Juggling Dynamite

Recently I am repeatedly asked, “how much worse can things get from here?”
Firstly, no, the string of bad data does not surprise me. It has been a long time building. This downturn is long overdue. Anyone who is taken off guard by market losses to date was quite simply not paying attention over the past couple of years. Those that call themselves financial advisors and have left their clients' capital fully invested in this mess should be ashamed and fired.
As I have repeatedly said over the past year and a half, this is a very serious global slowdown. The worst that we have seen in decades. Where equity markets will ultimately bottom is impossible to predict for sure, but presently probabilities suggest that asset values may fall significantly further over the coming weeks and months. As we saw again today, Canada is now one of the more vulnerable markets to the next phase of this market decline. Having so far corrected only a scant 12% from the peak, the TSX could easily fall a further 20%. Possibly more. And the financials that have led this nasty slide down? Sorry, no signs of a bottom just yet.
Tonight the US Dow 30 Index closed below 11,000 for the first time in a couple of years. The next key level we are watching is for the Dow to have a daily close through 10,770. If it does close through that level in the weeks ahead, (and I think it likely will) then we must be prepared that over the coming months, the overall markets could potentially test their lows from the last market downturn in 2002.
Given our long-standing assessment that we are in the midst of a secular bear in stocks that began with the last downturn 2000-2002, we must be aware that a re-test of the '02 lows is within the realm of possibilities from here. A re-test of the 2002 lows would take the indices to the 7286 range for the Dow, 780 on the S&P 500 and 5700 on the TSX. Such declines would be a crushing blow to buy and hold investors. I truly hope markets do not go there. But the fact is prior cyclical lows have been repeatedly tested in past secular bear markets. That is just the nature of secular bears.
Investors must have a plan to protect themselves and have cash liquid for the next major cyclical buying opportunity that undoubtedly lies ahead.
These are tough times. But they are only horrible times if we are unprepared and left to suffer major capital losses in this downturn. For those that are defensive now and prepared for later, opportunities will abound once again.
For an update on the evolving credit crisis this past week watch this Bloomberg interview this morning with Nouriel Roubini: “Worst Financial Crisis Since the Great Depression and Worst U.S. Recession in Decades.”
Remember that in times of great adversity, those that survive with the least damage will win and live to thrive another day.

Ms. Park will be a guest on CBC Newsworld Business tonight at 630pm, talking about the present bear market and what she thinks likely over the next few weeks and months.

Several readers have been emailing me lately with the trillion dollar questions “are we through the worst of this bear market yet?” and “how will we know when to buy equities again?” Good questions.
My answer to the first is no I doubt we are through the worst of this bear market yet. Counting from the October 2007 peak, we are now into this bear about 9 months. And while the historical average duration of bear markets has been about 10 months, I suspect this bear will prove to be a bit longer than average. Reverting to the mean on various metrics this time will likely dictate a longer than average market contraction, perhaps of the 12 to 15 month variety. US markets are now down by 20% or so. The average bear market decline would be 26%, but in longer more protracted downturns or recessions (as I believe we are in presently) the average bear market is -35%+. So to be defensive of your equity capital, I would remain seated (in cash) with seatbelts firmly fastened for a while longer yet.
In Canada? Today the TSX is only off some 10% from its commodity driven peak. Canada's market corrections generally lag the US. But our losses have also traditionally been more severe thanks to our concentrated market exposure to energy, commodities and financial services. If you don't believe me on this point, please do have a look at any Andex market chart and note the almost perfect correlation between the down and up trends among the stock markets in Canada, the US and the international indices. While you are at it, do look closely at the 1973-74 downturn. This downturn came in the midst of the last great secular uptrend in commodities, and Canada did not follow the US into recession in 1974. We still lost half of our stock market value along with the US.
At our firm, we will buy equities again as various indices and sectors come up in our analysis as buys. We don't call these things on “gut”. There are many indicators that help to give us an objective assessment on the probability of investment success through the various phases of this market cycle. The probability of success does not yet favour long investors.
If we are finally into the belief phase of this correction, the next leg of the downturn could happen faster than most understand. Or this contraction could continue as it has for the past many months, like a long-slow train wreck that grinds buy and hold investors down over coming weeks and months. To make matters more confusing for many, within the down trend we should continue to see big up days and even up weeks. And still the overall trend will grind on down.
At this point, sentiment is still too hopeful. So far the masses are still listening to the broker-dealers and their party line about this being a minor “correction” for “long-term” investors.
I know this first hand because everywhere I go regular people are talking out loud to me about the markets and their sentiment. Getting my hair cut, car serviced, or at the garden center. People who know I am a market analyst start telling me they have lost money but they are not too worried as they have spoken to their investment “guy” or “girl” and they have assured them that markets have their ups and downs, best to just hold and ride it out. I usually just smile pleasantly and try to change the topic. After all, as my dad always reminds me, you can't save the world, and most have to learn the truth about these things the hard way at least a couple of times. But in my mind I often hear myself screaming, like the ghost in The Amityville Horror, “GET OUT! GET OUT!” Maybe they will start reading my blog and take steps to protect themselves before it is too late. This is my hope.
For those looking for an excellent big picture update of what has happened so far in this economic downturn, and what we may be seeing next, read this article from economist David Rosenberg and his ” five phases of this economic down-cycle” and watch this recent CNBC interview clip with economist Nouriel Roubini.
And keep reading this blog. When we do see the probability of a lasting bottom, I will be telling you about it here.