Saturday, September 6, 2008

Dow 9,000 as President Obama wins election?

On the hottest day of the Montreal summer (33C on Sept 6th!), I felt a need to update my financial markets "winter outlook" from August 8th:

Markets remain choppy for August into mid September 2nd. Commodities bounce a little mid/late August and sell off again in early September. US and world markets peak in mid August, pull back in late August, rally into mid September 2nd to test August highs.

Then we plunge into mid November as the credit crunch really takes hold, the US economy plunges and recession is accepted by all. There is a chance that we get a slew of bank failures at the same time and systemic risk becomes a concern.

Canadian, US and European economies in recession or hard landings. I plan on conserving capital and shorting at opportune times.

Basically, the only change is that the markets topped out faster (Tuesday Sept 2nd) and from a slightly lower level than I thought. Thursday was the first 90% downday (technical measure). If a new downleg has started, you will likely get a series of them over the next few weeks/months.

Cash is king here for all but experienced investors (who can short carefully). Stay out of debt. I saw (and still see) a move to about S&P 1078-1090 (Dow 9Kish?) for this downleg which should last into November, around the time that Barack Obama (or John McCain) becomes the new President.

Some may feel that I am a permabear but I believe that I am a realist. The structural issues facing the global economy are deep. The credit cycle has gone on for most of my life (about 25 years- since the early 80s). Look at any long term chart of debt/GDP, debt/annual income, etc... It will take a severe bear market and a severe and lasting recession to correct the excesses of 25 years. This stock market bear thus far has not been severe (20% +/- on the S&P, 10 months in duration). Severe bear markets can last years (the 2000-03 one lasted about 3 years) and usually shave off 30-50%.

We currently have the worst housing recession in the US and many countries since the Great Depression. We have one the worst financial instability since the Great Depression, as the esteemed Paul Volcker stated today. The US consumer (70% of the US economy and 20% of the world economy) is overleveraged and underwater in his/her stocks and houses. Inflation has been high in recent years, thereby preventing further rate cuts in most countries.

All this and we are supposed to have a garden variety bear market of 20% and 10 months? And Canada is supposed to muddle along impervious to the massive hurt going on to our south. Housing will just magically rise by 5% a year.

I believe that we are likely heading for one of the 50% bear markets in the stock market. We haven't even had a real panic. The August 07 panic was minor. Socgen January was minor. Bear Stearns March bottom was minor. July Fannie Mae bottom was minor. Look at the VIX index. It peaked in the upper 30s in all but the July bottom (it only hit 30 in July). In 1997, 1998, 2000-03, we had numbers in the 50s and 60s. In 1987, we hit 180ish I believe. Perhaps there are structural difference in the markets (ultrashort ETFs, etc...) that will prevent a 60 reading, but even using other measures, we have yet to see true panic in the markets yet. I am old enough to remember scarier "corrections" in the 1997 and 1998 bull markets. There were none of the structural issues out there today! I believe that over the next few weeks you will finally get some panic.

The good news is that after this downleg, I believe that we will finally be past the halfway mark in terms of percentage and maybe, just maybe, in time. We even could get a nice 3 to 5 month counter trend bear market rally. If things got really ugly in October/November and we sunk to say 770 S&P with a few bank failures, you could even have the end to the bear in terms of price.

Eventually, there will be a new secular bull market in stocks and homes. It will probably not be like the ones of the 80s and 90s in stocks and 2000s in homes, but it should be good. We will definitely get a cyclical bull (2003-2007) at some point in 2009 or 2010. The BRIC country story may well be true and if the US can do a (much) bigger 1995-97 Canadian style cleanup cleanup of its structural problems, this could eventually make me start a bullish blog. But the "summer outlook" is likely many years away and for now winter has resumed in the financial markets.

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