A Beatles' Guide to the Bear Market
By
Bennet Sedacca
Mar 09, 2009 12:10 pm
What the Fab Four can teach us about those reviled ursines.
The long and winding road that leads to your door,
Will never disappear,
I've seen that road before it always leads me here,
Leads me to your door.
A common truism about bear markets -- that they can only be resolved via time and price -- is widely misunderstood. While predicting future prices is a dangerous affair, it’s even more difficult to grasp the other element of resolution - time, or how long it will take to reach bottom.
But when earnings estimates are nearly impossible to guess, we must revert to other, more tangible measures: price/tangible book value (note that I use tangible book value, which excludes nearly worthless assets like goodwill), price/Tobin’s Q Ratio (Tobin’s Q is the “replacement value” of a particular company), and price/free cash flow.
My price targets over the past few years were for an initial stop of the S&P 500 at 750, then 600-650, then 500, then the eventual 450 level. Despite my expectations of miserable earnings and global deleveraging, I’m sad to say that my ultimate targets may have actually been a bit too optimistic. My price target now for the S&P 500 is in the 350-400 range, which is still a decline of 40-50% from current levels.
My target in terms of time for the ultimate S&P low has been early to mid-October 2010, which coincided with the typical low seen in October of the second year of a presidential term.
As longtime readers may recall, I find the presidential cycle to be the strongest and most predictable cycle. A report out of Pepperdine University suggested that, since 1952, if you had been invested in the S&P 500 from Day 1 of a presidential cycle until mid-October of the term’s second year, a $1,000 investment would have turned into roughly $650, without even adjusting for inflation.
If, on the other hand, you had invested from mid-October of the term’s second year and sold on the last day of the term, your $1,000 would now be worth $71,000. Without a doubt, this is due to stock prices, economic circumstances, and Gallup approval ratings, all of which are amazingly synched.
Even if we’re lucky enough to estimate the ultimate bear-market bottom, this is only part of the equation. Making it through a bear market with the bulk of one’s capital intact is obviously the first priority. Buying at depressed levels, even within the confines of a secular or super-bear market, can be highly profitable.
Assuming we get the estimate even close to correct, we must then again guess just how long it will take before we start the next secular bull market. My guess is it will be at least 10 to 15 years from the secular bear market low, which I guess will be in 2010.
No positions in stocks mentioned.
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(18)
Reply
2009-03-09 13:11:15
$SPX price and time targets
Bennet,
Been following your stuff for a long time. Nice article today S&P potential targets. I also did some Long term fib work over the weekend looking at the monthly S&P 500 $SPX chart simply from the perspective of a day trader:
The monthly chart I posted shows that time wise - an ideal monthly fib time correction of the 2002 - 2008 bull run would be 50 to 61.8% of the time spend in the Bull phase. Ideally that would place April '10 to Nov '10 as an ultimate end of the bear market.
At the earliest, Sept '09 would be the minimum time to look for the end of a bear market, which would represent only 38.2% of the time spent in the bull phase.
In terms of price, your downside revisions also do not seem outlandish. Typically when prices break 78.6% retracement of a bullish move, the decline extends 1.272 in terms of price. This translates to a 549 initial target on the S&P500 $SPX cash index. Losing that price projection/support level means that prices typically travel up to 1.618 the distance of the rally to much lower levels.
Although the market's path is guaranteed to no one. It does give one pause. I do have a partly baked idea that since 1987 with all the derivatives traded on the stock indexes, that this market trades more akin to commodities than traditional stocks. If so, many stock investors are not prepared of how just one sided and unrelenting commodity trends can be. Just look at Natural Gas for example, how many bet the decline from the $12 highs basis the April contract, were over at $6. Now its traded less than $3.90. This move was straight down with not even a counter-trend bounce exceeding 5.5%.
Charts posted at http://www.tradingpoints.net
Been following your stuff for a long time. Nice article today S&P potential targets. I also did some Long term fib work over the weekend looking at the monthly S&P 500 $SPX chart simply from the perspective of a day trader:
The monthly chart I posted shows that time wise - an ideal monthly fib time correction of the 2002 - 2008 bull run would be 50 to 61.8% of the time spend in the Bull phase. Ideally that would place April '10 to Nov '10 as an ultimate end of the bear market.
At the earliest, Sept '09 would be the minimum time to look for the end of a bear market, which would represent only 38.2% of the time spent in the bull phase.
In terms of price, your downside revisions also do not seem outlandish. Typically when prices break 78.6% retracement of a bullish move, the decline extends 1.272 in terms of price. This translates to a 549 initial target on the S&P500 $SPX cash index. Losing that price projection/support level means that prices typically travel up to 1.618 the distance of the rally to much lower levels.
Although the market's path is guaranteed to no one. It does give one pause. I do have a partly baked idea that since 1987 with all the derivatives traded on the stock indexes, that this market trades more akin to commodities than traditional stocks. If so, many stock investors are not prepared of how just one sided and unrelenting commodity trends can be. Just look at Natural Gas for example, how many bet the decline from the $12 highs basis the April contract, were over at $6. Now its traded less than $3.90. This move was straight down with not even a counter-trend bounce exceeding 5.5%.
Charts posted at http://www.tradingpoints.net
2009-03-09 13:16:15
AAA to CCC
Bennet,
Honestly, I have yet to read this article(although I will certainly do so), but I was thinking about you this weekend when I was reading John Mauldin's latest article. I am curious as to your opinion on his reference to the downgrades on RMBS tranches from AAA to junk; and his contention that these drastic downgrades do not fairly represent their value and that they unfairly force banks to puke them below real market value.
It seems to make sense, but if so, then why are you not buying RMBS here?...and do you support changing the rules so that banks can keep these on the books with more reasonable values and keep capital leveraged against them?
Sorry all for the unrelated post, but I really value Prof. Sedacca's opinion on this, and he is difficult to reach. Also, I am sure that Minyanville will be posting John's article soon, so I won't post the link to the article.
Thanks.
Honestly, I have yet to read this article(although I will certainly do so), but I was thinking about you this weekend when I was reading John Mauldin's latest article. I am curious as to your opinion on his reference to the downgrades on RMBS tranches from AAA to junk; and his contention that these drastic downgrades do not fairly represent their value and that they unfairly force banks to puke them below real market value.
It seems to make sense, but if so, then why are you not buying RMBS here?...and do you support changing the rules so that banks can keep these on the books with more reasonable values and keep capital leveraged against them?
Sorry all for the unrelated post, but I really value Prof. Sedacca's opinion on this, and he is difficult to reach. Also, I am sure that Minyanville will be posting John's article soon, so I won't post the link to the article.
Thanks.
2009-03-09 15:02:35
RMBS Performance
There has been some very good analysis of the details of the RMBS situation in posts.
One thing to keep in mind, however, is that what ultimately drives the performance of these securities is unemployment.
The worst of the RE delinquency problems are very concentrated geographically. As these problems become more widespread with rising unemployment, the performance of the securities will continue to deteriorate and more importantly, the perception of their value will continue to be low.
The other attribute of current conditions that is difficult to predict but important to understand in a general way is complexity.
Complex systems and the actors/agents within them react to the networks of other actors/agents within which they live.
The complex system adapts in real time to changing events and decisions of the actors/agents within the network. In real time the more change that is occurring, the more chaos will continue.
In my view the most problematic event is continued "rules changes". The complex system will adapt to rules - whatever the rules are. A complex system will continue to be chaotic as long as the rules keep changing.
It is not as important to get the "rule" right as it is for the "rule" to be stable - if your goal is a reduction in chaos.
One thing to keep in mind, however, is that what ultimately drives the performance of these securities is unemployment.
The worst of the RE delinquency problems are very concentrated geographically. As these problems become more widespread with rising unemployment, the performance of the securities will continue to deteriorate and more importantly, the perception of their value will continue to be low.
The other attribute of current conditions that is difficult to predict but important to understand in a general way is complexity.
Complex systems and the actors/agents within them react to the networks of other actors/agents within which they live.
The complex system adapts in real time to changing events and decisions of the actors/agents within the network. In real time the more change that is occurring, the more chaos will continue.
In my view the most problematic event is continued "rules changes". The complex system will adapt to rules - whatever the rules are. A complex system will continue to be chaotic as long as the rules keep changing.
It is not as important to get the "rule" right as it is for the "rule" to be stable - if your goal is a reduction in chaos.
2009-03-09 15:44:34
helter skelter
When I get to the bottom
I go back to the top of the slide
Where I stop and turn
and I go for a ride
Till I get to the bottom and I see you again
.. that would be the bear market rally scenario.
I go back to the top of the slide
Where I stop and turn
and I go for a ride
Till I get to the bottom and I see you again
.. that would be the bear market rally scenario.
2009-03-09 16:09:31
RMBS Performance
Krazy P wrote:
"In my view the most problematic event is continued "rules changes". The complex system will adapt to rules - whatever the rules are. A complex system will continue to be chaotic as long as the rules keep changing.
It is not as important to get the "rule" right as it is for the "rule" to be stable - if your goal is a reduction in chaos."
Indeed.
What I am seeing makes me wonder if "a reduction in chaos" is what is intended. One hopes the situation is not that dire.
"In my view the most problematic event is continued "rules changes". The complex system will adapt to rules - whatever the rules are. A complex system will continue to be chaotic as long as the rules keep changing.
It is not as important to get the "rule" right as it is for the "rule" to be stable - if your goal is a reduction in chaos."
Indeed.
What I am seeing makes me wonder if "a reduction in chaos" is what is intended. One hopes the situation is not that dire.
2009-03-09 19:06:39
I sang
all the way through the article. Great Piece!
I wish you could have worked in Rocky Raccoon, though. *grin*
"Rocky Raccoon checked into his room
Only to find Gideon's bible.."
I wish you could have worked in Rocky Raccoon, though. *grin*
"Rocky Raccoon checked into his room
Only to find Gideon's bible.."
2009-03-09 19:20:52
AAA to CCC
I read that article too.
I agree with John Mauldin's premise. The part of the current issues come from rating agencies that have created a pass/fail system in bonds as any bond that loses principal is immediately junk. In other words, all the silly AAA, AA+, AA is just noise: agencies really only have AAA and CCC.
I'm not Prof. Seddaca (and I would be very much interested in his opinion) but personally. I wouldn't buy stuff that I had no idea what the value of it was. It would have to be (for me) pennies on the dollar to make the risk worth it. I suspect many people would agree with me.
(My personal analogy that it's like buying a boxed lot at an auction where you are only told how much it cost new with a vague description of the contents. (No peeking in the box!) There could be a gold bar in there or a complete collection of paper weight Presidents. In the end, how much would you pay for such an item?? )
Until the agencies are actually willing to use a true graded system for assets, we're all the in dark about the value of the securities.
I agree with John Mauldin's premise. The part of the current issues come from rating agencies that have created a pass/fail system in bonds as any bond that loses principal is immediately junk. In other words, all the silly AAA, AA+, AA is just noise: agencies really only have AAA and CCC.
I'm not Prof. Seddaca (and I would be very much interested in his opinion) but personally. I wouldn't buy stuff that I had no idea what the value of it was. It would have to be (for me) pennies on the dollar to make the risk worth it. I suspect many people would agree with me.
(My personal analogy that it's like buying a boxed lot at an auction where you are only told how much it cost new with a vague description of the contents. (No peeking in the box!) There could be a gold bar in there or a complete collection of paper weight Presidents. In the end, how much would you pay for such an item?? )
Until the agencies are actually willing to use a true graded system for assets, we're all the in dark about the value of the securities.
2009-03-09 20:18:58
Across the Universe
I vote for an acid induced trip of generational proportions.
Your S & P 350-400 range is not.
Several generations of debt living by Wall Street, Main Street, and Washington set the stage for debt paying.
Unemployment will rise, foreclosures will increase, spending will decline, earnings will decrease, and the market will follow.
No amount of government spending or cheerleading from pundits will change the reality that people don't have money to spend or pay bills, profits decrease, markets and tax revenues fall.
A time for listening to the Beatles and appreciating things besides money.
Within you and Without you time...
2009-03-09 20:19:56
Across the Universe
Your S & P 350-400 range is not acid induced at all (I meant to say).
Where is that Caterpillar when you need him?
Where is that Caterpillar when you need him?
2009-03-10 02:57:06
Beatles Redux
as Toddo likes to often say, as the Piggies (banks) go so goes the poke (market)...
the Piggies ran into problems with the Continuing Story of Bungalow Bill working on Fixing a Hole, but said, We Can Work it Out, just Let it Be.
the market, in response, said, I'm Looking Through You, and you're going Nowhere Man.
The Piggies cried to the market, Don't Let Me Down, It's Been a Hard Day's Night, but Baby's in Black.. Please Please, Me...
GM chimed in asking the market to Drive My Car(s) Eight Days a Week, but they found they Can't Buy Me Love, while AIG cried out I've Got to Get you Into My Life!
along came the US government to step in and help, and the market cried, Run For Your Life, its the Taxman!
there was No Reply from the government, but the Piggies asked, Do You Want to Know a Secret? I Need You, I Want to Hold your Hand - with a Little Help From My Friends we'll Get Back to Yesterday
the market on the other hand thought, It Won't Be Long before the Piggies & government Come Together to Carry That Weight down that Long & Winding Road. Hello Goodbye!!
The Piggies warned You Won't See Me if You Never Give Me Your Money and after some arm Twist(ing) & Shout(ing), The Fool(s) on the Hill acquiesced, and so bought a Ticket to Ride on the Magical Mystery Tour.
The market was patiently waiting with the mindset that All Things Must Pass, hoping for things to start Getting Better but as a precaution took Pepe's advice that Happiness Was a Warm Gun and bought some smith & wesson - better to be prepared for the Helter Skelter Revolution while waiting for the Good Day Sunshine.
the Piggies ran into problems with the Continuing Story of Bungalow Bill working on Fixing a Hole, but said, We Can Work it Out, just Let it Be.
the market, in response, said, I'm Looking Through You, and you're going Nowhere Man.
The Piggies cried to the market, Don't Let Me Down, It's Been a Hard Day's Night, but Baby's in Black.. Please Please, Me...
GM chimed in asking the market to Drive My Car(s) Eight Days a Week, but they found they Can't Buy Me Love, while AIG cried out I've Got to Get you Into My Life!
along came the US government to step in and help, and the market cried, Run For Your Life, its the Taxman!
there was No Reply from the government, but the Piggies asked, Do You Want to Know a Secret? I Need You, I Want to Hold your Hand - with a Little Help From My Friends we'll Get Back to Yesterday
the market on the other hand thought, It Won't Be Long before the Piggies & government Come Together to Carry That Weight down that Long & Winding Road. Hello Goodbye!!
The Piggies warned You Won't See Me if You Never Give Me Your Money and after some arm Twist(ing) & Shout(ing), The Fool(s) on the Hill acquiesced, and so bought a Ticket to Ride on the Magical Mystery Tour.
The market was patiently waiting with the mindset that All Things Must Pass, hoping for things to start Getting Better but as a precaution took Pepe's advice that Happiness Was a Warm Gun and bought some smith & wesson - better to be prepared for the Helter Skelter Revolution while waiting for the Good Day Sunshine.
2009-03-10 11:32:44
Illness
Here are a couple of things you might use to curtail your feelings of illness. The current and future Federal debt will never ever be paid off, probably not even reduced,in it's current form. No one in power on wall street or Washington is listening to what you say. I personally enjoy the Minyanville exchange. The government should be thinking "what can we do to stimulate productivity which creates jobs?" "How can we help provide water, fuel, food, transportation, and shelter for the population since the financial based economic system has collapsed. But they won't. What the hell, it's just as well to play the market down as up. There is no future grace without our complete support of the rising young generation who are full of hope, energy, and desire. The boomers blew it, we must accept that and give all of ourselves without concern for our own fate to the up coming generation.
2009-03-10 17:43:59
change, destruction, gonna be alright....
great ending lyrics to your article from a great band:
"Well you know
We all want to change the world
But when you talk about destruction
Don't you know you can count me out
Don't you know it's gonna be
Alright."
thank you much!
"Well you know
We all want to change the world
But when you talk about destruction
Don't you know you can count me out
Don't you know it's gonna be
Alright."
thank you much!
2009-03-17 23:41:28
$SPX price and time targets
Nice analysis - bleak, to be sure, but good work.
We will sorely miss Bennet and his take on Life, the Market and Everything. We hold his memory in our hearts and his work in our heads.
We will sorely miss Bennet and his take on Life, the Market and Everything. We hold his memory in our hearts and his work in our heads.
2009-03-18 17:08:17
Bennet Sedacca
I extend my prayers and thoughts to the family of Bennet Sedacca. He was one of the few fonts of wisdom and clear thinking that I have followed eagerly over the past two years of this historical downturn. I extend my deepest sympathies to Bennet's family. They should be proud of him, as he was one of the very best!
2009-03-18 22:08:19
October 2010
When i first read this analysis, I went to Outlook and created an 'appointment' w/ reminder for myself on 10/7/2010 as follows:
Subject: Does it feel anything like a stock market bottom?
Location : If it's been fugly for so long it couldn't be, then it probably is
As no good deed goes unpunished, I won't be surprised at all if it proves correct.
My deepest condolenscences to his family on the loss of their father and husband.
Bill Bahlke
Subject: Does it feel anything like a stock market bottom?
Location : If it's been fugly for so long it couldn't be, then it probably is
As no good deed goes unpunished, I won't be surprised at all if it proves correct.
My deepest condolenscences to his family on the loss of their father and husband.
Bill Bahlke
2009-03-19 21:55:18
As the market has been overpriced for years raising to irrational levels it will sell off to levels not thought today finally coming to exhaustion. Too many are holding and not selling. The 401ks are held in the headlights of disbelief not opening statements. They will sell......... at the bottom.
Fear will be manifest when the knife hits the floor and vibrates signaling "buy".
Missing now Bennett's extension to us all I finding it interesting his continued renaming the SP with a lesser title getting to 350, but I think too this title to be optimistic.
The likelihood is that irrational fear will keep one from grabbing the bottom when it arrives. High anxiety would be operative at the 193-257 mark. The market bottomed in 1932 at this lowest mark on a percentage decrease from peak to trough.
The bottom will without a doubt look more terrifying than hopeful signaling a “buy”. Wow!
Fear will be manifest when the knife hits the floor and vibrates signaling "buy".
Missing now Bennett's extension to us all I finding it interesting his continued renaming the SP with a lesser title getting to 350, but I think too this title to be optimistic.
The likelihood is that irrational fear will keep one from grabbing the bottom when it arrives. High anxiety would be operative at the 193-257 mark. The market bottomed in 1932 at this lowest mark on a percentage decrease from peak to trough.
The bottom will without a doubt look more terrifying than hopeful signaling a “buy”. Wow!
2009-03-20 13:32:51
Smart Investing
Good article.
But folks, investing is simple: be conservative when the market is long-term overvalued as it has been for a decade or two and be agressive after it corrects and when it is undervalued, historically.
We are getting close but are still just at fair-value.
But folks, investing is simple: be conservative when the market is long-term overvalued as it has been for a decade or two and be agressive after it corrects and when it is undervalued, historically.
We are getting close but are still just at fair-value.
2009-11-23 03:10:53
fitch
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