Saturday, March 01, 2008

Bear market on schedule

The S&P 500 lost 3.5% in February, which ended up being neither flat nor a fool's trap. Instead, the bear market is plodding along without much regard for the time of year. With Friday's close of 1330, the S&P is now down 15% from the October 9 high, and is only 20 points away from crossing the low of 1310 on January 22.

My long term forecast is unchanged, and I'm still expecting a market bottom around 8500 on the Dow and 940 for the S&P. Based on the schedule of the 1946 crash, there may be another month or so of flat market performance before the main event gets underway.

From a fundamental standpoint, things have only gotten worse on Wall Street, and there's really nothing that Bernanke or Buffet can do about it:
  • The Federal Reserve's lowing of interest rates has taken the squeeze off of some homeowners, but banks and other lending agencies are still being tight with their money out of fear of future defaults and write-downs. This reduces the availability of every kind of loan, including home, auto, and student loans for college.
  • The resulting lower bond yields are making U.S. Treasury bonds less attractive to foreign investors. Much of the $9 trillion federal debt is financed through sales of Treasuries, so reduced demand will only hasten the decline of the Dollar and lead to more inflation here at home.
  • The corporate buyback binge continues unabated. In fact, stock repurchases are so large now that some companies are borrowing money to finance them! Last year for instance, IBM borrowed $11.5 billion solely for the purpose of buying back shares. This only hurts long-term owners of IBM stock, since IBM will have to pay off these loans at the expense of the already tiny dividends. Why not forget the buybacks and simply pay shareholders with quarterly dividends instead of paying banks with monthly loan payments?
In short, all signs indicate that U.S. stocks are still highly over-valued, and that the bear market will continue.

1 comment:

Keith Wilson said...

Once again, your analysis is extensive and so far, right on target.

You look only at the facts, compare to past history, and then make unemotional predictions. That is why you are so accurate in your analysis.

Great job once again.