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There IS A Floor Down There

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About two months ago, back before the Dow had even broken below 10k, in conversation with Kelly I pointed to the 5k range as being where I expected to start seeing a floor finally coming into view. A week or two later on one of the market TV programs, I heard the same range predicted by one solitary analyst, explained using much of the same thinking that had gone into my own off-the-cuff call. Almost all other analysts have hidden behind the curtains when the market has been dropping, then ventured back out to hope we’ve already seen the bottom when the market has taken a breather after getting ahead of itself. Since that one 5k call over a month ago, I’ve not heard anyone else setting any market target that low.

But I’ve sharpened my own amateur’s pencil enough to feel comfortable doing so. I think the high 5k range to be our most likely cellar floor, and I’m expecting to see that target holding us through late summer into early autumn next year. If panic over reaching sub-8k then sub-7k ranges seize investors, accelerating the decline and driving it deeper faster, then I expect the bounce to be sharp at first, although that then should level back out as we come back into current ranges, with 10k not again likely until 2010 at the earliest. If the market has already taken enough laxatives to clean out its tubes, so that it drops more lazily into early 2009 and never actually manages to make it below 6k, then I won’t be looking for recovery to be as fast or as sharp.

I’m pricing a deep recession lasting at 30-36 months into my projections, with extraordinary failures stretching from corporations to state governments and countries, together with bailouts and other government intervention that will make TARP look like a pup tent. Give us trouble beyond that or permit the government to keep shoveling uncertainty into the markets, and the lower 5k region or even sub-5k is not outside the realm of the possible. So if our freefall elevator gets down to the first floor and I see more than one basement below us, don’t be surprised to see me revise my numbers downward another floor or two. But I currently see nothing giving me any hope that the market won’t at least stick its head into the cellar I’m seeing down there.

Meanwhile, I’ll let the Warren Buffett’s of the world get their army boots through the elevator door early, while we’re still in freefall. Although I don’t think it’s time to turn into a sell-low investor, neither do I yet see opportunity for any major buying. For now, we remain 0% invested in equities, as we have been all this year.

bumper sticker [] - calls & puts

Written by macheide

20 November 2008 at 6:13 pm

Posted in calls & puts


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