Subscribe in a readerSigns We Are Not Near a BottomPosted by ahc99 on October 10th, 2008
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The last few days I have been staying away from posting about the stock market. Reason is I am torn between the conventional mode of thinking and the reality that faces us now.
Historically we believe that the stock market moves in cycles. There will be bears and there will be bulls. The Dow crashes but then it will rise up higher than before. Stay true to the buy-and-hold method. When there is blood on the streets, we have hit capitulation or essentially the market bottom. When the VIX is at the highest, we are in buy territory.
Looking at all the news swirling around us, right now should be the perfect buy in opportunity. There are buy signals everywhere. From Cramer’s infamous “sell everything right now” to the Dow hitting levels that haven’t been seen since the last bear (the high 7000s), there is no wonder that based on contrarian investing there is no better time to buy.
Yet, have we really hit market bottom? Can we really use the conventional mode of thinking to determine when we should start buying index funds again? Truthfully I don’t believe so. The things that are going on right now is not like a normal stock market cycle in so many ways. The normal market timing signals and charts are no longer functional. I truly believe we have not seen anything like this since the Great Depression. Yes, I used the scary D word. But in this case it really does apply.
Why do I say we are not near a bottom even though all the conventional signs are pointing towards it? It is because there are so many problems that have not been fixed that until they are, consumer confidence will stay low and panic will continue to wash over Wall Street.
- The global credit markets are frozen. The interest rate for bank-to-bank lending is high, showing that banks are unwilling to lend to other banks. Why? Because they fear they won’t get their loan back. There are mines buried beneath numerous banks that can explode any second and wipe out the loan. Adding in is the fact that the banks themselves don’t know if they have hidden time-bombs in their own balance sheets so they need to hoard cash in order to stay solvant and not get down-graded.
- Small businesses have no access to credit. With banks themselves strapped for cash, there is no way they will be handing out loans as readily as before. As a result, small businesses without stable long-term prospects or good credit will probably be denied any source for additional funding. Without credit they cannot expand their businesses or make new investments. Most likely the number of small businesses will decline, with many going out of business.
- Big companies unable to get credit. This will hit large companies too. Companies such a Sears, GE, GM, etc… have already had their credit lines cut in half or just outright denied. This will shrink their future prospects. But this will have a much greater impact on society than the small businesses. Most likely we will be seeing huge layoffs. Unemployment will run rampant as the companies need to close down plants and stores in order to keep afloat.
- Home defaults and foreclosures are going to rise. Foreclosures have already been sweeping our nation but I don’t believe we have seen anything yet. Many of the ARMs are set to reset in 2009 and many economists are predicting it to hit the hardest in February of that year. With another wave of foreclosures wiping out neighborhoods, the price of surrounding neighborhoods will also plummet.
- Falling sales in America. With unemployment and foreclosures on the rise while the stock market plummets wiping out investments and 401Ks, the average consumer will tighten their belt and start saving money rather than swiping that credit card. We have already been seeing that with credit card usage declining for the first time in ten years. This in turn will cause both third and fourth quarter earnings to drop and make businesses need to cut back spending. Which would then likely result in another wave of job losses.
Scary prospects? Yes I know. But this is the stark reality that we are facing right now. The global credit markets are frozen and nothing the government is doing, from injecting capital to slashing interest rates, is making any difference. These problems were causing by unfettered lending of debts and will not go away by throwing more debts at the public. Until these problems are solved, I don’t believe we will be seeing a bottom any time soon. The current actions by the government is like slapping a band-aid on a shotgun wound.
The fundamentals of our once great country are broken and now we need to rebuild it all based on trust and real measurable wealth production. Otherwise, there will be no consumer confidence. This is a process that will take years and once it happens then the market will find itself again in stable footing.
