Another View

I was sent some commentary from a strategist at another firm.  Here are some highlights:

By the time this is over, we could be slapping a classic recession trough multiple of 12x on an earnings stream that is closer to $50 than the current consensus $70 EPS estimate (as an aside, the multiple has troughed in single digit terrain half the time, in both deflation and inflation times).

(It) goes without saying that there is likely no bottom in the overall market until the (financials) group finds a trough – which means that not only are we talking about a “6-handle” on the S&P 500, but that we probably have at least another six months of this bear phase. We have said time and again that investors should stop timing the end of the bear market, but for those who simply cannot resist the temptation, here is our view:

  • The market will bottom six months after the financials find their trough.
  • The market will find a confirming bottom once it crosses above both the 50- and 200-day moving averages. [DI: the S&P 50-day is now about 840 and the 200-day is about 1000. So we need a big rally or a lot more sideways action to cross both of these moving averages.]
  • The market bottoms 4 months before the recession ends (this is the average and median lag going back through 100 years of data), which we do not expect to see before the first quarter of 2010.
  • Bottoms form when fear overwhelms long-term resolve. Fear has yet to set in, beyond say a few days. So what has to happen is what happened in June 2002, when the Sept/01 intermediate low was not just broken but it was punctured and continued to slide each day until we did get that fundamental bottom in Oct/02 – which was 20% below what was perceived to be the end of the market more than a year earlier (i.e. call us at 600 on the S&P 500 – that may be the level to start putting cash to work). [DI: I have mentioned repeatedly of late how we could get to 600, but I have to strongly disagree that fear has not set in. I think we’ve been seeing panic for months.]

Net: the final market bottom is Q4 of this year and we have another 22% to drop in the S&P.  Ouch.  I’m not endorsing this analysis, but it is plausible.

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