Bottom? What Bottom?
(from Gold Eagle)
With the stock market up substantially from September's three year low, Wall Street pundits and analysts and the popular media are once again beating the drum for "the bottom". It seems this bear market has seen more bottoms than a box of Pampers. Unfortunately for the handful of naive investors who haven't yet realized that the so-called experts don't know bottoms from holes in the ground, every one of these "market bottoms" has proven to be false.
"But this is THE bottom," the experts tell us. "And this time, we really mean it."
But let's bear in mind that the experts are the same folks who last year told us that the U.S. economy would grow by better than 3% this year. And then told us that growth might slow, but that we'd surely avert a recession. And then told us that we should expect a soft landing. Then following the events of 11 September, they slithered out the back door with a perfect excuse for their failed forecasts ("no one could predict such an event") and officially proclaimed that a recession was inevitable.
Now they're telling us that the market has bottomed and that the recession will be a wee tiny one. The consensus estimate calls for a growth rate of 3-4% in the second half of 2002. That would make the current recession one of the shortest ever.
After all their blundering prattle, now they're telling us that this recession will be one of the tiniest in 50 years. Is anybody still listening? If so, why?!
It would be quite a feat for a record-breaking expansion to be followed by one of the mildest recessions on record. It would be much like throwing a basketball fifty feet into the air and then watching it fall ten feet toward earth, stop, and then head higher once again, defying all laws of physics.
Perhaps when viewed from the ivory towers of economic academia or the skyscraper-clad canyon of Wall Street, basketballs can hover magically at forty feet in the air and then project themselves again to higher elevations. But in the world most investors live in, that doesn't generally happen. Neither are record expansions followed by tiny little dents in the economic fabric. In this world, most of us know that "the bigger they are, the harder they fall."
If we're to believe the experts, apparently the bursting of the biggest asset bubble in U.S. history and a massive decrease in household net worth (for the first time in more than fifty years) will result in a two-quarter blip and a quick trip back to the land of peaches and cream in no time flat.
Never mind that household net worth plunged $532 billion in the first half of this year. Never mind that households shed $875 billion in net worth last year. Never mind that the U.S. has fallen victim to the biggest terrorist attack ever. Never mind that the U.S. will be spending billions of dollars chasing after an elusive enemy that might never be caught.
Never mind all of that. The experts have proclaimed that the good old days are just around the corner. Perhaps someone need remind them that we passed that corner a long time ago.
Some point to the stock market's recent rebound as proof that the recovery is imminent. After all, it's "common knowledge" that stocks bottom an average of 5-6 months before the economy begins to recover. That's the way things have always been.
May I remind the reader that there was a time when the Roman Empire ruled much of the world and was expected to do so indefinitely? After all, that's how things had always been.
Things may very well be different this time. Most of our historical recessions have been consumption-led. That is, the consumer pulled back on spending and the economy slowed. The Fed cut rates, restored confidence and voila! The U.S. economy was back on track.
But anyone that has eyes with which to see knows that this slowdown has had little to do with consumption, or a lack thereof. No. This beast has been of a much more threatening and longer-term variety, that of a decline in capital spending.
Businesses aren't spending. They aren't building new plants. They are no longer funneling capital into dot-com upstarts and telecoms. After having tossed capital around on any and every "high-tech" idea that came down the pike in the 90s, businesses are now sitting on their hands waiting for a reason to expand capacity. They aren't interested in Uncle Al's easy money. Why build more products that aren't selling?
This is a slowdown of a different flavor and it would be foolish to apply simplistic notions in an attempt to forecast the recovery. Wasn't it just yesterday that the financial pages were plastered with prattlings about how "three rate cuts ALWAYS lead to bull markets"? That was seven rate cuts ago. We can learn from the past, but history never repeats itself identically and indefinitely.
Now the pages are plastered with news that the economy generally rebounds 5-6 months after the stock market bottoms and that therefore, we can look forward to a recovery in the second half of 2002. (Remember when it was supposed to be the second half of 2001?) There's a mighty big assumption built into that forecast: that the stock market has indeed bottomed.
Every time the market rallies a bit, everybody is calling the bottom. And yet very few ever offer any compelling logic or reasoning for why it is indeed a bottom.
We're in a major bear market. Rallies tend to be bull traps. And there is nothing about the current rally which might differentiate it from a typical bull trap, much like the one observed in March of this year. You'd think that the experts would have learned by now that stocks rebounding from major lows does not necessarily constitute a bottom nor does it signify an impending bull market.
Stocks are still overpriced. The p/e ratio of the S&P 500 currently stands higher than it has at most previous market peaks. Does that look like a bottom? Bull markets have never, not once, not ever, begun while the stock market was overpriced. Bull markets have always begun when stocks were underpriced.
Investor sentiment also argues against a bottom. Small investors are disgruntled and frustrated, but everywhere you look, everyone is keeping their heads up for the next bull market.
Bear market bottoms are not characterized by confidence, optimism, nor hope. They are laden with gloom, despair, and frustration. Most people, including the experts, are dead wrong about major market turning points. But you can't turn more than two pages in the financial pages today without hearing some Wall Street cheerleader "rah! rahing!" about the bottom.
Forecasting the market and trading it profitably is a very tricky game. Even the best traders in the world will tell you that rarely, if ever, are they successful in picking major market turning points. Are we to believe that this time the bubble-heads at CNBC and the typical naive investor have succeeded where the world's best rarely do?
Are we to believe that the experts who once recommended now-defunct Internet stocks at hundreds of dollars per share and the small investor who foolishly held on while their dot-bombs plunged 90% have suddenly been shined upon by some golden light of prophetic ability? That they are now able to accurately forecast market bottoms?
The so-called experts were wrong about our economic growth. Repeatedly. They were wrong in forecasting that a few rate cuts will create a new bull market. The analysts have downgraded profit estimates all year. ("Downgraded" is Wallstreetspeak for "We're wrong. Let's make up another number.") Perennial bull Abby Jo Cohen, poster child for the excess and absurdity of the 90s market, has had her flock buying losing stocks all year, multiplying their losses with every downwave of the bear. And now the experts are telling us that the bottom is in place. Who you gonna believe?
Believe the market, and only the market. The market's opinion is the only opinion that matters. Only the market will tell us when it has bottomed and until it does, anyone forecasting a bottom is merely playing a guessing game.
We've had quite the bull run and we've seen the bear inflict some massive damage. After all that, when the bottom comes, rest assured that it won't come in a day. Major market turning points don't work that way.
The market will lull the remaining bulls into hopelessness and despair. It will takes its time in building its bottom. And it won't show its face until most of us aren't looking. It will take the "experts" and the investing masses by surprise, as it always does. Just as they believe that every rally marks the bottom, so too, when the bottom finally comes, they will not believe it.
When the "experts" tell you that there is no longer any hope, put on your smiley face. Buy with confidence because the bottom will finally be in place.
Mark M. Rostenko
Editor
The Sovereign Strategist
www.sovereignstrategist.com
Mark M. Rostenko, a veteran floor trader of Chicago's commodity exchanges, is the editor of The Sovereign Strategist investment newsletter. His views have been featured in Barron's, the Wall Street Journal, the Miami Herald and many other publications. His recent forecasts have helped subscribers profit from 40-500% on various investment vehicles this year.
For more information or to request a free sample of The Sovereign Strategist, please visit www.sovereignstrategist.com |
