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Saturday, 7 March 2009

How Low Can It Go?

by Mick Weinstein

Nobody knows, of course, when we'll hit bottom in this market. Disregarding a clever new Web site (isthisthebottom.com) on the matter, the new president is telling us to buy stocks -- as is Jim Cramer (of course) -- but let's see what some less conflicted and more rigorous econobloggers have to say. As always, click though if an item piques your interest -- I'm just curating links and providing short excerpts:

• Bespoke Investment Group notes that 2009 already has the ignominious honor of the worst two-month start to a year since 1900. By far. But: "With many comparing Obama and his plans to FDR and the New Deal, it's interesting that the market got off to a very bad start in 1933 after he was elected but reversed when he took office (in March) and finished his first year 66.7 percent higher! We can only hope that 2009 turns out that way."

• Doug Short provides daily updates on his helpful chart comparing this downturn to past ones. Where does it seem to you that this one will end?

• A few respected fund managers who were right about last year's fall have just turned neutral or bullish -- it's worth understanding their arguments: Steve Leuthold thinks "we're close to a major market bottom," Marc Faber covered his shorts, and Bill Fleckenstein bought more Microsoft stock this week.

• But Gwen Robinson at FTAlphaville says "beware bottom-fishers, stocks aren't as cheap as they look."

• Jack McHugh also sees more downside as likely, given the historical record: "Today's U.S. economy is still no Great Depression. Nor do our markets look set to match the almost 90 percent decline from top to bottom seen from 1929 to 1932...Then again, I think we can all agree that what ails our economy and markets is worse than anything since that awful time, and the worst punishment Mr. Market has meted out since the 1930s was a drop in the S&P 500 of just less than 50 percent..." Be sure to see Jack's table of possible bottoms -- ugly.

• Henry Blodget considers valuation troughs through Robert Shiller's cyclically-adjusted P/E ratio: "If the stock market stops falling and earnings eventually begin to grow again, we would be close to the bottom: The market could simply move sideways for 5-10 years while earnings growth gradually reduced the P/E to the 5X-8X range. This is what happened in the 1970s. Alternatively, the market could just keep dropping, as it did in the early 1930s."

• David Templeton focuses on investor sentiment: "This week's American Association of Individual Investors sentiment survey reported the level of individual investor bearishness hit 70.27 percent. This is the highest bearishness level report by AAII since it began tracking investor sentiment in 1987 when the bearish sentiment reached 67 percent in 1990...If we could get any sort of positive news flow, the market would likely make a significant move to the upside."

• Unlike many, market technician Michael Kahn at Barron's doesn't expect a big, high-volume "capitulation" selloff to mark the bottom. Rather, Kahn's looking for an "apathy bottom...When people stop worrying about where the bottom will be, the market will give them one."

• ETF Digest's Dave Fry, a trend-following investor, presents some very ugly charts and believes "the ammo to launch a major rally isn't there. The only folks with cash to invest are a few hedge funds and Wall St. trading desks -- courtesy of the tax payers."

• Jeff Pierce also still sees no good reason to buy: "The biggest reason to go long right now is that we are so oversold that we're bound to bounce. True, but a very hard strategy to consistently win at. Until I see a clear edge in being long which will coincide with extremes in my indicators, I'll likely remain short, or possibly move to cash if I get caught in a strong rally."

• Mark McQueen asks, "How does one trade the worst economic crisis in 75 years? You don't. You hide. The major layoffs just started 12 weeks ago. Until they are over, the market can't hope for a change in the economy...Let the crazy mega portfolio managers trade Citibank all day long."

• Portfolio manager Roger Nusbaum gives some perspective on what another leg down could mean: "I may turn out to be wrong about the S&P 500 dropping to the 600 level or lower (I don't think it will), but if that does happen, the psychological damage will be worse than the financial damage."

• Sean Hannon has a specific trigger in mind: "I expect the pattern of failing rallies to continue and do not expect a sustained bounce until we see a series of synchronized market lows on heavy volume."

And then there are the eternal optimists. James Glassman wrote the book Dow 36,000 back in 1999. Excerpting from a 'Washington Post' interview with Glassman, FreeExchange at Economist.com is less than impressed by Glassman's prediction that the Dow will still reach 36,000 -- someday.

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