Correction -vs- bear, Leuthold, mistakes, BP, thoughts
Well folks, this might be a longish post, I apologize if its a bore.
The market has some issues. We face some very identifiable headwinds:
1. The European Debt situation. The concern here is that austerity measures and debt problems in general will lead to a European recession that will then spread to the rest of the world. The real risk here is that we get a debt deflation. A deflationary spiral starting in Europe (or perhaps also in China, see below) and inevitably spreading. Greece, Spain, etc., pass austerity measures to get their deficits under control. This passing of measures results in recessions in these countries, which reduces tax revenue, thwarting the goal of reducing the deficit. Defaults result, resulting in a banking crisis in Europe, resulting in... etc. A deflationary depression would be the worst case, as GMX has called for for years here.
2. The China situation. Is China the bubble to end all bubbles? Will it eventually pop? Real estate bubble popping there leading to a banking crisis? The whole GDP figures enron-scale fraud? The concern here is that if China is forced to endure a big slowdown, due to (bubble popping, massive economic slowdown due to so much of the economy being sort of unnecessary building of unneeded capacity, etc.)that the shock to the worlds economy would be huge, resulting in a negative situation...
3. The BP and GOM oil situation. If BP goes broke the ramifications would be significant, etc.
4. Fear over volatility, late day swoons (or booms), the flash crash and fear of a repeat of it, etc.
5. Financial regulation casts a shadow on the future of wall street itself.
6. Various other headwinds including: mutual funds are said to have low cash positions at last report, which means redemptions can't come out of cash if they are sizable. The last jobs report was dissapointing, the ECRI leading indicators have been dropping for a while, will the US double dip? etc. etc. Goldman getting sued, etc.
Basically a crapload of negativity and a crapload of things to be legitimately worried about. Offsetting this, really, is basically just some generally good economic news (ISMs here and abroad, wages, hours worked, etc.) and corporate earnings which appear that barring a big slowdown are on their way to a "V" shaped recovery. And, offsetting also, is the fact that we have just experienced one of the 20 biggest drops in the stock market since 1930. This means that a whole lot of stocks are a whole lot cheaper than they used to be. Declines of 20, 30, 40% have happened in many-a-name. There are bargains out there to be sure.
You read that right, folks, this correction (to date, assuming it doesn't go any lower) is one of the 20 worst in the last 80 years. So its bad, and if you feel anxious its not for nothing, its because we have had a really bad 6 weeks in the market.
The real question for all but truly dedicated buy-and-hold investors is this:
Is this a new bear market or a correction in a bull? I will try to offer some thoughts on that. My tendency is to lean bullish in general, keep that in mind whenever reading my mojo.
Doug Kass, he of emminent and probably matchless bottom calling ability (basically always close to spot-on in the 15 months or so that I have been reading him. Surreal, almost) posted some data from Steve Leuthold. If anybody is unfamiliar, Leuthold runs a $5 billion fund bearing his own name, is a devoted student of market history that delivers research to other funds. He has a long string of "one could make you famous" calls including calling in the early 80's for 10 year treasury yields under 5% at some point in the future, telling people ot get out of his Grizzly short fund on March 4, 2009, calling in March 2009 for S&P 1100 in 2009, and calling for stocks to rally this year before experiencing a vicious correction. He has, like everybody, some bad calls also including being bullish pre-lehman with the S&P down 20% or so from its 07 highs.
Anyway, Leuthold apparently tracks 4 indicators to give him warning as to whether the market is about to sour, these are 1) a dow transports warning, 2) a dow utilities warning, 3) NYSE advance/decline warning, 4) VLT momentum warning.
In 15 severe corrections (12% or more but not 19%, which he classifies as a bear market) that didn't morph into bear markets, the average number of warnings before the decline was 1. In the 15 bear markets the average number of warnings was 2.7. Indeed only 2 bear markets began with less htan 2 warnings, one in 1938 (very shortly after a severe crash/rebound) and 1980-1982 (our only double dip incident).
This time we had just 1 warning. So barring a double dip this seems to imply that this is just a correction.
I acknowledge that there are legitimate concerns, and I am not as excitedly bullish as I was in March 09, July 09, or February 10. I would note that in general, the world is always ending, has always been ending, and may well always be ending. It was ending in 2002, it was ending in 1982, it was ending in 1974, ending ending ending. Yet it carries on. The following things give pause to my creeping bearishness:
A) its extremely rare for a market to crash significantly twice within 2 years.
B) corporate america seems to be in extremely good shape. balance sheets are hugely better than they were pre-crash in 2008, profits are recovering at a terrific rate
C) a huge amount of money is already "out". The last month has seen the hedge fund industry "de-risk", mutual funds have seen outflows in 08, 09, and 2010. A whole lot of weak hands are shaken out here.
D) sentiment is wildly negative. "we are witnessing the failure of keynesian economics" is a reasonably common headline, a deflationary recession is widely accepted as inevitable, panic and blood are everywhere in the streets, people are overwhelmingly negative. The memory of 2008 has given the markets very little confidence in the face of negativity. This probably leads to overreaction in the same way that the 5 year bull leading up to 2008 led to underreaction then.
I haven't any idea where the S&P finishes the year, but I will say that its by far not a foregone conclusion that we crash anew.
Beyond that,I think BP is going to live. Along with RIG, APC, and the rest. My reason for this is
1. my general assumption that outcomes are generally more normal than anybody anticipates during dramatic times
2. the world economy and markets would take quite a shock if BP was to go bankrupt, nobody wants that right now
3. BP is a big deal in the UK
4. BP is cooperating and, bankrupt, would not be able to pay for all this, but functioning it could.
5. The outcome of the spill is, like everything, quite likely to be less severe than most onlookers predict. Nothing, but nothing, that I have seen in my lifetime is as over the top and willing to depart from reason as the cries of the environmental faction of the US. They are amazing.
6. BP has $30B of pre-tax cash flow a year. That will pay for a whole lot of cleanup, folks, a whole lot.
That isn't a recommendation to buy BP, do that at your own risk, but BP will live and I may start buying it like there's no tomorrow one of these days.
And my last thoughts will go into a reply to this!