Bruce and Jack,
The summation of my thinking at this point is that the continuation of the bull market depends quite a bit on what happens next. Using the 20% decline benchmark, we are already in a bear market from my viewpoint and 1% or 2% in the largest averages doesn't mean squat when you look at the drops in the small caps. If we see the Japanese continue to stonewall on their financial reforms, then as Jack pointed out there could be an even more radical change in market psychology and the worldwide economic expansion could undergo at least a pause on the order of one or two years, not a quick snapback. No matter what you think of our current president, having congress consider impeachment proceedings in not condusive for good financial market conditions.
Although there are plenty of "bargains" out there, I would be very reluctant to put money to work at this point. If you were to use 1987 as an example you still have 2 months or so to rejoin the party if indeed the party is going to continue. If however we get a total lack of leadership from Japan and the US, you could see a very long protracted slide. If you use 1929 as an example you have 3-4 years to go. This is Prechter's viewpoint.
From an economic point of view, it is too close to call. Decisions need to be made. Money is too tight, yet the governments of the world are unlikely at this point to make it more available. Look toward gold and oil as rulers of worldwide economic stability. The benchmark for gold should be around $300-$325 and the old ruler for oil 1 ounce of gold per 20 bbl's of oil.
The way out of this mess, in my opinion, is to get meaningful reforms out of Japan, lower interest rates in the US such that the yield curve loses the "inverted" nature. This should go a long ways toward stabilizing the world markets. The "meaningful" reforms out of Japan would slow the flight of capital from the Asian markets and prevent another round of currency devaluations. The subsequent lowering of US interest rates would allow the high interest rates in other countries to attract the capital that has come to the US bond market as a safe haven and also lower the dollar vs. the currencies of the rest of the world. Once the dollar starts to fall, oil prices and other commodity prices will rise and the 3rd world markets will be able to generate hard currencies. This will in turn stabilize their currencies making direct investment by US companies possible and provide a backdrop for US investors to once again invest with some hope of real returns in those markets. For instance, there is absolutely nothing wrong with a stock like Telebras, yet the market has dropped this stock from $120/share to $74/share. Why? Fear that the earnings will be hit by continued devaluation of the Real. Eliminate the currency risk (or at least dampen it) and you see capital flow back toward companies like Telebras where the fundamentals make sense.
Rubin had it exactly right yesterday when he was asked to comment on the fall in the market. The majority of the comments were directed toward the Japanese economic situation and subsequent fostering of a backdrop where economic expansion could thrive. The Japanese need to be able to move capital from being locked into failed real estate values and into productive enterprises. If you look at what the US did with the savings and loan situation in the late 1980's, you can see some of the reforms that are necessary. Only a government can step in and make those moves. The next step is once the loans are written off is you need to get the banks to actually start to lend money.
----
Dave
BTW, that liquidity rally that I was looking for only two weeks ago is gone. The market is more concerned with raising cash right now, so any "rally" is likely to be sold into, not bought. |
