Five Things That Could Resuscitate the Markets

Includes: AMZN, BAC, C, DIA, GM, QQQ, SPY, WMT
by: Rick Newman

Can stock prices fall forever?

It feels that way. Each time we’ve hit an unthinkable low over the last few months, investors have whispered to each other that it can’t possibly get any worse. Then it gets worse. Overall, stocks are down about 25 percent just this year, and about 55 percent since they peaked in October 2007. By some measures, it’s the worst wipeout since (you guessed it) the Great Depression.

But stocks won’t keep falling forever, and some analysts are now beginning to mention the “B word” – as in bottom. Hardly anybody expects a dramatic rebound. But stocks are so beaten down that any good news would be a welcome surprise that might tempt investors to buy. A few such possibilities:

A full bailout for General Motors. GM has finally acknowledged the obvious: Without billions more in federal aid, it will have no choice but to file for bankruptcy. This terrifies the markets because a GM bankruptcy would send tremors far beyond Detroit and add many thousands more Americans to the unemployment rolls. But the federal government probably won’t let that happen.

The feds have already made a $13.4 billion down payment on a GM bailout, and GM is asking for up to $25 billion more. That’s a total of almost $45 billion – the same amount the feds have spent so far to keep Citigroup (NYSE:C) in business, and Bank of America (NYSE:BAC) too. And that sum is barely one-fourth of what the government has spent to keep insurance giant AIG afloat. Would the Obama administration really let an industrial giant fail while salvaging a bunch of wayward financial firms? Seems unlikely. We should know by March 31, when a federal automotive task force is supposed to rule on the “viability plans” – essentially, pleas for more money – from GM and Chrysler.

The bank “stress tests” provide some clarity. They may not produce a lot of good news, since many large banks are believed to be technically insolvent. But the government-administered tests, meant to assess how the nation’s biggest banks will fare as economic conditions worsen, could help clarify which banks are likely to need more help and which can muddle through on their own. The markets hate bad news, but they hate uncertainty even more. If the stress tests help define how much worse bank losses could get, that will be an improvement on the murky outlook we have now. The Treasury Dept. should release some of the data within a month or so.

The Obama bailouts start to take root. Critics have had a field day blowing holes in the government’s efforts to fix the economy: The bank rescue plan amounts to nationalization. The stimulus plan is too small. The stimulus plan is too big. The mortgage-relief plan helps the wrong people. The consumer-lending plan is too complicated. All of it is coming too late.

The pessimism industry is probably right about some of this. Lost amidst the grumbling, however, is the fact the government is taking extraordinary steps to boost the economy, and it is almost certain to have some effect. Anybody who’s looking for a silver-bullet fix will be disappointed. But by later this year, all of that federal spending may very well help stabilize the banks, keep some homeowners from defaulting, and save jobs. It would be extraordinary if it didn’t.

Some good news surfaces. Actually, there’s been a little. Amazon’s (NASDAQ:AMZN) stock, for instance, has been rising as skittish consumers turn to online retailing. Wal-Mart (NYSE:WMT) recently beat expectations and raised its dividend. And all those companies that are shedding jobs and cutting costs are getting healthier. The layoffs hurt, but as companies get more efficient they’re setting the stage for growth down the road. If we could get through a week without disturbing news from market-movers like GM, Citi, AIG, Bank of America and General Electric (NYSE:GE), smaller signs of recovery might get more attention.

The market actually finds a bottom. It has to be getting closer. And some money advisors are starting to say it’s time to buy. “We should be getting close to the bottom, and we think we are,” Jeremy Zirin, senior equity strategist for UBS, told investors in a recent conference call. He believes stocks are 20 to 25 percent undervalued, with a market rebound possible as the bad news moderates in the second half of 2009 and various federal programs start to kick in. That doesn’t mean another bull market is around the corner. But the gloom might start to lift. That alone might feel like a rally.

Disclosure: no positions