10 Reasons We Haven’t Seen the Bottom
Before I give my reasons, let me make clear that I have no idea what the market is going to do in the short term. Dow 8,000 would not surprise me in the least (well maybe a little). The biggest rallies happen in bear markets. Also, don’t read this if you prefer to remain in denial – you won’t like it. Caveats thus dispensed, here we go:
1) The bottom can’t be here because too many folks are still looking for it. When all hope of catching the bottom has been given up and the thought of buying a stock makes people want to puke, then maybe the bottom will be in. We’re a long way from the paradigm shift in sentiment right now.
2) There is a massive oversupply of companies built on free money. 1 out of every 3 companies needs to disappear, in my guesstimation. Good luck picking stocks now before the massive bankruptcy wave that is coming.
3) Discretionary income falls by a multiple of wealth destruction. In other words, if you lose 25% of your household income, discretionary spending can fall 80%. Think about it.
4) Behavior is changing this time. This isn’t like the tech bubble of the late 90s. That was a speculation bubble based on the greater fool theory. This time, the recession is pervasive and it is changing people’s lives for the worse by the day. The shock to the economy is just beginning.
5) Investors are going to understand more and more that the stock game is rigged. Who wants to go to a casino where the government is the house and keeps loading the dice and changing the rules? The economic stats published by the government are garbage and who knows which company’s CEO has been cooking the books?
6) Valuations are high. P/E ratios are only meaningful if you have some confidence of future E. I personally believe that earnings of the overall market are going to be negative for a couple years, which makes the P/E ratio N.M. or not meaningful. What will investors be willing to pay for negative earnings? Even if you believe the optimists who think S&P500 earnings will be around $50 this year, that puts the current P/E at 14x. Previous big bears have ended with P/Es closer to 6x or 7x.
7) Technicals. You can take your McClellan Oscillators, MACD, and Fibonacci Cycles and stick them where the sun don’t shine, as far as I’m concerned. Look at a 20-year chart of any major index and tell me that you’re jump in front of that freight train.
8) There will be other shoes to drop. In fact, it may start raining shoes. Some possibilities: currency crisis, war, treasury bond default, massive selloff by Russia, Japan and China of dollar reserves, bank runs, food shortages, civil unrest, snowballing bankruptcies, systemic financial meltdown; skyrocketing interest rates and inflation when foreign central banks stop buying those little pieces of paper that promise them 3% interest paid out of our children’s future earnings. If you really think that none of these or other shoes will drop, then you’re living in la la land. “This is America. We’re special. Blessed by God. It can’t happen here.” That’s exactly the type of arrogance that marked the end of other empires throughout history.
9) Political anger – people are getting mad, and they should be. Congress and the Fed are spending trillions of our money down a sinkhole – but at least it has been creating all those jobs and helping the little guy! Our children will be spending a huge part of their labor to pay interest on debt created by the profligacy of our generation. Good thing our congressional leaders all have PhDs in economics and finance. Not! Central planning worked so well in the USSR that we’re going to try it in our country.
10) The economy is in a death spiral. Lower spending begets layoffs which begets lower spending still which begets more layoffs. If we had been saving during the sunny times for the rainy days, this would just be a recession. But everybody is broke.
I really, really hope I’m wrong about all this. But I honestly don’t see how I could be.