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The Bottom's Within Sight - Barron's

by: SA Editor Eli Hoffmann October 12, 2008 | about stocks: BCS / BRK.A / WFC    
Eli Hoffmann

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Not withstanding a weak and most-likely recessionary economy, Barron's Jacqueline Doherty says that if history's any guide, U.S. stocks are likely to bottom within the next few months.

The average U.S. recession since the late 1940s has lasted 10 months, and stocks typically hit their low point about three months before the recession ends. So, if the U.S. entered a recession on July 1, as many economists now suggest, and the recession was to last until April 2009, a typical bottom for stocks would occur some time in the next few months.

Flying in the face of many doomsday heralds, Pequot's Byron Wien thinks we're getting closer to rock bottom: "I don't think this is the end of America as we know it. I think it's conceivable that the markets will bottom before year end." He cites the Treasury's exceptional power to buy distressed assets and $80/barrel oil as catalysts, and notes "smart investors" (i.e. Barclays (BCS), Buffett (BRK.A), Wells Fargo (WFC)) are wading into the troubled waters.

Investors are worried this time will be different. The 'great credit supercycle' will take a long time to unwind, say some. Others liken the government's rescue plan to fighting a forest fire with a garden hose.

It may be, but the good news, Doherty says, is that stocks - down about 40% - have already priced much of the doom and gloom in. Only once since the 1930s has the Dow fallen more than 40%. It did plunge 89% during the Great Depression, but then it was sitting on frenzied 500% gains, and the markets lacked many of today's safety nets like FDIC insurance, not to mention a proactive and more-informed Fed and Treasury.

::::::::::::::::::::

  • Doherty was impressed by Friday's bounce, with the Dow closing down 128 points after having been down 700. Kevin Mackey hopes "the incredible turn of events... were a magnanimous shift in investor sentiment and going forward we will finally see buyers return to the market," but thinks it may more likely have been a hedge-fund short squeeze.
  • Alan Brochstein sees a parallel between Friday's 'exhaustion' gap down, and crude oil's upside peak - after which it came crashing down, and never looked back.
  • David Tsao, much like Doherty, looks at the last three market crashes - and concludes those with money on the sidelines should be plotting when to start easing in.

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This article has 54 comments:

  •  
    Oct 12 08:09 AM
    "likely to bottom in the next few months" Wow that really is telling us something! At the current rate of decline that might be zero.
    Reply
  •  
    Oct 12 08:38 AM
    Wish this was one of the rare times Barrons was right. Unfortunately there is "no history" for what America is experiencing now! Wall Street has created 50-100 of TRILLIONS OF $$$$$$$$$$ of phoney trading instruments called Credit Default Swaps and Derivatives......... Stocks, Bonds, Options and Futures weren't enough for the GREEDY firms and exchanges needing "trading volumes" to satisfy their thirst for GROWTH! Creating these instruments was risky enough, but using 5% margins and/or 40-1 debt/capital ratios was insanity...........
    Exploiting the Sub-Prime MORTGAGE ALBATROSS WITH GSE's and accommadative LEGISLATION, SEC "non-enforcement&... Congressional "protection" was the perfect brew for these
    ROBBER BARRONS!!!!!!!!!
    Americans have lost ~$7 Trillion recently, yet nobody is questioning WHO GAINED THAT AMOUNT"????????
    America is "bankrupt" and the taxpayers [we who lost] are on-the-hook for another $$$$$TRILLION or so......... Interestingly, those who got the TRILLIONS were seemingly protected from the funding of the BAILOUT.......... HMMMMMM!!!!!!!!
    America is no longer credit worthy, as France and Germany and China are telling us. So who will buy our debt????????
    America is now hostage to oil producing "not-so-friendly&... countries who can drive a massive nail in our coffin by simply reducing oil production by 20%.......... See, we can't drill here!!!!!!!!!!!!
    America's political system is "corrupt" at best and looking like the tsunami is dead ahead!!!!!!!!!!!!
    So Barrons, these circumstances never existed in our "history" and we are in totally uncharted waters, alone with our mess, with no ports in reach or large enough to dock our MASSIVE DEBT LADEN SHIP!!!!!!
    IMHO
    Reply
  •  
    Oct 12 09:26 AM
    Please define that portion of the phrase "within the next few months."
    Reply
  •  
    Oct 12 09:29 AM
    I would rather see more bearish headlines than bullish ones. I hope the article is correct, but market bottoms are generally made when all the headlines and magazine covers are bearish.
    Reply
  •  
    Oct 12 09:46 AM
    Each day that passes, information will be revealed about just how dire the situation is. More importantly, most Americans, (the 90% that controls but 10% of the wealth) will finally wake up to the fact that this country is no longer a democracy, but a plutocracy. Every single economic policy supported, promoted and enacted by primarily the Republicans in Congress will be exposed as policies designed to keep the wealthy in power and the rest of us constrained. For more than 25 years, the Republicans have supported supply side (trickle down) economics, tax cuts for the wealthy, deregulation, consumer spending (vs. saving) and a dismantling of consumer protections. The Democrats are just as guilty for not standing up to the Republicans and in many ways supporting legislation that has protected the plutocracy. I think both sides have intentionally employed gridlock
    as a tactic to evade doing anything to benefit the majority of Americans.

    Now that financial armageddon has come to the world, who are the first to be saved? The wealthy!!!! As this world wide depression sweeps the planet, I think there is a chance that we may see a significant amount of class warfare erupt. It may get very ugly, before it gets better, but it will get better!

    Reply
  •  
    Oct 12 09:50 AM
    I hope Barrons is right. Where did they get the crystal ball? I want one too!
    Reply
  •  
    Oct 12 10:25 AM
    Barron's is a corporation, serving the interests of the corporation. Why would anybody put any credence to what they have to say?

    Where were they (mass media ala Barron's) when the market failed to take out the highs in Oct 2007 and instead had a massive reversal? That was a classic sign that the BULL was over. Of course, it was yet to be confirmed, but the point is where were the Barron's and the like?

    No where, they were saying BUY, and they are still saying BUY... Don't listen to analysts or mass media, do your own research and invest according to your own financial situation.
    Reply
  •  
    Oct 12 10:34 AM
    As the man said,while on the raft.

    After 40 days 0f continuous rain...

    Will this rain ever stop.?
    It always does.
    Reply
  •  
    Oct 12 10:56 AM
    articles that comment on "is this the bottom now ?"are a waste of everyone's time and good bandwidth. No one knows. no one. bobbleheads all. Of course there are safety nets such as FDIC but if the currency is destroyed, they are irrelevant to a large extent. This disaster has features not present during the great D. With the kind of politicians and business goons we have, who knows what will happen. At any rate,hings look to be worse in Reykjavik. That should cheer you up.
    Reply
  •  
    Oct 12 11:01 AM
    You always hear, buy low/sell high. Well, now is a low. Could go lower... you never know. Granted it could sting for a while, but even we can always inflate our way out of this mess.
    Reply
  •  
    Oct 12 11:24 AM
    maybe the market will hit bottom in a few months - with a 53 trillion dollar cds storm headed the markets way I believe it will stay on the bottom for a very very long time -
    Reply
  •  
    Oct 12 11:43 AM
    whose bottom is in sight. i hope its been wiped clean by all the worthless paper many are holding.the only bottom you can be sure of is the one you are sitting on. the usa has lost credibility around the world in many ways.
    Reply
  •  
    Oct 12 12:01 PM
    It WILL hit bottom --- and it won't be at zero and unfortunately it can be later than sooner. That said after dropping 40% the rate of decline has to slow down --- and if Paulson did something tomorrow instead of talking of in "a few weeks" it might be sooner than later and vice versa.
    Reply
  •  
    Oct 12 12:07 PM
    The bottom is close. I agree
    Reply
  •  
    Oct 12 12:18 PM
    We have been hearing there is or there will be a bottom for some time. It is hard to go into the field when every economy measuring stick out there is crying wolf. One thing is for certain.. nobody knows when it will hit. maybe tomorrow, maybe next week or even next month.. or longer? Oops I just predicted it too.
    I am also sure we have all seen the 50 dma's, the charts of the last 8 dow crashes and every other standard that has happened in the past. The way I understand it is we have barely hit the bottom 3rd on many of these stocks and we have a ways to go. We will be waiting and hope to be in when it hits.. for there is no timing this most catastrophic event.
    Thanks again Eli for keeping us informed. I wish there were more concrete indicators of a more positive move but better to let it happen than guess more.


    Reply
  •  
    Oct 12 12:25 PM
    Market will hit bottom in next few months? Gee, if we have even one or two more months in between like the last month or two, the DJIA could be down another 300 points or more in the interim. Doesn't sound especially compelling even if one believes it will bottom during the next few months.
    Reply
  •  
    Oct 12 12:44 PM
    It's the bottom, when people like you and I decide it's the bottom. When you and I decide it's time to start buying just a little, or buying a whole lot, it's the bottom.
    Reply
  •  
    Oct 12 12:56 PM
    Yea try to blame the Republicans. But it was the Democrats that demanded the financial institutions load to the homeowners who could not really afford the homes. This in turn drove the prices up to cause the bubble and bad loans that the Republicans have been trying to control with legislation the last 2-3 years but the Democrats would not allow the legislation to past because it would hurt the financial institutions that were contributing to their campaigns. There was a handful of Republicans that did side with the majority Democrats to keep this new legislation from passing. And I would like to see those RINO Republicans lose their job this election!
    Reply
  •  
    Oct 12 01:01 PM
    Some people confuse advertising with truth.

    Many people do, in fact.

    "If history is any guide U.S. stocks are likely to bottom within the next few months."

    Clears throat but can't think of anything to say.
    Reply
  •  
    Oct 12 01:02 PM
    I was about to write something in reaction until I read eddie64's comments. Now no need.

    I'll just add that many moon ago when I was living in Argentina, I read an article in Marcha, a left-wing Urugayan weekly, by James Petras, a leftist academic sociologist and specialist in Latin America. It was on the riots in the US in response to the assasinations in 1968. It was titled El Saqueo como Politica, y La Politica como Saqueo, which means Looting as Politics and the Politics of Looting. Petras noted that the rage of the disenfranchissed was directed to looting longed for commodities instead of in any organized political organizing. Decades later, the LA Riots in reaction to sanctioned police brutality were directed at massive looting. Just imagine what will happen in our urban areas once commodity consuption is restricted by no credit and increasing unemployment. The religion of America is consumption - you are what you wear, you are what you drive, or you are nothing. After 911, our Decider declared, "shop"!

    The US is bankrupt, and the credit bubble cannot be duplicated in the short term. Massive inflation is the only way to buy time, and massive public works and maybe a real physical green revolution can provide productive investment, but that means progressive decoupling from the world economy. But this is a violent country, and I fear you haven't seen nothing yet while you all await "the bottom" to try to make a few devalued bucks.
    Reply
  •  
    Oct 12 02:00 PM
    What hubris. Typical propaganda from the Reagan- Friedman playbook.

    Market will not recover until it hits 6,500 or so, and stays down for all of
    2009. The party is officially over for the Grand Old Party of fools. Todd
    Reply
  •  
    Oct 12 03:09 PM
    One of these days the commentariat will discover the difference between the haves and the havenots, and it sure won't be the Republicans and Democrats, or the Liberals and Conservatives. It will be the Elites and the Slobs (the rest of us). The Elites are those that feed at the trough...at universities, governments, think tanks, journalists, entertainers. The slobs fill the trough. You can view the confusion by taking a close look at Obama's supporters. Btw, I'm not a McCain supporter either...just trying to untangle the mess.
    Reply
  •  
    Oct 12 04:14 PM
    josil: You are correct, there are the elites and there are the slobs - and that is in ANY form of organization or government. This has always been and always will be. Rather than wasting energy trying to change the inevitable "system", just try to become one of the elites.
    Reply
  •  
    Oct 12 04:36 PM


    If we entered, according to Baron's, a "recession" on July 1 (a date about 6 months too late, in my opinion), it has proved to be the shortest recession in history. We are now well into the Second Great Depression.

    Credit and trust are the biggest problems. Ask any small- or medium-sized business which uses a line of credit for its working capital -- and that includes most small- or medium-sized businesses. Many have had their lines of credit cut way back or completely canceled -- and those who do get such loans now pay 10% instead of 5-6%.

    Employees of these businesses are now working part-time instead of full-time (if they're lucky), or have been laid off (if they're unlucky); and some of those who are still working haven't been paid for several weeks.

    Anecdote: a friend of mine has been planning to do some additions and upgrades to her house. She finally got everything set, told the contractor she was ready to roll, and then went to her longtime bank, where she had kept them informed of her plans, to finalize the home equity loan she had arranged. "Sorry," the banker said, "we can't lend you any money." I don't know whether the bank didn't have the money to lend, or management was being very restrictive, or even if, as a branch, they had been told not to lend any money without HQ approval (1,000 miles away); but it doesn't matter.

    That meant that the contractor didn't get any money to pay workers or subcontractors; the subcontractors didn't get any money to pay themselves or their workers; Lowe's or Home Depot or the local lumberyard lost several thousand dollars in sales, and so on. And all those people will stop spending money on nonessentials and buy cheaper versions of what they have to buy.
    And so forth in a downward spiral.

    I saw a piece in a newspaper yesterday (NY Times or WS Journal) headlined something like, "Is Now the Time to Buy Stocks?" , and all I could say was,
    "May it is -- but what am going to use for money?"

    Dig in, kiddies. This is no 10-month recession. This is sauve que put.

    Poor Jim
    Reply
  •  
    Oct 12 04:37 PM
    henarl: That is, in essence, what Benedict Arnold and his friends said to George Washington and the other rebels before and during the American Revolution.

    No system is "inevitable" and sometimes the former elites are either metaphorically or literally hung by their necks (if there is no Canada to escape to :) by the former slobs.

    No offense meant. Just saying.
    Reply
  •  
    Oct 12 05:13 PM
    My guess (and we all can only guess, lets be honest) is the path up is after the election.

    Reply
  •  
    Oct 12 05:31 PM
    carey_jim: You are correct, no system or government is inevitable and, unfortunately, that includes the great system that George Washington and others established with the American Revolution. The government we now have is a far cry from what was established in 1776. Of course the United States will not cease to exist but it will probably exist in a much more socialistic form than in the past. My point was that, even in it's future form, whatever that may be, there will still be Elites and Slobs and it is personally preferable to be an Elite if you can manage it.
    Reply
  •  
    Oct 12 07:00 PM
    "This isn't the end of the world, but you can see it from here."

    Thank god, I feel better now.
    Reply
  •  
    Oct 12 07:14 PM
    how much freakin money have you cost people.let's see your track record.i bet you it sucks!the only people you care about is the crooks on wall street&washington d.c.
    Reply
  •  
    Oct 12 07:39 PM
    We will see.

    en.wikipedia.org/wiki/...

    Electricity was ample then.

    It may not be now.



    Reply
  •  
    Oct 12 07:45 PM
    Henarl: I can't argue with that except by saying what Groucho Marx used to say:

    "I would never join a club that would have a guy like me as a member."

    Sometimes the elite and the slobs are difficult to tell apart :)
    Reply
  •  
    Oct 12 08:39 PM
    The most important point to be made, which may help with what you should do regarding your investments, is the 2 generation change in mindset.

    What you are seeing is a reversal of a mindset that started in the 1960s, specifically, with regard to responsibilities. That all of the great things in life are free. Houses, SUVs, great vacations, etc. One will never have to pay for them - housing prices will go up forever and you can always get another equity loan, for example.

    From a generational consideration, the baby boomers had children, and these children accepted (why not?) what their parents had told them. So that brings us up to the 1980s. Now those second generation children are having children, who were told that they too could have the great life style. Etc.

    So, what is going one is a revision to the real economic world.

    To beat the horse real dead, what needs to be cleaned up are two (if not more marginally) generations of a mindset.

    I think that this picture now gives an investment forecast. For the indefinite future, the name of the game will be more conservative investments, if for no other reason there isn't any easy money around.

    To talk about myself, I am 76 years old, still an active (not trader) investor since 1963. I am down about 10%, but still have some open equity investments since year end.

    The market and the economy will do well, but it will be a long haul -- and the tax burdens proposed by the Democrats will make things worse. The best thing long term are the tax proposals put forward by McCain -- not that the economy and market will pop up. All one has to do is to look at the European economies to understand what will happen if the Democrats run our country.

    All of the young college people are ignorant of what is going on in Europe, where the unemployment rate for college graduates is on the order of 20%.

    While I am ranting, regarding health insurance, etc. Canada, France and Germany are going to a more free market system because they are running out of money. Of course, promoters of the US getting into a government based medical plan have politics in mind, not what would be the best for the American public as a whole.
    Reply
  •  
    Oct 12 11:47 PM
    As long as democrats control congress and democrats control a big chunk of Wall Street, the country's economy and an individual's freedom are in peril. If Obama occupies the White House, the market bottom is apt to take a long time to form, and it may hang around down there for a while..
    Reply
  •  
    Oct 13 12:20 AM
    I my article I posted above, I give an exact month for hte bottom. Of course I highly doubt this forecast will be dead on, but it'll be close. I also give the market levels at which the bottom will occur.

    I'm currently working on an article which discusses the events that will occur leading up to the bottom, the conditions in which the bounce will occur, and where to put your money when it does!
    Reply
  •  
    Oct 13 12:25 AM
    Today, the "elite" bankers from all corners of the world congregated in Paris. They arrived in their polished limos, and looked dapper in their $5000 suits. Their $250 haircuts and $100 manicures made them look and feel like the elites that they fancy themselves to be. They entered the posh confines of a five star hotel, and likely dined on a sumptuous lunch before jovially congratulating each other on their exquisite plans to "rescue" the world's economy.

    In reality, these are the same overpaid, soulless parasites that engineered this crisis, and we are the "slobs" who are privileged to bail them out of it.

    I, for one, feel very confident that they will be concocting a plan to make the lives of all of us slobs much better in the near future. NOT!
    Reply
  •  
    Oct 13 04:56 AM
    I had a dream that a bunch of eccentric rich people were all eating a big fish with minnow stuffing...well, I think that sums things up...the little guy is definitely going to be the one getting eaten by the fat slob rich people who really don't have a clue...

    I'm exchanging (not selling) my funds into the new lower market prices in hopes that in the future I will make a killing...I have 20 years...so I hope this bottom is near because I'm losing 1% in a short term exchange...

    that's my little guy advice...I figure what the hell...I 'm gonna lose anyway...might as well exchange and buy low and take the hit ...
    Reply
  •  
    Oct 13 08:57 AM
    "Bottom in sight in the next few months." Swell. That's reassuring. Does that mean that once the total wealth of the nation is transfered, total loss of rights, and police state involked...is that when it turns around? That's like saying when the patient has lost all his blood he will stop bleeding. Is this woman deluded or what?
    Reply
  •  
    Oct 13 12:06 PM
    Eli

    We are indebted to you, not for you know (it is not much) but for the rumor mongering you do so well (which we enjoy if discount). I don't think anything has changed much until we get a follow through day (a la IBD). In short wait and see what the market does.
    Reply
  •  
    Oct 13 12:43 PM
    Listen bloggers, stop whining. You need to study American history and you don't need a PhD to see that economics are historically self-correcting as investors fall in line with the market, adjust their living standards to their income, whether increased or decreased by market fluctuations and by common sense. Americans embrace risk, but not economic suicide; we'll get through this, just like we pulled ourselves out of the Great Depression.Or did'nt you listen to your parents and grandparents stories at the dinner table about what was done to create, and survive that event. It seems so many Americans are relishing this recession as an "I told you so" instead of realizing they live in a country that enables them to do so. The Iraq gov't, in less than 3 years, has a thriving stock market...they believe in the economics of free trade and free markets. i know this first hand, as I'm deployed here. Quit whining...
    Reply
  •  
    Oct 13 12:50 PM
    DCM-
    ON: Sat Apr 12th 09:18 AM
    Commented on:
    The Fed is Terrified
    There is only one solution to our economic dilemma - redistribution of the wealth. It is both absurd and crass that 10% of the population holds 90% of the wealth.
    -DCM

    As a socialist i'll bet you are enjoying the current state of our economy. How in the world did Fannie Mae ever get to the point where they were loaning money to people that they should never have loaned too? Did anyone try to stop th