Sunday, February 20, 2011

Are we near the start of the next bear market?

What goes up must come down, and certainly, we have come a long way since the lows of March 2009. Any logical-thinking person must know that the days of stocks going higher are diminishing by the day. I do not know who Michael Lombardi is (other than he is a financial news writer), but his latest newsletter tugged at some of my heartstrings. In the newsletter dated 16 Feb 2011, he wrote:


In these very pages on April 27, 2004, I wrote, “We will wish Greenspan never brought interest rates down so low as to entice so many consumers to have such big mortgages.” Stock market started rallying.

On July 21, 2005, I wrote, “the Fed’s actions (of reducing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Stock market continued to rally.

On August 23, 2006, I started warning about a coming recession—two years before it was actually recognized in GDP numbers. I wrote back then, “I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession.” Stock market continued to rally.

Till this stage, Lombardi has been right on the credit bubble, but too early.

In the summer of 2007 I started comparing the recession headed our way to the Great Depression: “Anyway you look at it, the U.S. housing market is in for a real beating. In the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Indeed, the stock market crashed in the first quarter of 2009, two years after the real estate market crashed. He was right at last, as market began their descent.

Turning to the stock market, on November 29, 2007, I really started yelling that stocks are in trouble: “The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.”

In early 2008, I turned outright bearish on stocks and begged my readers to get out of them: “In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” (January 10, 2008.) The year 2008 ended up being one of the worst years for the stock market since the 1930s. Indeed, 2008 was the worst year for stocks.


In March of 2009, the Dow Jones Industrial Average fell to 6,440, a 12-year low and, in the depth of the crisis, when Wall Street was warning Washington that the financial system would come to a halt unless the government started bailing out financial institutions and larger corporations, I turned firmly bullish on stocks. We “jumped in with both feet,” to quote an adage. He was right on target.

Now he says:
If you have been reading PROFIT CONFIDENTIAL over the past two years, in my daily “Where the Market Stands; Where it’s Headed” section, you have been reading that I believe we are in a bear market rally, which will bring stock prices higher. In late 2010, early 2011, I changed that prediction to basically, “I believe stocks will continue to rise in the immediate term, but I’m turning bearish for the short to long term.”

Immediate term is now. Short term is three to six months forward. As a stock market analyst and economist, market sentiment and monetary policy are of utmost importance to my analysis. With investors turning more and more bullish on the stock market and long-term interest rates rising, I believe the bear market rally that started on March 9, 2009, has limited life left. The easy money in the market has been made.

I believe that stocks will continue to rise in the immediate term for two simple reasons: stocks love to ride the “wall of worry” higher; and too many stock market advisors are calling for a stock market correction. Stocks never do what is expected of them.

Longer-term, we have severe structural problems in America. We are slowly losing our status as the world economic power to China. Our currency could one day lose its status as the official world reserve currency. Interest rates, after a 30-year down cycle, have entered a 30-year up cycle. Inflation could become a real issue. Hence, 2011 could end up being a very challenging year for stocks. My old saying, “Enjoy the stock rally while it lasts, because it won’t” has never been more relevant.

Shall we believe in him? On one hand, the bull market is fast maturing, so there is reason to be concerned about an end soon. On the other hand, Paulson and Buffett are big buyers of the Great American Recovery, and have been urging people to buy houses in the US. But all three agreed that the US currency is losing its status, and that inflation will be arriving soon.

I believe, that the bear market will return one day. But that day can be a few months, or years away. Some, like Lombardi believes it will be sooner rather than later. Others, like Paulson and Buffett are more optimistic, for now. As for me, I feel markets may trade sideways, or even enter a baby bear market soon. But, I do not think we will experience a repeat of the Great Bear of 2008. Not yet.

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