latest month!) Expect banking industry liquidity to decline to levels not seen since the S&L crisis. Expect that Fed, Treasury, and SEC pronouncements will follow the party line and will send the market skyrocketing 416 points or 420 points or nearly 400 points as it is today (appropriately enough, April Fool’s Day.)
Expect that all this new liquidity sloshing around Wall Street and big banks will find a small trickle (whatever amount greedy hands on Wall Street let slip through their fingers) that actually works its way into the economy. So, yes, 6-9 months from now there will be light at the end of the tunnel and it won’t be an onrushing train. But for now, this bear is following the usual script of water torture small downs on most days punctuated by soaring up-days based on pure hope. In other words, it’s a classic bear market.
Disclosure: LONG SDS, QID, EUM, EEV, and sbb at time of writing.