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Stock Market Bear Bashing, The Teddy Bears' Picnic: All Eyes On The Broken Clock!

Stock-Markets / Forecasts & Technical Analysis Aug 07, 2009 - 09:15 AM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleFive months later and the S&P went up from 666 to pierce 1,000 and hardly a day passes without another theory for why it will dive catastrophically to 450.

Perhaps one day the watchers of that particular clock will be rewarded, but although they are adamant about the existence of the "end of the world" like Jehovah Witnesses they cleverly don't give any clues about when?

The fact remains that you can buy Coca Cola right now and get the same yield as a dividend as on a 10 Year Treasury except that in ten years time all you will get from a Treasury is par, but it's highly likely the price of Coca Cola will have more or less kept up with inflation.

One thing is for sure; the Bears aren't short of theories:

  1. The "dead-cat-bounce" was the first theory, but there is no record in history of a dead cat bouncing 50%; regardless of how high a building you dropped it from, even if it was dropped from a helicopter ( But perhaps this is a new paradigm?
  2. A reversal after a sucker-rally can never be ruled out, triggered at DJIA 10,000 perhaps? But that's hard to see with interest rates so low, wait for them to start to rise and the clock might get lucky, although again the sages are coy about at what level the rout will begin.
  3. There is of course the "Chart-Fitter" concept, which is vaguely reminiscent of the Rorschach ink blot test that psychologists used to use; the favorite period in history is the 1929 crash:

So where are we now? Is it (A) and its heading, for a 75% decline down to 250, or perhaps (B) bouncing off the bottom and heading for a three year sucker rally up to 2,000 before dropping back to 1,000, or could it be (C), no that can't be right, that was a bull run that had its roots in the greatest stimulus package of all time, World War II. Perhaps that's what's needed, another good war? Watch out North Korea and Iran, and well while you are at it, now that Hillary declared there is a "commitment to Africa", how about Zimbabwe?

Two differences between then and now, first this time the bubble was caused by credit driven speculation on house prices (then it was credit fuelled speculation on stocks), this time interest rates were lowered sharply, that time they were not.

4. The P/E argument relies on the theory that interest rates have got nothing to do with valuation, that is of course a theory that some subscribe to.

5. A conspiracy theory perhaps? Maybe the banks all threw the $3 billion they got in various guises into equities? I doubt it, even with the appalling sloppiness of the monopoly auditing profession and the SEC I doubt if even in America they would be able to count that as Tier 1 capital at par.

6. HFT is a new idea, that creates an illusion of buyers, when in fact there aren't hardly any. HFT reminds me of villas on the Palm in Dubai, for every one that gets put up for sale there are twenty unemployed freelance brokers knocking on their door saying, "boy have I got a deal for you", all of them "employed" by the same one solitary buyer. Then guess what, the guy who paid $3 million for his "dream" and put it on the market for $1.5 million, suddenly ups it to $2 million

OK but perhaps the sellers don't want to sell, because they can't think of anything else to buy and they don't believe the other remorseless bear-call over the past five months (that gold will go to $1,300). And perhaps the buyers are staying away because they don't like paying what constitutes a tax on buyers by the gatekeepers?

7. Nuclear derivatives, sure that was a story in September 2008, but the $400 billion CDS book of Lehman's was cleared away for $7 billion, that's a 1.75% hit and that was in extreme circumstances, and I'm not sure if those two guys who wrote half the un-hedged CDS in AIG got employed anywhere else.

Recently I noticed two (other) analysts who have this lunatic theory that the stock market value has ultimately got something to do with forward earnings and forward interest rates and, and if you apply history to that argument you get a 90% to 95% R-Squared on 50 years to 100 years (depending on if you subscribe to bubble economics or not Lunatic or not, that's how International Valuation Standards says you should do it if you don't trust mark-to-market...or astrology.

In September there was talk of a complete collapse of the whole system and a massive distrust in the numbers put out that had been audited and then approved by the SEC, in fact any numbers produced in America.

It was that fear and disgust that drove stock prices down, not anything else, remember the big investors in stock markets are pension funds plus foreigners leaving their excess dollars from selling stuff, in the country rather than remitting them (and apparently that’s a bad thing?)

Much has been said recently about "protecting the customers" meaning the people who borrowed money to buy houses they couldn't possibly afford assuming prices would go up forever, as if someone else was to blame for that.

But the customers here are investors, they have been treated very-very badly. And America will not move forwards until it can re-establish its reputation as a place where investors, regardless of who they are, don't get ripped off.

I know people who bought AAA toxics from a smooth talking traveling salesman from Lehman as a safe investment for their kids; there was a big sticker on them "Made in America With Pride". It will take a long time before they come back to the trough.

And sure, the audit profession hasn't reformed itself; neither has the SEC provided anything that gives a simple investor confidence that there won't be another "Made Off".

And sure again, the US economy is stalled, and in spite of all the money that was handed over to banks if you are a small business with a good idea in America, you are going to pay LIBOR plus six to ten; that's not exactly a stimulus. Pay a kickback in China and you can get LIBOR plus two, and that's including the kickback.

But another precipitous drop will require another prospect of Armageddon.

Even with everything that happened, it's hard to believe that after the embarrassment of finding out that the audit profession got it wrong by $1.5 trillion and counting, that they and the "watchdogs" in the SEC will just roll over and go back to sleep.

Probably the clearest head around is Bill Gross of PIMCO, his view is that nominal GDP growth will settle down to about 3% annually. That's hard to swallow after the rip-roaring time from 1995 ( to 2006 (housing) but it isn't Armageddon, and now we know that those rip-roaring times were an illusion, fuelled by money that got thrown out on the street that now people either can't or won't pay back.

Unemployment is going to be a tragic reminder that what killed America was a combination of unions, tax incentives to offshore production (or much less disincentive to do the grunt work elsewhere), and idiotic monetary policies. But that's the past (hopefully), and unemployment sad to say is good for the stock market, it keeps labor cost down.

The simple fact is the dive to 666 was a reaction and a shaking out, what's happening is that investors are putting their disgust in what was clearly demonstrated to be the blatant crookedness of the American system to one side.

In 2008 the stock market was not a bubble. It was in the process of recovering from the (that’s how long it takes for bubbles to dissipate).

 The big deception was that banks had booked a lot of assets (mortgaged backed securities), at a lot more than they were worth if you took into account FORWARD earnings (that's what International Valuation Standards calls other than market value) rather than PAST earnings (mark-to-market or mark-to-fantasy). Then all the losses they had accumulated over the previous five years suddenly got written down to some approximation of reality, and the reality in banking is that you lost the money when you handed it over to the person who had no intention of paying it back (and didn't), not when the reality finally dawns.

That was a deception played by the banks on their investors and counter parties, and one thing that spooks investors and counter parties more than anything; is when you lie to them, and then you get found out.

Now the economy is slow, but it's not the end of the world, although obviously anyone who didn't jump in with two feet at 666 is asking himself, "perhaps I missed the boat", but then that's what happens to clock-watchers.

NO POSITIONS: I couldn't persuade even one of my clients to buy at 675 (; they were too busy listening to the bears - sour grapes I guess!

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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