Better To Be Lucky Than Smart: The Bear Market is Over 19 comments
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For those who have followed my views over the past year or so, you probably realize that I have been very consistent in my longer-term bearish views though, fortunately, open-minded enough to realize on the past two occasions when “enough was enough” and get temporarily bullish.
That last occasion was just before Bear, Stearns (BSC) imploded in March, and the prior time was just before Societe Generale liquidated a massive desk-drawer portfolio of stocks in January. I was very clear in both articles that I believed that these rallies would prove to be temporary, which was certainly the case in January. I have been calling for an interim peak of 1410 to 1455 on the S&P 500, which has been obviously achieved. Today, though, I want to rewrite the ending of the 2008 story as I expect it to be written.
Before I elaborate on my capitulation, allow me to reveal that I have been working very long hours today, as my day began 18 ½ hours ago as I write (earnings season is great, earnings season is terrible – take your pick!). I must also confess to having had a couple of glasses of wine 5 long hours ago as well with my quick dinner. So, if this call turns out to be wrong, well, I have my excuses now. Kidding aside, I want to add that I have been very, very bullish, almost irresponsibly so, since March, with both my advice to my clients and my own personal investments. I have written just one negative article (on Under Armour (UA)) in the past two months but more than a dozen that can be construed as bullish. So, why did it take me 8 weeks to realize that this was most likely the end of the bear market? More importantly, why do I think so now?
Bear markets tend to be of certain duration and certain magnitude. This one will have missed on both counts. While it felt horrible, and the Fed panicked like I have never seen in my 43 years, if this ends up being the full extent of the decline, it will look like a blip on the long-term chart. As I write, we are now spitting distance from being unchanged on the year for the broad market. Of course, we were up slightly last year as well As you can see in the graph below, except for Japan, year-over-year changes in the major stock markets, including ours, are down only slightly at this point (click to enlarge image):
Prior to this evening, I have been expecting the market to peak and retrace the rally, perhaps making new lows. I now expect a potential pause, but I believe that we could have a violent up thrust should we take out 1455, which is highly likely in my opinion. I have already mentioned that the lows in March made the market fall a bit short of the traditional bear market definition of a decline in excess of 20% or more lasting nine to eighteen months. I was also thrown for a loop by the timing – bear markets typically bottom in Q3 or Q4, not Q1. I also was waiting for the overall S&P 500 consensus earnings to drop below $80 – still hasn’t happened and probably won’t. I had been expecting margin pressure to weigh heavily on stocks, though I was aware that the valuations were pretty low. Finally, I believed that the uncertainty of the national election could weigh on the market.
I now believe that a few things happened, some of which I have already pointed out previously. First, as I discussed in what I believe was perhaps my most popular article on Seeking Alpha to date, to be a bull required three things:
- Fed Funds cuts and fiscal stimulus will prove effective
- Analyst estimates are now reasonable
- Technical analysis is for the birds
Well, after the March sell-off that followed six weeks after these conditions and a few days after I went “short-term” bullish, we did get what is surely a potential bottom technically. It had massive volume as we made a new low. On the first point, as I highlighted in several articles, the Fed finally figured out that it had other tools in its arsenal. Finally, it has become clear to me that while certain estimates needed to come down (and have), other companies are performing quite fine. More importantly, it appears that investors have become extremely sensitized to the margin pressure story – it is now in the stocks. I suggested before they reported that Bed Bath Beyond (BBBY) was attractive going into the impending release. They made me look foolish – for a nanosecond. Despite horrible numbers and outlook, the stock ended up rallying significantly. Today, Fannie Mae (FNM), one of my favorite positions (now, not yesterday morning before the market opened!), stunned the market with a 25% reversal off of the lows in the pre-market. I am sure that you are aware of several other examples of companies that have rallied on disappointing news. While it is easy to attribute the moves to short-covering, I don’t believe that is the case at all. I think that professional investors got extremely defensive in January after being shell-shocked and remained so as they feared Armageddon. My discussions with clients and friends as well as my reading indicate to me that there remains a lot of caution. I believe that my former view – a move back towards the low or through it – is the consensus, and I expect that this view is unlikely to materialize.
Chalk it up to the global economy’s strength (primarily the emerging markets), chalk it up to a Federal Reserve Board that finally got to the root of the problem (liquidity), chalk it up to Mr. Market just being smarter than the rest of us (by having stocks not buy into the earnings growth of the past few years and allowing the PE ratios to compress to unreasonably low levels). No matter what happened, it is now clear to me that sticking to my former views would have left me very frustrated. I am not ready to declare that equity returns will be double digit, but I now have a materially higher forecast for year-end, expecting the market to end the year up rather than down.
I love the saying “better to be lucky than smart”. I got very lucky that the market ended up fearing what I expected it would fear. The fears, though, were exaggerated. Don’t get me wrong, as I believe that there are still some terrible problems in the student loan and housing markets, energy and food inflation is just killing us (for now) and shrinking credit availability will continue to put pressure on externally financed companies, but I think it is priced in. What people may not realize is that the best time to invest is the type of economic scenario that is likely – moderate, non-inflationary growth that is likely to raise PE ratios as rates remain low and earnings streams look more sustainable. I was lucky to be flexible, which isn’t always easy, investing against my longer-term view when the market was beaten up beyond merit.
I know that I could end up looking either “dumb” and/or “unlucky” in short order. I still expect the market to pause between here and 1455 and anticipate a retreat to as low as 1340-1380 if that is the case. I remain as bullish for now as I have been over the past couple of months, so tactically no change. There are a plethora of attractive stocks out there, some of which reside outside of the Energy sector! I disclose my holdings daily, so feel free to check out some that I find compelling. I tend to favor small-cap now, as I expect the dollar decline is most likely over and liquidity is improving.
Disclosure: Long FNM
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This article has 19 comments:
Like you say, it wouldn't surprise me if the recent market gains in fact accelerate. I can't find a single "common person" who believes in it, or is investing any money at all (besides already-regular 401k contributions).
In fact, I hear the common person talking about gold and oil, a sure sign to be careful in those areas.
then, the economy has yet to experience the true shock to consumers from rising oil prices and extreme tightening of credit standards as well as the subsiding of home equity extraction. gas may look expensive but the truth of the matter is, it is "subsidised" by the refiners still - most of which lose money these days.
europe is about to get a sizeable decline in growth now - which will further pressurize profits of us companies leading to more job losses and less investment.
everything i see leads me to one m,ost likely scenario: another push upwards in stock prices 8which may well include new all-time highs as the short interest is record-high) but afterwards a nasty drfit down. in S&p-terms, it would be 1680-1700 by summer followed by a water-torture like decline towards 900-1100 over the following 2 years.
The US stock market is no longer a free market. Our own gov't and Federal Reserve has pretty much admitted they manipulate the stock market as well as the treasury market. Out gov't is broke, as are 90% of our citizens, who are brainwashed into believing that being in debt up to your eyeballs is the way to live. Just look at the 950 Billion dollars in outstanding consumer credit card debt that is owed and cannot be paid back by our citizens. The recent market run up is pure walk up by Wall Street on light volume. Unlike previous instances when you don't fight the Fed, this time, there are serious underlying problems in the economy that need to be worked out. Any smart person, living in reality, and who isn't brainwashed by the media, knows its true. Look at all the serfs living in our country anxiously awaiting their "welfare" rebate check from our masters. That, I would think, kind of clues people in to what sort of country we are living in now.
I am staying long all my foreign equities, and am waiting to put my 20% cash position to work on the short side, hopefully sooner than later.
The media, and asset gatherers, are out in full force doing everything they can, to convince everyone, that nothing matters and that you "need" to, and "should" be fully invested. Do not be fooled.
1987-88 and 2000-03 followed different patterns. They were bear markets but the economy in both cases was nowhere as bad as 29-33 or 73-76.
At this point we don't know what we have here but an investor has to allow for the possibility of a steep decline and new lows after this rally is exhausted.
You know what is so sad? People tend to forget how fast time goes.
Think about it. For all the hemming and hawing from the media, asset gatherers, et al, look at where the overall (S & P 500) market it.
It is at the same level it was back in mid 1999. So for almost 10 years now, the asset gathers have been collecting their hefty fees (just ask that "legendary" fund manager Bill Miller..LOL) the media has been pimping and pumping stocks at the request of their handlers (corporate america) and all the while mom and pop have essentially had zero % returns (worse if you count inflation)
I have a very sad feeling that in another 5 to 10 years from now we are going to be revisiting this issue and looking back and saying "my god, the S & P 500 has gone nowhere for the past 20 years"
Invest accordingly and good luck to all.
opposite your experience of hearing only negativity
news, not opinion, this morning was retail sales in europe down worst since 1995; wouldn't be impact the de-coupling foreign-profits-are-al... thinking?
no? but still maintain the thought that overally negative thinking is controlling right now?
We will be lucky to make $71 earnings on S&P500 at the end of this year, which can be interpreted as 20x 2008 PE. Is it too low for a forward PE at 20?
TakeBackTheFed.com
Profit margins are near an all time high and input costs are increasing. This means one of two things, either smaller margins or lower sales if they pass the increase on. Rising inventories in the Q1 also point to a weaker consumer (Duh) who will not only cut back on spending becuase of higher oil and food prices but less credit.
Furthermore, Mr. Market believes housing will come back towards the end of this year or early next year. Dream on. There are no buyers out there anymore and more houses available every money.
Mr. Market is a genius, he is forward looking, lets keep repeating the same thing. I especially like how forward looking Mr. Market was in Oct '07 or March '00 he was spot on right?
The world is growing if you want to stay long make sure you are in those companies. As for US companies that focus on the US good luck. Anyone who thinks Mr. Market and his forward looking crack pipe is correct about retail US sellers doing well towards the end of the year is sharing the crack pipe with Mr. Market.
This market is perfectly irrational now. FNM reported perhaps the worst quarter and guidance in US history yesterday and went up almost 10%. What a joke. If they had declared bankruptcy they would have gone up 50%, that is how retarded the market is right now.
"Question: Russell, please answer this, at the January 2008 lows, stock values never came close to what we expect at a primary bear market bottom. What do you make of that?
Answer: I’ve thought about this situation, just as I thought about this same situation at the October 2002 lows. My answer is the following – neither October 2002 nor January 2008 represented a major or primary bear market bottom. Both, I believe, were important secondary or cyclical correction-bottoms within a continuing primary bull market. I see no other explanation. Remember, one of the most important Dow Theory concepts is that bear markets end with stocks at great values. Stocks were not great values in the classic sense at October 2002 or January 2008.
Question: Wait, Russell, whoa – are you telling me that we’ve been in a primary bull market ever since the early 1980s, and that we’re still in that same primary bull market?
Answer: That’s correct. That’s what I’m saying. Somewhere ahead we’re finally going to enter a true primary bear market, maybe one of the greatest and most tragic in history. That future bear market will end with something we haven’t seen since the 1980 to 1982 period, and I’m talking about great values in stocks. And when I say great values I’m talking about blue-chip stocks selling in single-digit price/earnings ratios while at the same time providing dividend yields of 6-7-8%, the kind of yields we last saw at the lows of the early 1980s.
Question: What do you think could bring stocks down to those levels? What might the market be discounting?
Answer: Here I’m only guessing, but I think it could be the dollar losing its reserve currency status. If that happens, the US would no longer possess the incredible and singular privilege of printing the same money in which it is indebted. In other words, the dollar would no longer be accepted by the rest of the world as the reserve currency. And the US could no longer print itself into solvency.
Question: Russell, to get back to your previous statement, you said that we are still in a primary bull market – the same one that started from the lows of the early 1980s. If that’s correct, if we’re still in a bull market, then almost by definition shouldn’t we see new highs in the major stock averages somewhere ahead?
Answer: Strange, almost impossible as that may seem, yes I think there’s a definite chance that somewhere between 2008 and 2010 we will see new highs in the major Averages. The stock market occasionally does the totally unexpected, and you can put ‘new highs’ in the major stock averages on that list.
Consider the following – pessimism has now enveloped almost the entire nation. Estimates of home foreclosures are running into the millions of units. The American consumer is buried in debt and stranded with little or no savings. Manufacturing is slowing down in the US. Leading analysts are competing with each other with bearish forecasts. People are calling the Fed impotent or even helpless in the face of the enormity of the problems we face. On top of everything else, the unfunded liabilities in Medicare and Social Security are running into the multi-trillions of dollars. The presidential candidates do not even want to talk about the nation’s potential liabilities. And on top of everything else, we’re mired in one of the longest and most expensive wars in US history.
Yet slowly, almost imperceptibly, the major stock averages have been building huge bases. Since January 22, the majority of stocks have stopped going down – in fact, they’ve been rising.
In the face of these improving market conditions, the short interest on the NYSE continues to build. The latest statistics, covering the latest two-week period to March 31, show that the short interest on the NYSE has risen to an all-time record high of 16.142 million shares sold short. If I’m correct, if we have concluded a correction in an ongoing bull market, then this is an explosive situation with a record number of shorts locked in on the wrong side of the market. As the market slowly builds strength, these shorts will be forced to cover.
Question: Russell, what kind of fundamentals would you expect to accompany a resumption of the primary bull market?
Answer: An incredible amount of fiat paper (currencies) is being injected into the world markets. There’s also a mind-numbing amount of currency on the sidelines. There is more than $3.5 trillion parked..."