Calling a Bottom Here

 

Whenever I feel afraid
I hold my head up high
And whistle a happy tune
So no one will suspect
I’m afraid.

Are the markets bottoming here or are we being hopelessly optimistic?

The markets have indeed been terrifying since mid-May and we have to keep checking our premise to see if we are blowing off our problms or if we are fighting the tide with good reason.

Obviously, the crux of my bullish premise is that oil and pretty much nothing but oil is killing the economy.  Yesterday’s action did nothing to shake me off that premise and, looking at the past 5 days’ action:  It is very clear that oil goes up and the Dow goes down, oil goes down and the Dow goes up.   I firmly believe that $140 oil is unsustainable therefore I think that Dow 12,000 is also unsustainable but it is sooooooooooo painful to hold onto our bullish positions while we wait for things to "normalize."

We ran the Big Chart last Thursday, where we had just made some great gains based on the ADP report but I was concerned at the time that the government jobs numbers would not support it and they didn’t but I’m a little taken aback by how far we’ve fallen since then.

The Transports drove off a cliff, diving 10% for the week against a $10 rise in oil.  Transports fell so far they added 3 red boxes, dropping all the way back to our "20% Horror" level (how far they’ve fallen off last year’s highs).  You may be surprised to know that the Dow, the S&P, the NYSE and  the Nasdaq are ALL still ranging in our "Feeling Better" zone and that’s why it’s important to do these weekly charts - it helps keep things in perspective…

The SOX are still hopeless and we got more bad news this week so they’re not likely to come back soon but Hong Kong fell 10% this week and Japan and India fell 3% and Europe fell 3%+ so WE ARE LOOKING PRETTY GOOD BY COMPARISON!

Let’s remember my overriding premise for the year is that US markets will be the "least sucky" place to put money in 2008.  We expected the global economy to suck, we expected runaway commodity prices to cause a global crisis and we expected the dollar to bottom out.  Well check, check and check!   Things are going according to plan and it’s time to buy. 

I’m not saying we should rush in and put is all on the buy side but I’m ready to begin to move off our 80% cash position for the first time all year and put some capital to work.  There are a lot of really good companies being given away right now and it’s time for us to flex our long-term investing muscles.  This is timely as we will be doing our major annual Long-Term Portfolio Review next month but I’m starting the process this weekend as I think the tide may be turning sooner than we think.

I know it’s scary out there and we may have a little further to fall as investor panic is a palpable thing and we still haven’t had a really good capitulation day but we have had a 1,000-point drop since May 19th and, as I said the other day, I’m just not willing to accept that this market is worth less in 2008 than it was in 2006.

 

Comments

[firefox2:]

Well said. Certainly in the US. Now China, Brazil is as another kettle of fish.

2008 Jun 13 10:26 AM

[icandoitdon:]

"the crux of my bullish premise is that oil and pretty much nothing but oil is killing the economy"

just oil? and what about the following.....

the financial system is a shambles. truth be known, many banks are insolvent in my view, propped up by the federal reserve and phony accounting. off balance sheet risk is huge and companies don't even understand their exposure because they don't know the financial integrity of their counterparties.

housing is a shambles, with more resets in 09 in the face of likely rising interest rates caused by rising inflation. look for increasing foreclosures.

consumeres are debt-ridden and being squeezed, with personal balance sheets steadily eroding.

wages are stagnant and unemployment rising.

your belief in a weakening world economy bodes ill for exports. if the dollar happens to strengten, as you believe it will, it's a double whammy.

further....the federal reserve is also nearly impotent. their actions have had little long term effect on the structural issues i refer to unless you consider their overseeing a partial collapse of the financial system, negative real interest rates and a collapsing dollar a success. moreover, the fed can't do much else from here to "help" either the financial system or the economy with real rates deeply negative and their balance sheet having been compromised by bear stearns. thank god.

this isn't a pretty picture and the relentless run up in crude reflects, among other things, a breakdown in confidence in the financial system, primarily in the u.s., which has exported its bad paper around the world.

bottom line: things get worse before they get better. i think your bullish call is at least 6 months early.

2008 Jun 13 10:33 AM

[Joe Ranft:]

And what about dilution of the money supply? The US continues to print paper, so 12,000 for the DOW is now what it used to be.

2008 Jun 13 11:08 AM

[opinionated:]

Thanks for the heads-up Al.

I also denounce Mr. Davis for his gratuitous posting of the despicalbe 'Haditha' cartoon-smear of the USMC.

Good men and women fight and die to defend our freedoms and lesser men like Mr. Davis and the fatuous Haditha smear-cartoonist demonstrate themselves to be unworthy of their sacrifices.

In case Mr. Davis or anyone else is interested on the facts surrounding the phony "Haditha massacre" media frenzy, they can find them here:

warchronicle.com/TheyA...

2008 Jun 13 12:20 PM

[wes mantooth:]

Great call on the March 31st Citigroup bottom. Somewhere Meredith Whitney laughs.

2008 Jun 13 12:42 PM

[whidbey:]

Itchy hands want to buy? Yes, I know the feeling, but just because something is cheaper now than a few years ago says nothing about its future value. I suspect that a further devaluation is coming and that the net SPX yield won't exceed 5-6% a year for a while. If you give in, look at some dividend stocks and maybe a few CLF. You ready did over simplify the problems in the USA, maybe you should review things before taking a plunge.

2008 Jun 13 03:32 PM

[Philip Davis:]

Haditha - actually I just liked the picture of whistling past the graveyard, it was not my intention to promte the views of the cartoonist.

2008 Jun 13 04:53 PM

[bruin532:]

For a professional this is a very simplistic approach. Deficits, job losses, inflation, forclosures, subprime all need to be cured before we get a REAL bull market.

2008 Jun 13 04:58 PM

[fatcat:]

phil,i basically like your stuff,but you need to llose the political bs,and stick to investments..just my thoughts..AFTER 30 YEARS PLAYING THE MARKET!!

2008 Jun 13 06:26 PM

[ICouldBeWrong:]

I will continue to short the SPX rallies. Like others I suspect the housing collapse has just begun and that the major banks, bond
insurers and mortgage brokers are insolvent.

A continued break down in the transports will be very bearish from a dow theory perspective.

I'm a bit worried about peak oil (I mean it's a when, not an if). I agree the market is totally fixated on oil right now. The current front month contract closes late next week so it will be interesting to see what the closing price is, we could get some major volatility as we approach that. Maybe a day trade opportunity (long) if crude breaks out to new highs?

At least sugar and orange juice are still cheap so no danger of a global famine quite yet.

Crude oil in a bubble? Maybe in the short term, but the real bubble is in the bond market.

But my main focus continues to be on the Yen, which is rapidly, and from my perspective surprisingly dropping in value vs the US$. I'm not sure why this is, more articles on the Yen please.

Perhaps the Yen carry trade is rapidly winding up as an enormous effort is made to save the global equity markets. If it unwinds as quickly I would not be surprised to see the DJIA below 10,000 this time next year. Commodities could also correct violently, but unlike the equity markets should recover quickly I expect.

So waiting for the long term downtrend in cotton, sugar and oj to finish so I can take long term positions in those markets. (Also watching base metals with interest, zinc and nickel are getting cheap). Continuing to short global equity markets (except the Nikkei, not sure about that one, maybe domestic Japanese equities are due for a rally), and shorting selected banks, bond insurers and financial institutions. Good bye middle class America, I will miss you.

Still out of precious metals, and oil. But willing to day trade oil, and waiting for the Yen to turn bullish to take a long term long position.

2008 Jun 14 06:09 AM

[David Lentz:]

re "I’m just not willing to accept that this market is worth less in 2008 than it was in 2006"

But was the market in 2006 really worth what it thought it was then? How about in 1999? or 2002? Comparing market levels without context seems a bit like a fool's errand.

If you look at the declines from the peak, we have only managed a "correction" and not really entered a full-fledged bear market yet. Certainly no blood in the streets with panic selling -- yet. We are down less than 13% from the Oct 2007 S&P500 peak, with the worst lows (Mar 2008) thus far only taking us to just under a 17% decline from the Oct 2007 peak. If this is as bad as it gets in the equities markets then Wall Street should erect statues to Bush, Paulson and Bernanke. Somehow, that doesn't seem likely.

This market looks more and more like a market slogging its way through a prolonged period of stagflation, with only feints up and down, but no decisive sustained moves in either direction (except for the overall trend of gradual decline). We might have quite a long ways to endure this before we see the markets claw their way out of the muck and move decidedly higher.

A trader's market, in other words. Grist for the mill at Phil's Stock World.

2008 Jun 14 10:50 AM

[CLH:]

What makes a market? Disagreement. I agree with Davis that this market is cheap after a year of no gains while profits have been very good (except real estate). Im staying long. I dont see any inflation but some deflation is present. High oil prices cause deflation or recession not inflation. When prices go up without wages and debt is removed by people going bankrupt, its deflation.

2008 Jun 14 12:24 PM

[cynic69:]

Its improper to use the term "worth" when referring to common stocks because if a company goes broke the stock has zero "worth". The correct term is "price".

The cost of crude will increase for the rest of time Phil so I guess your investing career is over. The market would already be in the dumper if Ben weren't shoveling tons of M3 liquidity into the thing on a daily basis. This shoveling insures that the real value of your stocks is going down every single day no matter what you read in IBD.

2008 Jun 14 03:41 PM

[Bruce Pile:]

It was probably prudent to be a skeptic on the stock market for all last year and the first 4 months of this year untill one could see how the debt house-of-cards was going to go down. If the Fed, the big banks, and other big money players were to be unwilling to juggle the toxic hot debt potatos, the severe stock market collapse of January to April would likely have continued. If the monetary powers that be would have decided, as Jim Rogers says they should have, to take their medicine and a sharp recession and end the debasing of the dollar, the market collapse would surely be continuing.

But it seems clear now (over the last month or two) that this will not be the course of the debt bubble burst. What seems likely is a contraction of credit, recession, much more dollar debasing with little medicine being taken in the near term, a juggling approch to the bad debt, and problem inflation in the long term. But the good news is that the market probably won't be in a persistent broad-based free fall. It seems to have broken out of that technical mode, but not out of bear market mode.

The condition of the market seems to have morphed into a more gentle bear or even a sideways doldrums where bull market areas will mostly be allowed to do their thing. Witness what I call "market breaks" taking hold in the good areas. A market break is when you can overlay an index or stock with the S&P 500 and see the stock pretty much following the moves of the market and then start to break away and move to their own drummer. The energy stocks started doing this as a group a month or two ago. Other bull areas are doing the same.

2008 Jun 14 04:28 PM

[adan:]

also re: "...as I said the other day, I’m just not willing to accept that this market is worth less in 2008 than it was in 2006." -

uh, who is it that hasn't capitulated yet? :-)

2008 Jun 14 06:34 PM

[adan:]

also re: "...as I said the other day, I’m just not willing to accept that this market is worth less in 2008 than it was in 2006." -

uh, who is it that hasn't capitulated yet? :-)

2008 Jun 14 06:34 PM

[Kunst:]

opinionated says....

"In case Mr. Davis or anyone else is interested on the facts surrounding the phony "Haditha massacre" media frenzy, they can find them here:

warchronicle.com/TheyA...

Yes, read this. You will see a prime example of US military whitewash. The ending saluation says it all: "Steadfast and loyal," to the military system, not the truth. The occupants of the taxi ran away so they were "engaged and killed by the Marines". Non-combatants died all over the place, but it's OK because our guys were taking fire. Note that all the testimony is from the Marines accused; not one word of Iraqi testimony.

Over and over, US troops have killed Iraqi civilians as if they didn't matter, because they don't. Only American lives matter. In an earlier war, they were called "gooks". Same attitude. No one ever gets punished for killing Iraqi civilians, whether from misguided bombing attacks ("oops, guess we made a mistake") or cold-blooded murder. Give the families a few bucks and they will like us again.

opinionated says...

" Good men and women fight and die to defend our freedoms and lesser men like Mr. Davis and the fatuous Haditha smear-cartoonist demonstrate themselves to be unworthy of their sacrifices."

This is a bad war, initiated by bad American leaders, and it has had terribly bad effects on good men and women who are NOT defending our freedoms in Iraq. They are being used and then thrown away by the American military empire. There is nothing patriotic about supporting this war. It is destroying American soldiers (and our economy) in a shameful and unworthy cause. Incidents like the Haditha massacre (and it is not unique) are a direct result of the nature of this war.

Sorry to get into the political side of this, but garbage like opinionated's is what got us into and keeps us in this war, and possibly more to come.

2008 Jun 15 02:15 AM

[ICouldBeWrong:]

I felt bad after saying goodbye to middle class America in my previous comment. As if the inflationary monetary policies of the fed, and peak oil were not bad enough, the probably soon to resume unwinding of the Yen carry trade and continued contraction of the globaly credit bubble is probably going to cause a deep depression.

So i did some searching for break through energy technologies. Something that could allow central banks, to continue their counterfeiting ways and expand the money supply exponentially without the price of commodities rising even faster than that.

Here's the best I could find *EMC2 corporation*, founded by the late Dr Robert Bussard, PhD from Princeton, former Assistant Director of the Controlled Thermonuclear Reaction Division of what was then known as the Atomic Energy Commission. Co-wrote "the" textbook on Nuclear Rocket Propulsion. He was working on cold fusion for the Navy and was under publishing embargo for 11 years. Due to the Iraq war the entire Navy energy research program has been terminated, including Dr Bussards project. The good side of this is that he was able to take his work public last year shortly before he died of cancer.

He definitely appears to have achieved cold fusion, but his small scale "Polywell Inertial-Electrodynami... Fusion" devices, need to be scaled up before they become net energy produces.

This could be a revolutionary breakthrough that frees the world from dependence on fossil fuels. The physics look good. Congratulations EMC2 corporation.

Anyway, if you can suspend your disbelief maybe check it out:
Rencent news article cosmiclog.msnbc.msn.co...
Interesting history of construction pdf iecfusiontech.blogspot...
How to build you own home made cold fusion reactor
www.youtube.com/watch?...

10 years and $250 million to go before a commercial product can be produced. 40 year half life to replace fossil fuel energy infrastructure.

So I still see a severe depression coming, but there's real hope our way of life can be preserved.

2008 Jun 15 03:43 AM

[schminkie:]

regardless of all theories i notice that on or about march 20, 2008, when the feds bailed out bear stearns, stocks began to rise and given the predictable ups and downs they continue to do so. look for yourself.

2008 Jun 15 03:17 PM

[Philip Davis:]

Good links Icould - I love that stuff!

2008 Jun 16 06:50 PM