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Bottom Fishing: Let's Hope It's Different This Time
Posted Oct 29, 2008 10:18am EDT by Aaron Task in Investing, RecessionTuesday's huge rally and expectations for rate-cuts not just from the Fed but central bankers worldwide helped global stocks rally Wednesday.
U.S. stocks dipped early in the session, but the conventional wisdom among traders is the market is going to move higher, perhaps dramatically, between now and year-end due to a combination of rate cuts, attractive valuations after the decline and (mostly) fund managers' chasing stocks for fear of missing a rally.
Have been burned by many false dawns in recent months, many investors are understandably wary about making aggressive bets here, and history suggests caution is warranted.
WSJ columnist James Stewart notes the S&P's 40% drop from its year-ago peak parallels the index's move from its 1929 peak to late September 1930.
"If you bought stocks at that point in 1930, you faced a further severe decline," Stewart writes. "Stocks had another 40% or so more to drop, but that's a much higher percentage of the price you just paid. Measured from 1930 to the low in 1932, the S&P 500 lost nearly three-quarters of its value."
To be fair, Stewart's larger point is that we're almost certainly not going to repeat the Great Depression and that stocks significantly outperformed Treasuries in the 5-, 10-, and 15-years after bottoming in 1932.
Of course, past performance is no guarantee of future returns and it is possible the market has put in a true bottom at its recent nadir. But the bottom line is "no one has any idea what is going to happen in this market. NO ONE," as billionaire blogger Mark Cuban writes.
While "it's different this time" are the most dangerous words on Wall Street, Cuban makes a compelling case that it's actually true now, citing the following:
- Until this past year, at no other time in U.S. history were investment banks leveraged 30 or more to 1.
- At no other time in the history of this country did the savings rate fall as far below zero.
- At no other time in the history of this country were net effective interest rates as far below zero.
- At no other time in the history of our markets have the words "blue chip" completely lost their meaning.
- At no other time in the history of the markets are there 17k mutual funds and more than 10k hedge funds -- and the portability of money in and out of those funds has never been easier: We as consumers have zero transparency as to whether or not there is a run on our funds.
- At no other time have their been three financial news networks and thousands of websites providing so much financial information and opinion.
Points well taken Mr. Cuban, but don't forget about blogs.
48 Comments
__A_YAHOO_USER__ - Wednesday October 29, 2008 10:31AM EDT
Another 900 points up rally this time will shock the short selling.......I know they win a lot but another one like today will make a difference.
Steven - Wednesday October 29, 2008 10:39AM EDT
10K hedge funds and absolutely no regulation, accountability, or capital gains taxes in most cases. I feel so safe.
Yahoo! Finance User - Wednesday October 29, 2008 10:42AM EDT
We are at the rim of a financial "perfect storm".
- Wednesday October 29, 2008 10:48AM EDT
A run-up until Halloween.................then get ready for a 1,200 pt. MELTDOWN. YEHAWWWWWWWWWWWWWWWWWWWWWW.
sportsmadness - Wednesday October 29, 2008 10:49AM EDT
The only rate I want to see cut is the mortgage loan rate. Yesterday the CEO stated he wanted to see it around 3%. The last time that happened he said the housing market made a huge rebound.
Yahoo! Finance User - Wednesday October 29, 2008 10:53AM EDT
Very good points from Mark Cuban
sportsfan - Wednesday October 29, 2008 10:54AM EDT
Mark Cuban is an idiot. He's one of those people that got lucky in the tech boom (statistically, SOMEBODY had to get lucky, by large numbers). He carries on like a moron at basketball games. He gives "noveau riche" and "Ugly American" new definitions. Just because he got lucky in business does not make him a genius in predicting stocks. We'll see if he's a contrary indicator.
Yahoo! Finance User - Wednesday October 29, 2008 10:56AM EDT
From a technical point of view, there was a 2 week long small triangle, plus diversion on the oscillators. In other words a predictable technical bounce. And note that the bounce has reached its target of about 9000. Its not safe to go into the water yet folks. The Dow is also sitting on a trend line formed from 1988 to about 1995. This will probably hold, but it means that at best the Dow will slowly crawl up along this trend line . Alternatively it could just remain on this 8000 fibonacci level. The good old days of big moves are over. If this 8K line breaks, the sh@$ will hit the fan.
Yahoo! Finance User - Wednesday October 29, 2008 10:56AM EDT
Waiting with bated breath, the vaunted interest rate cut, a magic elixir to save the pubic beast. Sure, more borrowing is what we need, we pay from the future, of course. The creditors, to which we continue to prostrate ourselves are all already awash in the US dollar. If we borrow enough we may stave off the day of reckoning a bit longer, after all it worked before didn't it? Doesn't inflation FIX every thing? The dinosaur
Harold - Wednesday October 29, 2008 10:57AM EDT
THE FED CUTS INTEREST RATE BY 2 POINTS. Ok so, let's say this was actually true. Does it really change anything? Companies are still posting 3 qtr losses, consumer confidence is what it was yesterday, foreclosures are still on the market and layoffs are still happening as we read this. So, we may get a 500 pt. rally in the market today. That just means that tomorrow is going to be another sellers market. VOLATILITY IS HERE TO STAY FOR A WHILE.
JOED - Wednesday October 29, 2008 11:01AM EDT
The sharks are waiting for your money today... don't jump in yet!
rockjock1037 - Wednesday October 29, 2008 11:09AM EDT
I love the smell of chaos in the morning...
Yahoo! Finance User - Wednesday October 29, 2008 11:10AM EDT
I would have to say...this is special!! This is a once in a lifetime phenomena and quite frankly, no rate cut will be enough. The market will do whatever it wants. These day to day fluctuations are purely speculatory!! If you can live with a stock fundamentals and price (and don't compare it to a year ago - that was superficial), then get in. Otherwise, stay out!! My real concern is that after the market stabilizes (whenever that will be), there's that "small" issue of all the money the already-very-broke govt is throwing out right now. Too much money (+low rates) = inflation AND...all the borrowing is from somewhere (China, Russia etc).
sportsmadness - Wednesday October 29, 2008 11:12AM EDT
Correction: The only rate I want to see cut is the mortgage loan rate. Yesterday the Pulte Homes CEO stated he wanted to see it around 3%. The last time that happened he said the housing market made a huge rebound.
Mark - Wednesday October 29, 2008 11:13AM EDT
The volatility in the markets will continue until Obama is elected, at which time there will be a huge rally to show confidence in Change.
sportsmadness - Wednesday October 29, 2008 11:14AM EDT
Henry and Aaron Guys guys, lets not turn this into a Beavis and Butthead analysis.
t - Wednesday October 29, 2008 11:14AM EDT
this is the downwave. Markets, housing and econimy have got more years of going down. Everything goes down including gold. Lasts way too long and ends in wars. The joker in the pack is oil which may jump up again sometime just to make the downwave worse. About 2015 we should be out the other side and getting back to normal. Unless there is some genius leadership in the world which might just happen.
adarmiento - Wednesday October 29, 2008 11:18AM EDT
I keep hearing that the P/E ratio is at the same levels as it was in the past such as 1970's. Okay, then I want my 6.5% dividend on my S&P 500 index fund since when the P/E was traditionally low (i.e., 50's through 70's) the dividend yield was a lot more than the measily 1 or 1.5% during the 1980's - 2000's proliferation of "growth stocks". If all you naysayers want to refer to history to justify this low P/E, then don't ignore the fact that dividends were a lot better back then.
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sportsmadness - Wednesday October 29, 2008 10:31AM EDT
If you notice the "VW" stock today, they are posting massive pullback since yesterdays huge rally gains of over 50%. I heard an analyst say yesterday that the market has no firm footing yet. The voloatility will continue because the swings at this time are emotional bargain hunters and have nothing to do with economic progress in any of the sectors. To say happy times are hear again is "DAMN FOOLISH".