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On Calling a Bottom

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By Election Day, I think we’ll be happy if 12k would serve as reasonable target to climb back up to.

aftermath (5/20, after the Dow closed at 12828.68)

Well, here we finally are, just around the corner from Election Day. And yes, we would be happy, indeed quite surprised, if we could realistically set a 12k Dow as any reasonable target to climb back up to. At the time, just before Memorial Day, nobody else I was reading in the business press or watching on the business TV channels was breathing a word about the market even dipping into the 11s, much less far enough so to consider 12k a “happy” target to reach for.

I’ll tentatively set my expectation for the market within the next 18 months to steer downward toward 10k.

aftermath (5/27, after the Dow closed at 12548.35)

The biz press & TV were still talking like the Dow’s loitering in the 12s was but a temporary lull, with some prognosticators pointing up to 15k and even beyond. I had already given up on expecting to see 13k again, and felt that we were headed lower, far far lower. I anticipated seeing sub-10k levels by early 2009, but gave my prediction an 18-month horizon just to be on the safe side of the intermediate term of my expectations.

I expect us to be between 10k and 11k by September.

aftermath (7/24, after the Dow closed at 11349.28)

Technicians were scurrying around with their charts, all pointing to perceived bottoms, at that time none of them calling for numbers below 11k. I had already started talking about how long I thought it might take to find the sub-10k floor I still did not see anywhere near. I felt the market would continue drifting slowly down down down, but verbally did sketch out how equities might drop like a rock if and when other selling – such as that from hedge funds or 401(k) plans – might join the on-going pension plan selling in some sort of panic.

Before we reach the end of 2008, I expect the Dow to dip below 10k.

aftermath (9/4, after the Dow closed at 11188.23)

As close to the precipice as we stood at Labor Day, at that point there still were no TV or newspaper analysts daring to point further down. Whereas I couldn’t see anything that would give us any sustained climb, and only pointed vaguely at the next four months just to hedge my bets. I didn’t believe it would take very long to drop below 10k. Just, outside of the panic I’d briefly sketched out mid-summer, I didn’t expect it to fall quite so dramatically.

So then, where do we go from here?

If one were to eliminate that economic risk premium from corporate bond yields and consistently eliminate the same economic risk premium from the valuation of equities, we’d be looking at an S&P 500 index of about 1300.

aftermath (10/22, after the S&P closed at 896.78)

Yeah, but read that correctly and you’ll know I was definitely not predicting a bull 1300 S&P anytime soon; rather, I was trying to point out that analysts who were expecting corporate bond rates to fall precipitously ought also price a 1300 S&P into their pension funding calculations, else their results are grotesquely unrealistic.

And actually, the S&P chart shown on that post suggests where I personally see the market going. Since that chart suggests that the market decline this year may have been driven largely by perceptions of economic risk, without having yet priced in the significantly lower corporate earnings we are about to start realizing. Bring the risk element down to a soft landing while bringing in lower corporate earnings and other negative factors we’re seeing, and 2-3 weeks ago – before we heard much the same analysis broadcast on TV – I told Susan and Kelly that a 5k Dow was not outside of the realm of the possible.

By this time next year. All through this decline, the market has been reaching my floors faster than I was calling; and we may still see another elevator drop or two over the coming months. But whether slow or fast, I do believe we are going materially further down. If not all the way down to 5k, then making up for it by lasting longer at whatever cellar floor – at least down to 7k, perhaps down to 6k – we do finally land on.

bumper sticker [] - calls & puts

Written by macheide

28 October 2008 at 6:18 pm

Posted in calls & puts


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