The Bottom's Within Sight - Barron's

 |  Includes: BCS, BRK.A, WFC
by: SA Eli Hoffmann

Not withstanding a weak and most-likely recessionary economy, Barron's Jacqueline Doherty says that if history's any guide, U.S. stocks are likely to bottom within the next few months.

The average U.S. recession since the late 1940s has lasted 10 months, and stocks typically hit their low point about three months before the recession ends. So, if the U.S. entered a recession on July 1, as many economists now suggest, and the recession was to last until April 2009, a typical bottom for stocks would occur some time in the next few months.

Flying in the face of many doomsday heralds, Pequot's Byron Wien thinks we're getting closer to rock bottom: "I don't think this is the end of America as we know it. I think it's conceivable that the markets will bottom before year end." He cites the Treasury's exceptional power to buy distressed assets and $80/barrel oil as catalysts, and notes "smart investors" (i.e. Barclays (NYSE:BCS), Buffett (NYSE:BRK.A), Wells Fargo (NYSE:WFC)) are wading into the troubled waters.

Investors are worried this time will be different. The 'great credit supercycle' will take a long time to unwind, say some. Others liken the government's rescue plan to fighting a forest fire with a garden hose.

It may be, but the good news, Doherty says, is that stocks - down about 40% - have already priced much of the doom and gloom in. Only once since the 1930s has the Dow fallen more than 40%. It did plunge 89% during the Great Depression, but then it was sitting on frenzied 500% gains, and the markets lacked many of today's safety nets like FDIC insurance, not to mention a proactive and more-informed Fed and Treasury.


  • Doherty was impressed by Friday's bounce, with the Dow closing down 128 points after having been down 700. Kevin Mackey hopes "the incredible turn of events... were a magnanimous shift in investor sentiment and going forward we will finally see buyers return to the market," but thinks it may more likely have been a hedge-fund short squeeze.
  • Alan Brochstein sees a parallel between Friday's 'exhaustion' gap down, and crude oil's upside peak - after which it came crashing down, and never looked back.
  • David Tsao, much like Doherty, looks at the last three market crashes - and concludes those with money on the sidelines should be plotting when to start easing in.