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Abby Joseph Cohen and Tom Galvin were interviewed on CNBC yesterday and each concluded that the worst is over for the stock market and the economy. They felt the combination of Fed easing and income tax rebates would propel the economy and stock market higher. This is the same theme all of the “bulls” have been using since the Fed started easing at the very beginning of this year. Once the President's tax rebate plan was approved then it was a “no-brainer”.
It would seem to us that the bulls should, at the very least, be concerned that the same ingredients that turned the market around 10 times in a row doesn’t seem to be working presently. The Fed lowered rates in 1953-54, 1957-58, 1960, 1967, 1970, 1974,1980, 1982, 1985-86, 1990-91, and each time the stock market and economy responded positively. In fact, history shows the stock market rising about 25% twelve months after the easing started. When the easing started earlier this year it not only got the bulls excited about the stock market's prospects, but caused some long time bears to reverse course and climb aboard the bull. We happen to have great respect for many of these strategists who reversed course such as Jim Stack, Steve Leuthold, and Don Hays. We on the other hand never wavered from our very bearish stance (except for a few weeks when the market broke out on the upside with good volume - and even then remained bearish at – 5 on our bull-bear meter on the bottom of our home page).
It’s not that we aren’t statistically oriented. Normally something that has worked 10 out of 10 times would concern us if our bet were not in accordance with the 100% correlation. This time, however, there were special circumstances that we couldn’t overlook. The main one was the fact that the greatest speculative mania in all of history ended at ludicrous stock market valuations and started the largest wealth reduction in history. This was combined with the largest amount of over-investment and over-capacity in the technology sector since Japan in 1989. With the record debt levels and record public participation weighing on top of the other “special circumstances” we felt quite strongly that this was the recipe for a deflationary bear market that would take the major averages down to much lower levels (DJIA 6000-7000, S&P 500, 600-700). We still believe this to be the case even if the rate reductions continue and another tax rebate is passed.
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