Hope springs eternal…and then gets whacked.
Big jump in the Dow yesterday – up 889 points. Does this mark the end of the downturn…the bottom of the bear market…the worst it’s gonna get?
Everyone hopes so. But don’t count on it. There is almost always a large rally before the final bottom is in. Hope…followed by disappointment. Often several times. Over a long period of time. And by the time the final bottom comes, investors are so broke, so depressed, so fed up that they no longer care.
The Japanese market hit a high over 30,000 on the Nikkei Dow in January of 1990. Stocks plunged. Investors have been waiting for a recovery ever since. This year, for example, Japanese stocks have lost 50% of their value…bringing the index down to the 8,000 range, the lowest it’s been since 1982!
Compared to long-term investors in General Motors, the Japanese are lucky. GM is now trading in the $5 range – a price it last saw when your editor was born 60 years ago. But even that could get worse.
“End of the road for US automakers?” asks a headline in the Los Angeles Times.
Meanwhile, Detroit seems to be becoming a ghost town…or a hellhole like Port-au-Prince, Haiti – with ice. Mansions once owned by auto industry tycoons now selling for $100,000 or less. But just wait until the auto industry shuts down completely!
Where and when will the bear market in the United States end? No one knows. But it could end on some sad day 20 years in the future. Between now and then however, typically, a major bear market gives you a second chance to get out. After the October crash in ’29, stocks rallied until April…then they started to slide again and did not fully recover until the 1950s – more than 20 years later.
At today’s levels, U.S. stocks are not terribly overpriced. If you look at the stock market over the last 100 years, you find stocks usually trading in a range similar to where most are now. They are, say the analysts, at “fair value” with the Dow anywhere between 6,000 and 9,000. But earnings are falling. And stock prices lead earnings. In fact, they are thought to “look ahead” and track future earnings. If the First World Depression – of FWD, for the history books – unfurls as we expect, stocks could be “fair value” at much lower prices.
The other thing that is likely to happen is that stock values could become “unfair.” It was unfair to charge investors $90 a share for Micron…or $120 a share for Yahoo…or $70 a share for KB Homes. Soon, it may be similarly “unfair” to pay investors only $5 for their shares in KB Homes, or Yahoo…or only 50 cents for a share in General Motors.
Typically, everybody overdoes it. Coming and going. On the upside, they get carried away and pay too much. On the downside, they panic…then lose interest…and won’t pay enough. The “overshoot” usually goes to about half again as much – at least on the downside. That is, stocks fall to what might be considered “fair value” by most measures…and then they fall another 50%. So, if “fair value” is 8,000 on the Dow, you should expect the Dow to hit 4,000 before the bottom is in.
But here at The Daily Reckoning, we are always walk on the sunny side of the street. Our optimistic guess is that that the Dow will fall to 5,000. Perhaps sooner, rather than later.
Mr. Market is a strange fellow, isn’t he? When he is pushing up prices, everyone loves him. When he is knocking them down, the mob gets a rope and comes after him. Even the short sellers turn against him, because he inevitably disappoints them too – causing stocks to rally strongly even in the midst of a major bear market.
Believe it or not, now the capitalists are arguing that they should be allowed to ignore Mr. Market altogether. They want to use “fair value” accounting on their financial statements. They don’t like Mr. Market’s offer. So, they hope investors will accept their idea of what their stocks and assets “should” be worth…rather than what they are really worth. “Mark to market” asset valuations are “unfair,” they say.
We don’t recall them complaining when “mark to market” put their asset prices far higher than they were really worth. Besides, whoever said Mr. Market played fair?
for The Daily Reckoning Australia