We may well end have seen the bottom we may not, no one holds a crystal ball...
To Low Ball (as opposed to crystal ball) is callous and does nothing to assist all of us in these hard times. As you now are aware I am no Bull and neither am I a Bear.
Having sat on the sidelines for the past 9 years, I thought that because we are on average in the lower quartile of historical lows that it was a good time to enter. I entered only having to retract again into my shell when it became obvious that this is no normal cycle, I believe we are entering a long term Kondratieff wave, whether we all have to wait another 5 days or another 5 years to find a long term (as opposed to a short term) bottom we do not know, but there are scant positive leading economic indicators (Global Business Cyle Indicators) coming out of the US or globally. In fact "with consistently widespread weakness among its components, the leading index has been falling since July 2007. Following the leading index, the coincident index, a monthly measure of current economic conditions, has also been decreasing, and its rate of decline has accelerated in recent months. Meanwhile, real GDP growth slowed to a 1.8 percent average annual rate in the first half of the year, down from an average annual rate of 2.3 percent in the second half of 2007. Taken together, the behaviour of the composite indexes suggests that the US economy is unlikely to improve in the near term." The Conference Board US Leading Indicators
Let's hope their wrong but I suggest not... to call against them right now and say that the market itself is a leading indicator is fantastic but which tick-up turn do you take your risk on? I'd prefer to minimise my risk with some fact and forgo the initial up-tick percentage and gain the major up-tick run.
What I do know is that I have extensive analyst experience and if you appreciate it at that, i.e being a personal point of view with research to create the point-of-view, then it would be great to see if we can find a near bottom together with differing view-points backed up with some actual research and facts to create a compelling reason to buy as opposed to a one liner guess (or low-ball), which we can all see through as being mere speculation (gambling) and adds no weight to assist us all in making a decision as to whether to invest or not.
OK, I have done a little bit more research and this article from Gerry Grantham (20th October 2008) maybe discusses my feeling more succinctly (although I disagree with his averaging down).
First: As we've noted before, the three great stock-market bubbles of the 20th Century--US in 1929, US in 1965, and Japan in 1989--were all followed by price troughs that were 50% below fair value. (See charts below right). The bubble that peaked last fall was every bit as spectacular as these earlier bubbles, so it seems reasonable to expect that stock prices might trough 50% below fair value this time, too.
Jeremy puts fair value on the S&P 500 at about 975 (vs. Friday's close of 940). A trough of 50% below fair value, therefore, would be about 500, or some 45%+ below today's levels.
The good news: US stocks are finally below fair value for the first time in two decades, so Jeremy finally feels comfortable buying them. Also, three previous bubbles do not, in Jeremy's opinion, constitute enough of a data sample to bank on. So he's hoping, for the sake of all of us, that it's different this time and the market won't fall 50% below fair value (while keeping in mind that this is a distinct possibility):
We have had some confidence in saying that by October 10th global equities were cheap on an absolute basis and cheaper than at any time in 20 years. Full disclosure requires that we add that, in our opinion, this is not as brilliant as it sounds, for markets have been more or less permanently overpriced since 1994 and have not been very cheap since 1982-83 and perhaps a few weeks in 1987.
There is also a terrible caveat (isn’t there always?), and that is presented in Exhibit 3, which shows the three most important equity bubbles of the 20th Century: 1929, 1965, and Japan in 1989. You will notice that all three overcorrected around their price trends by more than 50%!
In the interest of general happiness, we do not trot out these exhibits often and, until recently, they would have been seen as totally irrelevant and perhaps indecent. But, after all, it’s just history. Being optimistic like most humans, we draw the line at believing something so dire will happen this time.
We can hide behind the fact that there are only three data points, and therefore no self-respecting statistician can give them much weight. We can convince ourselves that things are different this time since the background to each of the four events, including this one, is different.
One of them had high inflation; three, including the current situation, did not. Japan and 1929 were characterized by complete incompetence, while this time we had only – shall we say – very widespread incompetence. This time we have thrown ourselves more quickly into battle, although not so quickly as some would have liked.
Not all of the differences are favourable: we have a more global, interlocking, and complicated system, including non-bank players like hedge funds. We also have the “financial weapons of mass destruction” – asset-backed securities that are tiered and sliced and repackaged – and, perhaps most destabilizing of all, totally unregulated credit default swaps. Did we have even more greed and short-term orientation this time than they did? Well, we certainly didn’t have less!
Still, a 50% overrun seems unacceptable. Probably governments would feel that the consequences of such a loss in asset value would simply be too awful and would do anything to prevent it. And perhaps, just perhaps, their “anything” would work. But a reasonably conservative investor looking at the data would want to allow for at least a 20% overrun to, say, 800 on the S&P 500, and have a tiny portion of their brain loaded with the notion that it just might be quite a bit worse.
So what the hell to do? Start buying, cautiously, saving some powder in case we get the same complete collapse that has followed other bubbles of this magnitude.
We at GMO have a strong value bias, and our curse, therefore, like all value managers, is being too early. In 1998 we saw horribly overpriced stocks that at 21 times earnings equalled the two previous great bubbles of 1929 and 1965. Seeing this new “peak,” we were sellers far, far too early, only to watch it go to 35 times earnings! And as it went up, so many of our clients went with it, reminding us that career risk is really the only other thing that matters.
The other side of the coin is that only sleepy value managers buy brilliantly cheap stocks: industrious, wide-awake value managers buy them when they are merely very nicely cheap, and suffer badly when they become – as they sometimes do – spectacularly cheap.
I said as far back as 1999, while suffering from selling too soon, that my next big mistake would be buying too soon. This probably sounded ridiculous for someone who was regarded as a perma bear, but I meant it. With 14 years of an overpriced S&P, one feels like a perma bear just as I felt like a perma bull at the end of 13 years of underpriced markets from 1973-86. But that was long ago.
Well, surprisingly, here we are again. Finally! On October 10th we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will therefore be steady buyers at these prices. Not necessarily rapid buyers, in fact probably not, but steady buyers. But we have no illusions. Timing is difficult and is apparently not usually our skill set, although we got desperately and atypically lucky moving rapidly to underweight in emerging equities three months ago.
That aside, we play the numbers. And we recognize the real possibilities of severe and typical overruns. We also recognize that the current crisis comes with possibly unique dangers of a 0.3 global meltdown. We recognize, in short, that we are very probably buying too soon.
To specifically answer Voltaire, appreciate your comments... and appreciate your support.
Refer back up to prior post with graphs.
In Elliott Wave terms The S&P 500 is in wave 3 of 3 down. I will attempt to explain this in terms those not familiar with Elliott Wave can understand. Here goes:
Wave 3's are long and strong and unrelenting. They can be in either direction. When wave 3 is headed up, everyone is waiting for a pullback to get in. That pullback never occurs.
When wave 3 is down everyone wants a rally to either get out or get short. Those rallies either occur intraday or they do not occur at all.
Wave 3 of 3 is where everything you do is right or everything you do is wrong, depending on whether you are long or short. Playing for countertrend moves is highly unlikely to be a winning move for anyone but the extremely nimble.
In Elliot Wave theory, "impulsive" waves trace out in patterns of 5 and corrective waves in patterns of 3. Note 5 clearly distinct waves down off the October 2007 high until the March 2008 bottom (the big red 1).
Wave 2 up, a corrective wave(the big red 2) peaked in May. When wave 2 ended, wave 3 began. In theory, wave 3 like wave 1 should subdivide into 5 clearly distinct waves. Indeed that is how it seems to be playing out.
Wave 1 of 3 ended in July, Wave 2 of 3 ended August, and we are now in the unrelenting 3 of 3 down where every attempt to play for a bounce has been like "catching knives".
I have a small blue 3 labelled, but that is not final. We do not know where 3 of 3 down finishes. Here are the implications.
Given that we are in a 5 wave impulsive pattern, wave 3 of 3 has to end first before we can think about the 4 of 3 up. 4 of 3 up will be followed by 5 of 3 down. If this sounds complicated, just look at the chart (1 of 1, 2 of 1, 3 of 1, 4 of 1, 5 of 1) all distinctly visible with blue numbers, ending with a big red 1 down.
Where to from here? Wave 4 of 3 up has not started yet. Technically I expected wave 4 of 3 to start at 960. However we blew right through that number to the downside.
I do not expect wave 4 of 3 up to be a strong up although it could be reasonably long (2-3 months) in duration. Here is the reason to NOT expect a big bounce:
Sentiment in a wave 2 up is often very strong as it is accompanied by big short covering rallies. In wave 2 up, people still believe “we are off to the races again”. No one is convinced the bull market is over.
In wave 4 of 3 up, sentiment will be more of “suspicion” as opposed to “we are off to the races again”. Consider the big 3 of 3 down as the “recognition” phase where everyone finally realizes all is not OK.
If we continue heading south as it looks, the 960 target for 3 of 3 we blew past on the downside, could serve as huge overhead resistance in any corrective wave up.
If the pattern plays out like it is setting up, wave 5 of 3 down will reverse all of the gains of 4 of 3 up and then some. Once wave 5 of 3 down ends, we can then put in a big red 3 on the chart.
Wave 4 up will begin after 5 of 3 down finishes. Look for wave 4 up to be choppy and overlapping (ups and downs in seemingly random patterns). 4 up will be tough to play. It is best to avoid it unless you are extremely nimble.
Once again, "suspicion", as opposed to “we are off to the races again” will be the overriding sentiment.
Wave 5 down will be the washout phase where everyone throws in the towel who is going to, capitulation like many on HC like to call it :). Pessimism will reign supreme and many will swear off the stock market for good. Given that we blew straight past 960 without so much as a pause, the likelihood that wave 5 down blows right through the 2002 bottom is quite high.
It is important to note attitudes change first and price follows, for example:
Think back to the Summers of 2005 and 2006. People were camping out overnight hoping for the chance to buy a house all around the country. Overnight sentiment changed. It was many months before there were significant price declines in housing. Yet, you still hear today ideas such as "consumer sentiment is down because house prices are down". Such statements are clearly backwards.
Home prices will not go up until sentiment changes, not the other way around. Right now, people are still walking away from homes in the US (even though there are signs abetting), I do not believe the Fed bailout will have a dramatic impact (in the short term - the Obama election on the other hand may well do), Banks will continue to lick their wounds and dented egos and require time to open their doors again with confidence.
