Bear Bottom Yet to Be Seen - Barron's

by: SA Eli Hoffmann

There's every reason to believe we haven't yet reached bottom, Barron's Vito Racanelli posits:

Bear markets eventually get to all equity sectors, notes Mike O'Rourke, chief market strategist at broker BTIG. After housing, retail, financials -- and energy last week -- have been hit, technology might be next for a further mauling, given the poor trading action and recent disappointing news out of Apple (ticker: AAPL), Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT), he says.

The good news is the process is unfolding. The bad news is that there are plenty of stock groups not nearly as beaten-up as the ones mentioned above, and even a few that are up since the market hit a high last fall. Eventually, the bear will get to most, if not all, and investors will collectively cry "uncle!"

If you ask me about capitulation, I haven't see it yet. But it's coming.

Wachovia analyst Stuart Freeman notes that volume, both on the way down and on the way back up, was good, but not 'crushing.' "It was a bottom, but not The Bottom," he says.

Average bear markets shed 30% top to bottom (the Dow has given up just 22% thus far), and last longer than ours - which began in October.

Meanwhile, oil bulls - he notes- seem to have latched on to the belief global demand was completely inelastic. Recent data indicates otherwise. Down 15% from its highs, Federated Investors' chief investment officer Steve Auth sees the price of oil dropping to 80% in the medium term, as U.S. demand slows, and foreign demand follows suit. "Americans do respond to oil price signals. It takes a lot, but we got a lot," he says.

But for those hoping an oil bear will automatically lead to an equity bull, Racanelli says the data shows otherwise. In 26 oil bear markets since 1986 (drop of at least 20%), typical S&P gains are just 6% - much of which we've already received.


Mark Barath suggests oil bulls capitulate, fast:

Currently the International Monetary Fund is predicting 3.73% global growth in 2008. This is 50 bps lower than in their forecast in January, and 125 bps lower than the 4.94% growth witnessed in 2007. Given the slowing growth around the globe, we are going to likely see demand for energy related commodities slow, which gives greater recognition to a longer term commodity slump.

Bespoke notes that consensus oil price targets have jumped to $125-128 from $80-90 as recently as April.

Only time will tell if this bullishness was prescient, or too little too late.

While conceding oil prices may have gotten ahead of themselves, Mike Stathis sees higher average prices long-term. He suggests using oil trusts (SBR, PBT, SJT, DMLP) as an inflation hedge.

Oil trusts offer an excellent solution to counter the effects of high inflation. And during this period of economic uncertainty, perhaps one of the few things we can be certain of is that oil will remain high for many years.