TheGarcipian (87.68)

Happy Anniversary! Check Your Pulse: Are We Dead Yet?

October 02, 2008 – Comments (5) | RELATED TICKERS: SPY , SPX

Part III: The Medusa Staredown

“Clear!” – ZAP! – Did you feel that? Are you breathing again? No? I didn’t think so…

As the world is coming down around our ears and bailout wails & woes are heard everywhere, I have little confidence this post will see many eyeballs. But lucky for you, you’ve landed here, so hopefully I can make it worthwhile for you.

Congress, in their infinite wisdom and uncharacteristic synergy, are hooking your economy directly to the defibrillating paddles of circulatory lifeblood, your money. This synergy is especially uncharacteristic during an election year. As they say, politics makes strange bedfellows. I’ve got my reservations about this whole bailout thing, and like my fellow All-Star CAPS players, I’m a little surprised that The Motley Fool is backing it. Perhaps it’s really come down to a case of curing the cancer without killing the patient: either path we choose, there’s bound to be a lot of sickness and death-risking acts involved.

So, where are we now in the throes of this downward slide?

The short answer: We’re fifty-two weeks into it, with at least another 52 weeks to go before hitting bottom, and probably more like 65 more weeks or longer, depending upon how much the Fed & Congress mess with the markets, trying to “control” them.

How do I know this? One answer could be “I’m Arnold’s much-wimpier cousin, sent back from the future, having seen it play out, and it’s not very pretty”, but I don’t think you’d buy that one. No, instead, my guess is derived by looking at data from the “Medusa Curves”, a moniker I’ve taken to calling MauiPeter's and my collection of graphs featuring:
&nbsp&nbsp&nbsp&nbsp the S&P500 History of Corrections,
&nbsp&nbsp&nbsp&nbsp the NAHB’s Housing Market Index vs. the S&P500 Index, and
&nbsp&nbsp&nbsp&nbsp the Coppock Curve.

If you’ve been reading my past columns on this subject (July 2008 and August 2008), you’ll remember there’s an 85% correlation underlying the second-mentioned graph. This correlation between the HMI and the S&P500 Index was discovered by David Rosenberg, the Merrill Lynch economist, who saw before the rest of us what the effects of cheap money and Congressional deregulation would do to the housing industry and the stock market. Ok, maybe that’s giving him too much credit, but he did spot the trend first.

Here are the graph updates through Monday, September 29th, which, considering how the market fell today back down to those same levels, is equivalent to performance through today (Thursday, October 2nd, 2008).

Click here for the full image.

As you can see from this first graph, we’ve fallen 29% from that high of 1561.80 back on October 8th, 2007. If this recession is to follow in the footsteps of the 2000-2002 decline (and I have every reason to believe it will be the same or worse), then we are slightly more than halfway to the bottom. I have to shake my head when I hear people on CNBC calling today a market bottom (just like yesterday and every other week for the past 6 months). That’s not to say you can’t cherry-pick the market for hidden gems, or hedge with foreign stocks/funds, or make money on shorts (well, as long as they’re not financial shorts and as long as the SEC doesn’t change its mind again!). But it’s going to be a lot harder to do so. The tide is still moving out…

This next chart is the Rosenberg correlation of the Housing Market Index against the S&P500, and it supports my assertion in the above text that the S&P500 will continue to slide:

Click here for the full image.

In the HMI chart immediately above, we are finally starting to see real downward movement of the S&P500 (yeah, tell me sumpin’ I don’t know, Gar!), but we are also starting to see a leveling off of the HMI, which is a very good thing. If the HMI levels off here or starts to move up and if Rosenburg’s correlation continues to hold, then we might be lucky enough to have the stock market hit bottom in another 12-15 months, say in Sept-Oct. 2009. Lots of “ifs” here, but they only serve to shorten the S&P500’s death drop. More than likely, the S&P500 will not hit bottom for 15 or more months, IMO.

Finally, here is the Coppock Curve still showing a bearish sentiment:

Click here for the full image.

The big unknown here is this: Has the market decoupled itself from the NAHB’s index, finally sundering that 85% correlation? The answer may be “Yes”, but that answer doesn’t matter right now, because a “Yes” answer doesn’t mean the stock market will roar back to its break-neck pace. Far from it. Perhaps the “Quintessential Orgy of Cheap Money and Congressional Deregulation” is over for the finance & banking industry & their lobbyists, but their corporate greed, highly-leveraged dealings, bewildering books, and crap assets have brought this country to the edge of financial ruin. It will be difficult at best to back away from the precipice. Make no mistake about that: we are staring directly into Medusa’s many eyes and we should be petrified.

I don’t see the present economic situation getting better anytime soon. I’m expecting unemployment to rise, as well as the Consumer Price Index. With car sales plummeting, large UAW layoffs at the Big 3 automakers are just around the corner. I think I will follow TMFSinchiruna's lead and invest in gold funds (like CEF), but leave a large part of my losses in place (I've already hit my maximum tax loss limit reasons for this year). Hopefully, in 3-5 years they'll be worth something again.

Not that it’s all Doom-n-Gloom around here. Heck no! We’ve got an anniversary to celebrate: Happy First Anniversary on our stock market slide into Medusa’s tangled coif. In a few days (October 8th or 11th, depending upon how you reckon it), it’ll be time to rush about and celebrate that cherished event with friends and loved ones. And since winter is coming and the traditional first year anniversary gift is one of paper, might I suggest you give each other firewood kindling in the form of wadded up US dollars? Believe me, after the Hanke-Panke Plan goes through, that paper will be worth more as fire-starters than for anything on Taco Bell’s 99-cent menu.