more pain to come, page-29

Don't know if you have heard of this guy...Henry Blodget
He was one of the main analysts pushing stocks during the dot.com days.
He would now be described as a "disgraced" broker.
Anyway he wrote the following article.
I don't think he is a broker now and he works for himself so I doubt whether he is pushing any barrow or profiting in anyway from what he is saying.
But could be wrong. He looks as though he may in fact trying to redeem himself here by giving punters good information.
So read on....it's a great article.
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Don't bet the farm on it all turning out OK

Precedent . . . the slow decline around the 1929 crash, which had investors gather outside the Wall Street Stock Exchange, was repeated in 1973, 1987, 200 - and 2007. Photo: AP
Email Print Normal font Large font AdvertisementAdvertisementDecember 26, 2007

He once was the most bullish man on Wall Street. That was before the dotcom crash and before he was banned from trading. These days a chastened Henry Blodget is far more cautious.

Now the Federal Reserve has started to cut interest rates, the stockmarket and deal-making will be off to the races again, right? The subprime mess will stay contained, stocks will extend their recent gains, and the takeover wave will start anew as corporations and private equity firms feast on cheap cash.

Well, that's the bulls' theory, anyway. And it could happen. Aggressive rate cuts in 1998 by the Federal Reserve chairman, Alan Greenspan, headed off disaster and set up the market for a historic run. After this year's brief panic, moreover, the market has not only stabilised but is back at record highs.

Unfortunately, we are not off the hook yet. It is still possible that we are in the early stages of a painful, extended decline.

A crucial misconception about market crashes is that they are short, violent events - Black Monday, Black Thursday - that wipe out traders before they know what hit them. In reality, crashes usually take months, if not years, to play out.

Consider the slow and painful trajectory of the last market crash, the one that clobbered stocks from 2000 to 2002. Depending on which index you look at, that crash was either the worst in a generation or the worst since 1929. Either way, it didn't happen overnight.

The Nasdaq famously peaked on March 10, 2000. After a sharp sell-off a few weeks later, however, it drifted sideways and up for six months. All summer long, many of Wall Street's best and brightest predicted an autumn rally and through the middle of August that year, it seemed one would arrive. But in September and October, all hell broke loose, and the real crash began.

What happened that autumn is relevant to today's market with respect to economic fundamentals. The credit crunch that set off the 2000 crash stemmed from the initial public offerings and corporate debt markets that for the previous 18 months had gleefully financed anything with a prospectus, including, unfortunately, some companies I championed. (My fortunes were similar: in 2000, I was among the most-read Wall Street analysts; in 2003, regulators alleged that my bullishness stemmed from conflicts of interest and threw me out of the industry.)

When the IPO and debt markets started shutting down in spring 2000, hundreds of emerging companies could no longer raise the tens of millions of dollars they needed for advertising, software, computers and other products and services. As a result, the companies stopped spending, hurting business on Madison Avenue, Wall Street, Main Street and elsewhere.

Cut off from the free-flowing capital that had financed operating losses for years, many companies that a year earlier could have raised hundreds of millions of dollars overnight began to go bankrupt or sell their wreckage for cents on the dollar.

At the time, it seemed that most of these companies, the subprime borrowers of the era, would quietly disappear, leaving the rest of the economy to charge ahead. Only after six months had passed, though, did it become clear that the loss of the technology and telecommunications engine would wallop not only the dotcom sector but also technology-related service providers and, finally, the economy at large. This ripple effect did not happen fast; it occurred sector by sector, company by company, until, six months later, it hammered almost everything.

The analogy for the technology sector in today's market is housing, the engine that has been driving the economy for nearly a decade. Like the tech boom, the housing boom turbocharged the performance of not only the real estate industry but also dozens of related industries: mortgage lenders, construction firms, building supply companies, appliance and furniture makers.

The rising value of houses also allowed home-owners to make frequent withdrawals from home equity ATMs, cash that they often spent on remodelling, holidays or buying four-wheel-drives. The National Association of Realtors and other real estate boosters, meanwhile, repeated the role Wall Street played in the 1990s, finding ever more creative ways to explain why this time was different, why homes were still a great investment, why housing prices would just keep going up.

As with technology spending in the late '90s, the housing market took longer than expected to roll over. But now it has done just that, taking more than the home builders down with it. The housing slowdown is hurting all the industries it helped on the way up, and home equity withdrawals have turned into mortgage defaults.

Can the subprime mortgage damage remain contained? It could. But one could make a compelling case that it will ultimately ripple through the economy until it hits consumer spending. If it gets that far, most companies will suddenly be under pressure and will respond by trimming spending (advertising, salaries, jobs). And if that happens, the virtuous cycle that powered the expansion will have reversed, and the resulting profit crunch will take the market down with it.

Moving back in history, other crashes have played out in slow motion, too. The Great Crash of 1929 is recalled as a few brutal days in October, but the market had been dropping for nearly two months. The next spring, the market largely recovered; it wasn't until the decline resumed in summer 1930 that the crash seared itself into history.

The bear market of 1973 to 1974 chopped the Standard & Poor's 500 in half without there ever being a crash. Even the crash of 1987, which included the sharpest one-day drop in history - 23 per cent - was gradual: the market had been weak for two months before Black Monday, and was already more than 15 per cent off its peak. So don't get fooled into complacency by the market's September recovery.

And what about Ben Bernanke, the Fed chairman, and his celebrated rate cuts? Will they save the market? Perhaps. But despite what the recent euphoric market move may make you think, stocks don't always soar after rate cuts. Greenspan started cutting rates in early 2001 when the market crash was in full swing and the Fed funds rate was at 6 per cent, and he didn't stop cutting until a year-and-a-half later, when the rate hit 1 per cent.

In the months leading up to that first rate cut, Wall Street strategists urged everyone to load up on stocks because rate cuts usually marked the bottom. But usually does not mean always: the Fed cut rates 13 times over 18 months and stocks dropped the whole time.

Greenspan's aggressive rate cuts, by the way, shifted the housing boom into high gear, and thus helped set up the market for where it is today.

Takeover activity tracks the stockmarket, not interest rates, so if the market's recent resurgence is a head fake, Wall Streets deal makers will also take it on the chin.

Despite making money cheaper, for example, the rate cuts in 2000 did not sustain merger and acquisition activity. Like the stockmarket, this sector had been on fire for most of the 1990s, with the aggregate yearly value of deals rising more than tenfold, from a trough of $US125 billion in 1992 to $US1.7 trillion in 2000, according to Thomson Financial.

But when stocks fell, the value of deals did, too, so that by 2002, aggregate transaction value had dropped more than 75 per cent, to $US441 million. This was not an anomaly; acquisition transaction volume fell two-thirds in the years after the 1987 crash as well.

No one likes a bear and it's no fun to be bearish and everything could indeed work out OK. Just don't bet the farm on it.

The New York Times

The New York Times Henry Blodget is the author of The Wall Street Self-Defence Manual and is the chief executive of Silicon Alley Insider.