Bottom; where is the stock market bottom?
Dr. Neville Bennett
Christchurch, New Zealand
July 26, 2002
n.bennett@hist.canterbury.ac.nz.

Panic in world stock markets has been interspersed with strong rallies. Investors under stress drive markets. Their emotions are extreme in volatile markets. One day they mutter “capitulation”, the next they perceive “value’, and go bargain hunting. Last week has seen 5 year lows and 15-year record gains in one day. The yoyo is classic bear market behaviour.

The art is in picking the bottom. Buying cheaply can be hugely rewarding. The rewards motivate risk takers to back the rallies. Much bullish sentiment has survived the 28-month decline in the indexes. Some expect an early recovery. They are unlikely to be right.

The fault lies in the assumption that panics create “v’ patterns of crash and quick recovery. To be sure that happened after September 11, but few people doubted the market then. The problem was terror. A quick recovery did not take place after New Zealand crashed in 1987 and Japan in 1989. Japan has lost three quarters of its value. Wall Street may not bounce back.

Bears stress the nature of the investment cycle. Markets increase in a bull run to a top and then decline into an intensifying bear market. The bottom is deep and protracted, and the majority of stockholders sell out. When stocks are dirt-cheap bottom fishing starts again, confidence tentatively recovers, stock ownership broadens again, stocks increase more rapidly in price, euphoria takes over, the public become engaged, and stocks are over-bid.

This classic scenario requires extreme sell- offs, which have not yet occurred. A good measure is the number of days when 90% of stocks fall in value.

Another indicator of a bottom is when stocks offer very good value in price/earnings terms. The S&P 500 is presently at about 900 and yielding a P/E of 30:1. Bears expect it to fall to 500 where it will yield a P/E of 15:1. The fair value argument sees the bottom a long way away.

Share values have been inflated by a lot of hype, which has drawn in an ever-widening group of citizens. Many will now feel disillusioned by the 40% fall in shares this year, and rue reading market analysts who have overdone their recommendations. Merrill Lynch has reached a $100 million settlement in May with the State of New York after its analysts were accused of ramping shares to lure banking clients.

Increasing investors are searching for alternative advice. The debt rating agencies (such as S&P, Moody’s) are taking centre stage because their warnings proved effective in the case of WorldCom and other spectacular bankruptcies. Debt raters assess a company’s ability to repay their debt based on financial and industrial conditions.

The accounting problems and fiddles now being revealed will deepen the lows of many shares. More revelations of malpractice are anticipated, and it seems likely that the market will be down further by September/October, which was the bottom period in some recent bad years like 1982, ’86,’87, ‘ 90, ’94 and ’98.

Chartists also feel the bottom is remote. Most indices are in a classic “head and shoulders” pattern, which seems to portray great downside potential. {

It is only now that some indications of financial stress are appearing. But it is usually supposed that massive crashes in Enron, WorldCom, the tech wreck, must have wounded deeply some financial institutions. Where are the casualties? When will there be an upsurge in margin-call selling, or in index fund redemptions?

The tech, media, and telecom sector (TMT) has fallen 70% from its peak. America-on-Line is typical of the group. But the group still does not look cheap as earnings are down and debt levels seem excessive. There can be no recovery until this sector looks healthy.

Financial stocks are beset by vigorous rumour. Few spokesmen say much for fear of setting off an avalanche. But it does appear that Citigroup and JP Morgan had crisis talks last Wednesday on account of their derivative books. Morgan has $24 trillion derivative position, which eclipses Long Term Capital management’s exposure.

The bottom may not be at a defined level. US equity prices and consumer confidence are correlated. The panic has shown up already in lower consumer expectations, according to the University of Michigan. The risk is that contracting wealth will trigger reduced spending, as it has in deflationary Hong Kong and Japan, causing business to report lower earnings and also curbing their investment spending. This process stalls the economy and slowly ratchets down the indices.

This analysis also contradicts the current wisdom that declining stock markets are out of step with a vibrant economy. It is usually wrongheaded to dispute the wisdom of the market. A more appropriate argument is stock market is a sensitive leading indicator of the economy’s direction. The market is pointing towards a recession.




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>Bears expect it to fall to 500 where it will yield a P/E of 15:1.

Nee, ein richtiger Bär erwartet ein P/E von 5 - 7 ;-)


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>>Bears expect it to fall to 500 where it will yield a P/E of 15:1.
>Nee, ein richtiger Bär erwartet ein P/E von 5 - 7 ;-)

-----------------
na immerhin gings in den letzten Monaten schon deutlich in die Richtung ;-)
Jeweils als Durchschnittswert für den Monat gab es für den S&P500 <pre>
Apr-02 45.12
May-02 43.90
Jun-02 41.14
Jul-02 36.91</pre>

Gruss
Cosa


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>>>Bears expect it to fall to 500 where it will yield a P/E of 15:1.
>>Nee, ein richtiger Bär erwartet ein P/E von 5 - 7 ;-)
>-----------------
>na immerhin gings in den letzten Monaten schon deutlich in die Richtung ;-)
>Jeweils als Durchschnittswert für den Monat gab es für den S&P500 <pre>
> Apr-02 45.12
> May-02 43.90
> Jun-02 41.14
> Jul-02 36.91</pre>
>Gruss
>Cosa


Salut Cosa

besten Dank für deinen Service.
Eine Frage:
Verfügst du über verlässlich Zahlenreihen über
die FED Rates über die letzten 80 Jahre und
die Inflationsraten.

Wäre es dir zudem möglich, einen Chart zu zeigen
der die Differenz (Rate minus Inflationsrate) und die P/E des SPX
Entwicklung über dieselben Zeitraum zeigt.

Ich gehe davon aus, dass eine Korrelation besteht und
erstere als Vorlaufindikator einige Schlüsse zulässt.

Gruss


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Hi Jacques,

da gibt es schon einiges an Daten; vom S&P500 das P/E Verhältnis (auch inflationsbereinigt) und Kurs jeweils monatlich seit 1881 - wenn's genehm ist ;-)

Die Daten sind von Robert Shiller, denke absolut zuverlässig. CPI-U wird vom BLS eine Zeitreihe seit 1913 angegeben - geht auch. Von der Fed kenne ich seit 1914 eine Zeitreihe zum Diskontsatz.

Mal schauen was rauskommt, wird aber wohl erst Morgen was, aber interessiert mich auch.

schöne Grüsse
Cosa

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>da gibt es schon einiges an Daten; vom S&P500 das P/E Verhältnis (auch inflationsbereinigt) und Kurs jeweils monatlich seit 1881 - wenn's genehm ist ;-)
>Die Daten sind von Robert Shiller, denke absolut zuverlässig. CPI-U wird vom BLS eine Zeitreihe seit 1913 angegeben - geht auch. Von der Fed kenne ich seit 1914 eine Zeitreihe zum Diskontsatz.
>Mal schauen was rauskommt, wird aber wohl erst Morgen was, aber interessiert mich auch.


Das wäre fein.

Ein Vorschlag: Die P/E's vorzugsweise infla unbereinigt, die Differenzen Diskontsatz und Inflaratio falls möglich, mit Faktor 10 multipliziert, damit auf y-Achse zum P/E besser vergleichbar.

Herzlichen Dank im voraus für deine Bemühungen und ein schönes WE

Gruss
jacques

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