No Fear
S&P500 June 1999 to June 2008
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One might think that the chart above would give the usual cheerleaders some pause.
One would be wrong.
WSJ: "The good news is stocks typically snap back from a bear market in relatively short order."
Apparently, good news is good, bad news is good -- its all good!
That seems to be the philosophical approach some people are taking to the market's turmoil. When things are going swimmingly, you should be a buyer because (of course) markets tend to go up over time. When things are ugly, well that apparently is also a buy signal.
A brief look at the papers this morning has the usual suspects talking up what a buying opportunity this market is. Consider:
Snatching Bargains From Bear's Jaws (WSJ)
Market Update: For Stocks, the Worst Is Over (Kiplingers cover via NYT)
Bear Market Guide: Relax, make money (Money Magazine)
What to Do to Survive This Market: "It's hard to time the market, so stay in and benefit from the inevitable turnaround" (WSJ)
To those of use who have spent decades studying contrary indicators, this stuff is laughable -- and quite dangerous. At least Barron's has an interview with Peter Schiff -- as penance for their disastrous June 2nd 2008 "Buy GM" cover story a month ago.
S&P500 investors are on the verge of experiencing something not seen for a very long time -- a losing decade. If markets continue their losing streak for a few more months, that is a realistic possibility. The S&P500 is now down 4.8% since June of 1999. To hit the decade mark, the SPX would need to be below the 1998 close of 1,229 -- less than 50 points below Friday's close of 1278.38 come December 31st. This has not occurred since the 1930s.
As we noted twice this week, the VIX is not showing the sorts of fear typically associated with either tradable lows or lasting reversals.
Most people assume that 1929 was when all the damage was done; it wasn't -- the rally and subsequent collapse was the most dangerous period. Trying to buy cheaply all-the-way-down is where nearly all the pain came from...
~~~
Saturday, June 28, 2008 | 09:20 AM | Permalink
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You once again show your common sense.
I made the mistake of watching one of Larry K's rah-rah sessions on cnbc.com just now for laughs. Couldn't actually watch it more than halfway. But, the title was "Are stocks doomed?" One of the guests opined that the the very fact that he was asking the question meant that the answer was "no."
So, don't ask that type of question any more and we can get on with the bear market and get it over with :)
Posted by: Mike in Nola | Jun 28, 2008 9:35:50 AM
A stock market meltdown would seem an entirely appropriate exclamation point to George W. Bush's disastrous stewardship of his entire presidency. When you consider the state of economy in the 1990's and how we arrived in this untenable mess in just 7 1/2 years, it's really quite incredible. Almost unfathomable.
Osama Bin Laden must find it just so amusing that simply by crashing planes into the WTC and the Pentagon in 2001, we have embarked on a trajectory to financially ruin ourselves, something that will take perhaps decades to undo. What George W. Bush never understood is that a financially weak country eventually becomes vulnerable militarily when it can no longer afford those military expenditures.
It's fitting that a Rupert Murdoch-owned news organization would be telling us to buy stocks now. Heaven forbid they would be honest about the folly of George W. Bush.
Posted by: Todd | Jun 28, 2008 9:48:39 AM
The idea is buy higher, buy higher, and sell on the way down. This "catching a falling knife," i.e., calling a bottom, is dangerous business, the first sign of an amateur that has learned just enough to hurt him or herself.
As Nick Darvas once wrote about the stock market, (he was a professional dancer):
And how to determine when to take profits?
I realized that I would not be able to sell at the top. Anyone who claims he can consistently do this is lying. If I sold while the stock was rising, it would be a pure guess, because I could not know how far an advance might carry. This would be no cleverer a guess than anticipating that "My Fair Lady" would end its run after 200 performances. You could also guess it would go off after 300 or 400 performances. Why did it not go off at any of these figures? Because the producer would be a fool to close the show when he sees the theater full every night. It is only when he starts to notice empty seats that he considers closing the show.
I carried the Broadway comparison through to the problem of selling. I would be a fool to sell a stock as long as it keeps advancing. When to sell then? Why, when the boxes started to go into reverse!
Applies also to oil futures.
Posted by: Melancholy Korean | Jun 28, 2008 9:50:53 AM
Sorry, I don't do fear.
Posted by: cinefoz | Jun 28, 2008 9:58:46 AM
Great post, Barry..... Many thanks.
Please let us know when these people turn bearish, so we can buy with both hands.
I gather that real estate agents have taken over in the world of finance... I love it.... "This stock is a great buy.... It has haadwood floossss.... a dezina kichen with granite counta tops and stainless steel appliancessss...."
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Jun 28, 2008 10:00:20 AM
I look at a 20-year chart of the Nikkei at least once a week, imagining what the rhetoric has sounded like, and wondering if the "real" bottom is in yet.....
But that couldn't happen here, right?
Posted by: mark mchugh | Jun 28, 2008 10:00:42 AM
Kudlow is a particular bete noir of mine because he pretends to be running a program about the markets when in fact what he's running is cheerleading sessions for the GOP. Reality, political or economic, have little role in this bit of kabuki theater. He invites a handful of mainly like minded guests, throws in the odd token contrarian like BR, and invites the guests with whom he is in agreement to agree with him and then when the tokens open their mouths, he shouts them down. It's a totally transparent and mildly sickening charade. The problem with it arises when the financially unsophisticated amongst it's presumably mainly right wing audience, I can't imagine anyone with much objectivity watches it, buy into his pernicious fibbing. I imagine elderly Republicans buying into his bilge and going out and acting upon it. Basically it's fraudulent and although I can discern BR's goals in participating, it's a pity he's prepared to lend a shred of credence to this confidence trick. Sorry BR but that's what's happening here. If Kudlow was working in some stock pumping boilerroom he'd be arrested but seems to be able to get away with it in this medium because it's covered by the First Amendment but what he's doing is no different from one of those pumpers. Many here like to give him a pass because he's an "entertainer" or a "comedian running a tv show" but that's not what he purports to be the classic modus operandi of the con man. The guy is a dangerous phony and should be booted off the airwaves.
Posted by: John | Jun 28, 2008 10:05:11 AM
Practically speaking, I am still interested in making money so when I look at this chart I think we can pretty much dismiss buy and hold as a sound investment strategy, but can we trade this market?
So, my guess is next week is "bargain hunting" and "money on the side lines testing the waters." Maybe a few "sovereign wealth funds" pouring a few billion in to recapitalizations?
So, anybody have any opinions on the financials maybe a little bump up from here, I mean there is liquidity which was the problem in January-treasuries for garbage solved that:
WM: Just got $7 billion equity investment-so, doesn't that give them a breather? Citbank-does this bank's OPEC friends let their investment go to $0.
BAC: $30 billion paper profits in Chinese bank-does this help pay for CFC fiasco?
GM-anybody think President Obama is going to let this stock go to $0 with all those pension obligations and union jobs?
Is it just possible that there might be SOMETHING that is not going to $0 besides SKF, SRS, SDS, etc.?
Without getting too deep in to blame and politics and the CNBC comedy hour, anybody have any positive ideas to share?
Posted by: Rich Shinnick | Jun 28, 2008 10:08:24 AM
Paradigm: A set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them, especially in an intellectual discipline.
-- Ride out the volatility and short-term swings.
- Buy the dips.
- It is unamerican to short(oops! I meant capital un-AMERICAN).
-- Support the troops and now the markets and the banks/broker-dealers.
I agree asset allocation works but when people are deluded to trust the historical performance (hard work benefiting the society) in equity markets/ownership human society, you end up creating and trusting Greedy Thugs/CEOs at the top (90% of the S&P 500 generals) , who will lever up the company balance-sheet and society, to buy back stocks and support their stock options for as long as possible instead of investing in research (XOM;l banks; B-D). You can add the fed, past and the present, and the current president to the mix; they both have eroded the currency/good-will that past generation had created.
No wonder people want real stuff now and not $$$.
Sounds like a "Black-swan" is about to hit the "free/random-markets."
BR: You should do an anticipatory post: Coming soon: "Black-Swan" -- XXX days to the Grand Show; Coming to The "free/random markets" near you.
And, yes, I will be happy to share the credit for the post/warning against this "anti-delusion" orderly markets/world that they have fed to smaller Joes (wink, wink 401K investor with a growth objective).
Oh, well. It is all cyclical & in the grand scheme of things it is all mind-stuff!
Posted by: Nihilism | Jun 28, 2008 10:12:53 AM
Barry - I agree with most of what you have argued. But I am struggling to see why you originally forecasted such a relatively high "low" for the exchanges this year. (Yes, I know you offered a mea culpa back in January.)
Did you believe that the denial was going to last until 2009, and all would hit the fan then? Because if you believe Easterling, et al., stocks are still way overvalued at 11750.
What would your revised expectations be?
Thanks to all for great dialogue and insights
Posted by: H Salmon | Jun 28, 2008 10:13:43 AM
Barry,
Would love to hear your thoughts on the "17-yr market cycle" that is apparently upon us. The basic premise is that capital markets move in longer cycles - roughly 17 years. If we agree that market peaked back in March of 2000, we will see the sideways pattern that has emerged until sometime around 2016. So, lots of ups and downs, but no clear uptrend for another 8 years or so. Backtested, this holds pretty solid as far as we have good records. Bottom line, go long or short specific holdings and avoid the larger indexes in this phase of market history. Thoughts? Thanks!
Posted by: PHB | Jun 28, 2008 10:35:39 AM
While I agree with BR's general premise of dismal equity returns, I have two points to make:
1) It is not entirely fair to exclude dividends from this analysis. According to my Bloomberg, total annualized return as of now since 6/25/99 is 1.35% Stinks, but at least positive.
2) The truth is, if you just didn't get suckered in by NASDAQ big tech stocks in 1999-2000, it really wasn't that hard to make excellent money in the 1999-August 2007 time frame. Value investors made tons of money in 2000-2001, and everyone made good money from 2003-mid 2007. Certainly, the last 12 months have been brutal in most places [energy and materials the obvious exceptions].
But the key was just making two decisions: As little tech as possible in 1999-2000, and as little finance from 2007- now.
Posted by: Jay Weinstein | Jun 28, 2008 10:43:42 AM
A picture is worth 1929 words.
http://stockcharts.com/charts/historical/djia19201940.html
Ready for negative Gs. We'll get plenty next week...
Posted by: OldBrokenRecord | Jun 28, 2008 10:45:58 AM
There's a record amount of cash sitting in money markets right now, and yes, it is there, earning negative real returns, for good reason.
However, there are many vested interests in the stock market and it seems reasonable to suppose some of that sideline cash belongs to them. Sometime in the not-too-distant future something perceived positive probably will explode onto the scene and that cash will start seeking a home in the stock market.
There are any number of circumstances that qualify... The Congress could grow some nuts and begin impeachment proceedings IMMEDIATELY, clipping neo-con plans to ignite a Middle East conflagration in the bud (was this the price Sen. Clinton extracted for unity in the Democratic party?)... The Congress could take the advice of Michael Masters to heart and tie a leash around the CFTC and likewise go after the City's FSA... The FBI could arrest the boards of directors at GS and MS for any number of criminal charges running all the way up to treason... the possibilities are rather endless at this point.
Even if nothing like this happens, some of that sideline cash probably will make its way into the stock market and drive it to levels beyond last year's peak. In considering this scenario I would recommend one read "Reminiscences of a Stock Operator" for a better understanding of how shorts build their positions. Yes, I believe a great shorting opportunity is coming. However, I do not suppose it is necessarily right now (no matter how much lower the market falls over the days straight ahead).
I presently look at the stock market as being in a position similar to where it stood in the first half of 1929. It was a tough first six months then, too. However, the market's insiders won the day and ramped the bad boy higher, taking many clueless Ben Steins of that day along for the ride.
I think we're about to see something quite similar...
Posted by: Risk Averse Alert | Jun 28, 2008 10:50:16 AM
Kudlow is an Econo-Progagandist. He is to financial news what supply siders are to economics, an inside joke.
He distracts people from seeing that 8 years of blind refusal to regulate capitalist excesses and to address matching budgetary needs/choices to resources has undermined this nation and its social peace for years to come.
It is ironic that the upper class began class warfare in this society against the middle class. They deserve to reap the whirlwind they sowed.
Posted by: Percy | Jun 28, 2008 10:58:19 AM
Interesting that you mentioned 1929.
The Great Depression lasted much longer than it would have had the market been left alone...But the *massive* interventions by government did in fact turn it into a "Great" depression.
A quick scan of our politicians today show us that "hands-off" isn't even considered so we can be sure to expect another "Great" one.
So to be a buyer in such conditions is pretty risky, imho.
Posted by: Chris | Jun 28, 2008 11:15:10 AM
If in the long run the stock market is a weighing machine, think of leverage as a carbohydrate: tasty, available, useless.
Someone took away the carbohydrates, now we're on a diet. Lean, earnings is all that will last on the bone. The Bulls are selling fatty, yummy, sugary goodies that you shouldn't eat, ever. But you do.
The Bears are your personal trainer with a plate of steamed veggies, keeping you fit, healthy available to stay in the game.
Your choice, but like a healthy diet, it takes discipline.
Posted by: VennData | Jun 28, 2008 11:25:51 AM
Hey, that just broke through the neckline on a H&S pattern. That *at least* means a whole herd of H&S technical sell believers will be jumping on the back of the short bandwagon. That is the best case scenario for those that call technical trading nonsense. If enough of those that believe it act upon it there is always the danger of the self fulfilling chart pattern. I'm a value guy myself but this could lead to some fireworks going into the dry trading season
Posted by: DavidB | Jun 28, 2008 11:52:14 AM
From a technicians point of view, the price action is obviously horrific right now. The lack of volatility and volume (real panic) is very interesting. Is everyone just on vacation? Is this just a simmering kettle building up pressure?
After a big down day on Thursday, all we could really muster on Friday was narrow range congestion around the lows? That in itself is never a good signal. Very negative headlines out ther right now and the mood is dark. I'm very long S&P puts and have been for weeks now, but I'm looking for a tradable shorter term bottm in next few weeks.
BIG, BIG PICTURE HERE TECHNICALLY:
After massive moves in price, markets MUST congest/consolidate after the move. If you look at decades long charts on the u.s. indices, you cannot help but to observe a massive multi-decade rally that ended in a parabolic mania type fashion. After such a powerful and enduring move in price, the market must lapse into years, if not decades, of congestion.
By 2010 we will be trading near 800 on the S&P and we will finish this bear market. By 2015 we will look back on the decade that was 2000-2010 and see a massive channel of congestion that was needed to absorb the enormous bull market of 1982-2000.
So, over the next few decades I'm pretty bullish. But over the next few years, it seems pretty obvious we will be testing the 2002 lows.
If you want to verify the trajectory we're on, simply draw a line from the 2000 highs to the 2002 (SP500) low and you'll see we're on a very similar path right now.
- AT
Posted by: Andy Tabbo | Jun 28, 2008 11:57:59 AM
>> The Great Depression lasted much longer than it would have had the market been left alone...But the *massive* interventions by government did in fact turn it into a "Great" depression.
When will the present downturn end:
a) If government does not intervene?
b) If government intervenes by bailing out banks and depreciating the currency?
Posted by: wunsacon | Jun 28, 2008 12:03:40 PM
Rich Shinnick:
I had a limit sell order on the SKF sell me out yesterday. I regretted it a bit since I think it could go another 5-10points, but there's also a chance if things get too much worse for financials BB still has another 2% to cut. In contradiction to Darvas, Rothschild said when asked how his made his money in the markets: "I never buy at the bottom and I always sell too soon."
I think SMN (2x short DJ basic materials) is a good bet now. It was double the price last fall when people started pricing in the recession until the commodity bubbles got ahold of it. But the much- vaunted Asian demand is going to fall precipitously, as Kudlow pointed out how much better off we Americans are than the rest of the world.
More generally, Hussman has a good collection of thoughts and quotes about investor psychology in frenzies and bear markets in this old column. It should be required reading before being able to purchase a stock or mutual fund. Or maybe, Barry could give them a lecture :)
Posted by: Mike in Nola | Jun 28, 2008 12:05:38 PM
Rich Shinnick:
How can Obama save GM if he isn't inaugurated for another seven months still? It could go to pot before then.
Posted by: Joe Klein's conscience | Jun 28, 2008 12:28:36 PM
thanks for the hussman article. Reading that bit on the early 70's was brutal. Being reminded of what my unattended 401K did at the end of the tech bubble wasn't very pleasant either.
This time I'm paying attention.
Posted by: 12th Percentile | Jun 28, 2008 12:28:53 PM
Risk Averse Alert wrote:
"There's a record amount of cash sitting in money markets right now, and yes, it is there, earning negative real returns, for good reason.
[...]
Even if nothing like this happens, some of that sideline cash probably will make its way into the stock market and drive it to levels beyond last year's peak."
I just don't understand the logic of this argument with the "sideline cash" etc. which allegedly will increase the prices of equities, when it makes "its way into the stock market".
Each buyer who invests money to buy equities meets sellers who realize the same amount of money. There is always a counterparty in a trade, i.e. there isn't any cash flowing into the market or coming out of the market. Markets aren't balloons or containers in which cash is poured or from which cash is drained. The prices of equities aren't a measure for a filling level of the markets with cash. Cash and equities only change their owners in a trade. The markets are just the interfaces for this exchange of ownership. The huge amount of "cash on the sidelines"-argument in which people put their hopes has a very flawed logic.
Posted by: rootless cosmopolitan | Jun 28, 2008 12:50:27 PM
So 800 implies SDS going to ~$200, a triple-bagger from here.
'course, if S&P is 800 good luck with the counter-party risk.
Posted by: Troy | Jun 28, 2008 12:59:14 PM
