The 1929 & 2007 Bear Market Race to The Bottom
Week 71 of 149
2007/09 Bear Moves Up to #4 of
Historic DJIA Bear Markets
Grizzly Tracks in the Barron's 50 Stock Average's
Earnings & Dividends Trends
The 2007/09 Bear Market's Social Security Connection
20 February 2009
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
The Bear is making progress on his journey to its ultimate bottom. He now ranks at #4 in the record books for DJIA Bear Markets. But as we can see on the table below, a 0.06% fall from Friday's closing price is all that prevented it from becoming #3 this week. These rankings are based upon weekly closing prices.
This bear market may seem like it's taking its sweet time, but note in the table above how long other bear markets took to get to their bottoms. We are not at the bottom yet of this historic Bear. The quicker he finishes his work the better it will be. A BEV-60% decline by June seems very possible now as the negotiations between the Bear and "policy makers" are close to breaking down completely.
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.
(Remember, with the 2007 data up is down and down is up!)
1929/32, Wk 71 200 Day Moving Average Volatility: 1.34%
2007/09, Wk 71 200 Day Moving Average Volatility: 1.89%
Tuesday provided us with another 70% A-D (Advancing Declining) day as 79.92% of the shares in the NYSE declined.
Historically, daily 1% swings from the pervious day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."
Above is an ugly chart.
I thought it would be interesting to compare the 1929/32 DJIA Bear with its Step Sum to the 2007/09's chart. You may want to refresh your memory on the Step Sum and Lundeen Bear Boxes by clicking my link above before you read my expanded section on the Step Sum.
On Friday 20 Feb 2009, we are 344 trading days into the Bear Market. The charts following also include the 300 trading days before the last all-time highs to show the end of the preceding bull market.
For your information, the NYSE had a 6 day trading week from 1885 to the early 1950s. So 344 trading days after our Terminal Zero in October 2007, we are at Wk 71 of our Bear Market. But the 1929/32 Bear Market is only about Wk 60.
We see below that 60 trading days after the start of the 1929/32 Bear Market, the DJIA had its first -40% decline. From 1885 to 2009, there was nothing more bullish than having the DJIA fall below the BEV -40% line.
Except once (so far) in 1929.
So it's logical that after a terrible -47.87% drop in the DJIA, only 60 days from record highs, the bulls would jump back in the market with both feet. The DJIA and its Step Sum climbed together from day 60 (13 Nov 1929) to day 180 (16 Apr 1929). Then their trends split (Step Sum higher to neutral, DJIA down) forming the left side of the Lundeen Bear Box. These two trends stayed split until day 457 (23 March 1930). The DJIA had fallen -28.30% while the Step Sum broke even after 277 NYSE trading days. When the Step Sum's trend became bearish, the Bear broke out if his box. For the next 386 trading days, the DJIA and its Step Sum tumbled down to their final bottoms on 08 July 1932. There were few survivors.
However, the best year in the history of the DJIA starting on 08 July 1932, finishing with a gain of 154% one year later! Few people cared.
The 2007/09 Bear is unique in the history of the DJIA. It's the only -40% bear market, since 1885, where a Bear Box formed on the first day of the bear market. Being the suspicious type, I suspect the "policy makers" hand in this.
Forget about the "Policy makers" and the Bear Boxes. A review of past -40% bear markets with their Step Sums show that in the final stages of a big bear market, the Step Sums have always finished the bear market by tumbling down with the DJIA. This has been true since 1885.
But what do we see above? Only a net decline of 21 days in the Step Sum since October 2007, out of a total of 344, has resulted in the 4th worst DJIA bear market since 1885. This is a damn scary statistic as it suggests that there is still much selling yet to come. This is because big bear markets terminate in chronic selling, day after day as people flee the market. If 124 years of market history holds true, the Dow's Step Sum will at some point fall down taking the DJIA with it. I expect this event will bring panic to the markets as the bulls surrender to market gravity.
I think the only significant buyers now are the "policy makers" using computer hard-drive money to pay for their positions, while exempting themselves from the normal rules of prudence. The market is in the hands of counterfeiting morons. But really, it has been this way since Alan Greenspan became Fed Chairman in August 1987. We are now experiencing the deflation of the many bubbles he inflated during his tenure as Fed Chairman. Remember how the Congress and Wall Street loved him? That is an indication of the caliber of brain power now in control of the economy.
So capitulation may be a ways off. When the DJIA's Step Sum starts tumbling down from its current lofty position, it will signal the "policy makers" loss of control over their asset-price fixing scheme.
The "policy makers" will have been gained nothing rational people would desire from any of this. At the end of all their machinations, the world's reserve currency, the US dollar will no longer be anyone's asset. I see some in the financial media awaking to the menace in Washington, but on the whole, the toadies in the news rooms stick to the party line and will not tell these madmen "No More." But then the media went to college to learn their economics from people like Ben Bernanke, as did bankers, congressmen, and businessmen. Academia is the source of most of our current problems.
You would be smart to have a few months of canned food in your house as the mad scientists of the social sciences have not finished their work just yet.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish the Step Sum will rise. When bearish it falls.
Think of the "Step Sum" as the sum total of all the up and down "steps" in a data series as prices change over time. An Advance - Decline Line for a data series derived from the data series itself. Logically, to have more up days than down days during a bull market makes sense as does having more down days than up days during a bear market. Understanding the Step Sum is no harder than that.
Grizzly Tracks in the Barron's 50 Stock Average's
Earnings & Dividends Trends
Since January 1938, Barron's has published its "Barron's 50 Stock Average" every week without fail. At first, Barron's only included earnings with the average, but by July 1939, dividend yields and payouts were also included with the Barron's 50.
Barron's has never promoted their 50 Stock Average as Dow Jones and S&P have with their market metrics. That's unfortunate. This weekly financial series records earnings and dividend data back before World War Two. This is the market data series Time forgot. Maybe we should give Grandpa a little time to explain to us youngsters what he has learnt over the years. It's amazing how much historical insight the Barron's 50 Stock Average can provide investors today.
The Barron's 50 acts pretty much like the DJIA. But unlike the DJIA or the S&P 500, there are no derivatives written directly on it. I assume each of its 50 companies do have a presence in the options market. This uniquely insulates the Barron's 50 from direct "policy interventions."
It's a reality of today's markets, on bad days for the DJIA and S&P 500, the "policy makers" are big players in the stock index options and futures markets. But few people even know the Barron's 50 Stock Average even exist!
Here is the Barron's 50 BEV Chart.
Since 1938, the largest decline was in October 1974. How much did the Barron's 50 decline? Well, that is what makes a BEV Chart so useful: a little over 50%. I suspect that after this week, the 2007/09 Bear will hold the #1 position. But I don't have my Barron's on Friday night.
This starts to get very interesting when we look at the earnings and dividend payouts and compare them to past historic bear market lows.
Again, CinC inflation makes nonsense of decades of data. The Barron's 50 had weathered a World War, eras of CPI inflation, market panics and some good times too. But in the chart above, the earning from 2001 to the present seems extremely volatile. Has this happened before? Let's look at the Barron's earnings data with a BEV Chart and find out. And then, a few comments on the BEV Chart.
BEV (Bear's Eye View) plots are derived by the following formula applied to each data point in a series:
(Each Data Point / Last All-Time High) - 1
The actual Excel formula used in the first and last data points in the above chart are as follows.
First Data Point: =BG1269/MAX(BG$1269:BG1269)-1
Last Data Point-: =BG4980/MAX(BG$1269:BG4980)-1
The BEV Chart of the Barron's 50's Earnings places all 71 years of its history into perspective. Each data point above is converted into a precise percentage, bound between 0% and -100%. No other mathematical outcome is possible. Each new all-time high becomes a 0%. Any data point not a new all time high becomes a negative percentage value from its last all time high.
In this series of Bear Market Reports, I've frequently referred to the last all-time high of a particular Bull Market as the "Terminal Zero." As the last all time high always produced the final; or BEV Chart Terminal Zero of any particular Bull Market.
Go back to the BEV Chart of the Barron's 50 Average itself. We see that up to the 16 Feb 2009 issue of Barron's, the 1973/74 -40% Bear was the deepest bear market of the series. Now jump back down to the Earnings BEV Chart. The 1973/74 Bear Market, the biggest bear up to now, only saw a -20% reduction in the earnings for the Barron's 50. Note that since 2000, the Barron's 50 have seen not one but two 60% drops from record earnings. Still, as of Friday 13-Feb-2009, this bear has only managed a #2 spot in the Barron's 50 Bear Market Rankings.
Someone's finger-prints are all over this.
Earnings will get much worse in the months to come for a host of reasons. Economic downturns are only one. Wall Street ensnared corporate America with derivative counterparty risks that will also claim a huge slice of future earnings.
The Social Security Connection
The Feds are after Bernard Madoff for running a $50 billion dollar Ponzi Scheme. According to the media, it was to be the largest ever. That's not true. The Social Security System, managed by Washington, has that distinction. It was a Ponzi Scheme from the start.
In 1936, Barron's called FDR's Social Security a fraud with fictitious accounting. After 73 years, that is still true. Over the past decades, Barron's has said many things about Social Security, mostly bad. During the Carter Administration (1977-80), it was recognized that Social Security would fail the Baby Boomers, those Americans born between 1946-60.
In response to the inevitable 21st century failure of the Social Security System, Washington created tax deferred investment accounts such as IRAs and 401Ks. Barron's covered these tax-deferred accounts in detail all during the 1970s as did many financial publications. During the 1970s, it was no secret that retirement accounts were a "policy initiative" to compensate people for Social Security's coming failure. Wall Street loved IRAs! So did I!
These retirement accounts, have introduced a political factor that superseded all other factors in the stock market. To take the heat off Social Security, Washington tossed Wall Street a tasty bone. Captive retirement accounts with little chance of withdrawal for decades to come.
In retrospect, it seemed that one of the perks given to Wall Street was that Washington would not ask any questions how Wall Street managed the market, as long as it was a bull market. At the "policy level", the 1982-2007 Bull Market was a thieves' bargain between Washington and Wall Street to save FDR's Social Security System.
Economists in college explain the stock market as a discounting mechanism for future earnings. But when these same "Professors of Economics" obtain a position of power in "policy implementation", they do everything in their power to defeat the discounting mechanism of the stock market with the derivative markets. Since 1974, how the Barron's 50 has valued its earnings has changed drastically. It's not hard to understand why: political obligations to the electorate require asset valuation increases regardless of earnings.
This is why, after the 2000 market top, the Barron's 50 stopped discounting corporate earnings, and started discounting the reelection prospects of American incumbent politicians. In 2009, the basic function of the stock market has been perverted to serve the political needs of "policy."
If the dollar must be sacrificed to support toxic credit instruments of past boom times, and support share valuation of companies losing money, well the "policy makers" will buy toxic credit instruments that currently masquerade as assets in pension funds and retirement accounts for public and private funds.
In medical science, practices that have no chance to cure but are likely to kill a patient would be declared quackery. But in "political science", quacks like Greenspan and Bernanke are the go-to guys to keep the entrenched bureaucracy - entrenched.
Let's examine a BEV Chart for the DJIA Earnings. Note the different BEV values for the Barron's 50 and the DJIA's earnings from 2001-09. I can't say with certainty why there is the huge difference. I only note that the Barron's 50 Average is completely off the "policy makers" radar screen. It offers a unique view of the American Stock Market that maybe only 10 people in the world are tracking. I love it!
From 1945 to 1971, Bretton Woods was successful in limiting CinC and credit inflation. The DJIA's Earnings seemed fairly stable, until the US Broke the dollar's link to the Bretton Woods $35 an ounce mandate. Shortly after 1971, the earnings on the DJIA became a roller coaster ride. DJIA earnings actually went negative (down to -$109.43) from August - November 2008. But the BEV Chart only goes to -100%.
I never thought I would ever agree with a Communist, but the Bank of China's, Mr Lou Ping comment's on the American "monetary policy makers" is pretty much how I feel about them too.
"We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."
- Luo Ping, a director-general at the China Banking Regulatory Commission, 11 February 2009
Let's look at the Charts for the Barron's 50 & DJIA Dividend Payouts.
The Dividend Payout for the Barron's 50 has been pretty smooth. Or has it? Note, these charts are for dollars paid out in dividends, not dividend yields.
I don't see a conspiracy of "policy" above, but I do think it is strange that we actually see a decline in volatility with the Barron's 50 Dividend Payouts while its Earnings volatility has increased. With future Earnings for the Barron's 50 Stock Average appearing bleak, I expect a serious reduction in dividend payouts in the near-term future.
How bad could it get? I don't know. But a BEV chart for the DJIA Dividend Payout may hold a clue. Again, it is rather startling how stable the DJIA dividend-payout volatility has been given the wild swings in its earnings.
Massive Bear Markets, born in a credit crisis, are hard on dividend-payouts. Remember, companies will cut dividend payouts to make bond interest payments, or make good their OTC Derivative Counterparty Obligations. We don't know how much TARP money has gone to honor troubled bank counterparty obligations. I suspect a lot.
Since August 1971, "policy" has stimulated debt creation at all levels of society. It's a safe assumption that in 2009, American Corporations are loaded with unproductive debt that must be financed with cutting employee cost and dividend-payout reductions. We are already seeing the destruction in jobs from 30 years of inflationary "monetary policy."
Future cuts in dividend-payments are to be expected as past "policy decisions" will consume future wealth creation. I expect these cuts to shareholders to be as massive as the ill-considered debt and derivative positions assumed by their companies in past years.
Nothing is going to change unless pressure is brought to bear on the Congress and the White House. I spend many hours each week writing this report. Maybe you could find it within yourself to contact the Congress and White House twice a month and tell our elected officials to stop killing the US dollar and let failed institutions fail. The death of our economy should not be a spectator sport.
20 February 2009
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.
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