To be sure, this reeks of socialism and is delaying the "business cycle" as I used to understand it. In my humble opinion, the longer the cycle is delayed, the longer it will take for confidence to be regained in the system, not the opposite as government officials mistakenly believe. After all, haven’t they noticed that every time they intervene/intrude, the credit markets and equity markets sell off right in their face? I certainly have noticed this, which lead me to the conclusion that intervention/intrusion are the absolute worst direction to go.

I say let markets be markets, that those that have made mistakes suffer and that those that have sinned pay for their sins. But not with my money. I have spent my adult life, being prudent, saving money, investing wisely (most of the time) and being prudent with other people’s money. It should be my choice if I want to own impaired CDO’s, Fannie/Freddie/AIG and a bunch of impaired bank stocks, not the choice of the Fed, Treasury and Congress.

Perhaps injecting equity into banks around the world will encourage them to lend, perhaps not. More likely, it may be the cushion necessary to allow banks to write down/write off assets and return to lending. The question that lurks in my mind is lend to whom?

Consumers have over-consumed for so long that I wonder if freer credit will actually allow the economy to grow. See a chart of Mortgage Delinquency Rates.

Why Have Stock Prices Fallen So Quickly?

The pace and severity of the decline in global stock prices has taken many by surprise. I have to admit that although I have maintained a target for the S & P 500 of 500-650 for quite a while now, I too have been a bit surprised by the speed at which the avalanche of stock prices has taken place.

Then again, I have stated for months that we were living in a world of a Tale of Two Markets, where the credit markets were dying a slow death and the stock market proceeded merrily along. So it is my opinion that the stock market has simply caught up to the credit market, a market with little liquidity and loads of assets for sale due to mutual and hedge fund redemptions in addition to margin calls.

The chart below of the S&P 500 says it all—the uptrend from the 1982 was broken and support line after support line has been broken. It is said that "in bear markets, support exists to be broken." The next line in the sand is in the 750-775 area, the area that was the bottom of the previous bear market low in late 2002-early 2003. But if that support line is broken, it brings into view the uptrend line from the 1974 low in the 500-550 area. I have no idea if this will occur or if markets will bounce from historically oversold conditions, but will stand by and watch. Please note that we do not currently maintain a position in the S&P, neither long nor short. See a Long Term Chart of S & P 500 in logarithmic terms.

Summary--What would it Take For Me to Turn Bullish on Equities?

• Credit markets need to normalize and spreads tighten.
• Allow markets to function without government intervention/intrusion.
• Equity valuations need to become oversold, not just stock prices.
• A return to ‘Social Darwinism’ – allow the weak to fail.
• A rise in the personal savings rate, even at the expense of recession.
• Leverage reduced at the corporate and consumer level.
• Presidential cycle to reach a low (October 2010).
• LIBOR to normalize.
• Most importantly, we need time to heal the market, not just price.

When I consider the bullet points above, I think of the lyrics at the outset of this piece from my teenager days. I believe that the markets have not been permitted to react on their own in a traditional manner since 1997 and the Greenspan days. Instead, we suffer from chronic dependence on a Fed/ECB/Treasury that seems more interested in asset price increases than they do in price stability and normal business cycles.

Government officials have the fight of their life on their hands and it appears that each time they intervene it delays the ultimate economic outcome, and possibly even reduces the bottom in equity prices further than I can imagine.

The avalanche in equity prices has begun and when I think of the amount of assets that have been lost in a short period of time, I shudder. Pension plans around the globe are now woefully underfunded. In addition, mutual funds and hedge fund redemptions will continue into year-end.

Earnings estimates will fall unless credit spreads and LIBOR normalize quickly. We are about to possibly enter a period of substantially higher tax rates on high wage earners. Margin clerks are busy asking traders to sell, and mutual funds and 401 (k) plans have liquidity and credit problems. Credit issues are now spreading to commercial and construction loans not to mention credit card delinquencies on the rise. Unemployment is likely certain to increase further and jobs will be lost to emerging markets.

The point here is not to depress anyone or to sound like a spoil-sport. Instead, we must face the issues at hand and deal with them in a fashion that is not a constant "Band-Aid." The only way stocks could be deemed "cheap" here is if we believe the Wall Street S&P 500 estimates of 2008 estimates of $75 per share. We actually think 2009 earnings will come in around the $55-60 range at best which would suggest an index price target (if a "normal secular bear market bottom" P/E ratio of 8 to 10 times earnings) that coincides with the price on my S&P 500 chart of 500-600.

Bounces along the way are inevitable, but for a true bottom to be put in place, some more work needs to be done to the downside.

This may be a trader's paradise, but investors beware.