Russell On The Evolving Bear MarketMarch 10, 2008 -- March 7 (Bloomberg) -- The Federal Reserve moved to add as much as $200 billion to the banking system over the next month to offset a deepening credit crisis that may have already pushed the U.S. economy into a recession.
The central bank raised to $50 billion each from $30 billion the amount intended for auctions of funds on March 10 and March 24. The Fed also said in a statement in Washington today that it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets including mortgage-backed bonds.
The decision is the central bank's latest attempt to reduce the threat to the economy from banks curtailing loans to companies and households. Banks and securities firms have posted losses exceeding $188 billion since the start of last year as the impact of surging defaults on subprime mortgages rippled through world financial markets.
"Given what we have seen in terms of illiquidity in the financial markets in the last four or five days, this came right in time,'' Ajay Rajadhyaksha, head of fixed-income strategy at Barclays Capital in New York, said in an interview with Bloomberg Television.
Russell Comment -- The Fed is going all in its effort to get the banks to start lending again. This includes taking in almost anything for collateral including those junky mortgage-backed bonds. The new recognition -- we're not dealing with a liquidity problem, we're dealing with a solvency problem!
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The Stock Market -- where are we -- and what are we looking for? We're in a bear market, we don't know how long it will last, and we're looking for any indication that we might be near a bottom.
First -- according to Dow Theory, a bull market ends and a bear market begins at the point where both Averages, Industrials and Transports, record their last highs together. The last time both Averages recorded highs together was back on July 19, 2007. On that day the Dow closed at 14000.41 and the Transports closed at 5446.49. However, the Dow continue higher, closing at a record high of 14164.53 on October 9, 2007 -- but July 19, 2007 remained the high day for the Transports.
Therefore, according to Dow Theory, July 19, 2007 marks the end of the bull market and the beginning of the current bear market. On that basis, the primary bear market is now eight months old. It would be unusual for the bear market to end after only eight months, but in this business anything can happen. Furthermore, as we saw during the 1966 to 1980 period, a bear market can be made up of a number of smaller bull and bear market cycles -- all taking place within the structure of one extended secular bear market.
What about the idea of a major bear market bottom appearing in the days or weeks just ahead? I jettisoned that idea, mainly because it didn't begin to fit in with Dow Theory thesis of values. At major bear market bottoms such as 1949, 1074, 1980, stocks sold at what I call "great values." What's a great value? Stocks sell at great values when the Dow or the S&P are priced at 6 or 8 times earnings and when blue chip stocks provide dividend yields of 5-6 percent or better. In contrast, today investment-grade stocks are priced on average at around 18 times earnings --while providing average dividend yields of around 2% or less.
There are actually two types of market bottoms. One is a temporarily oversold bottom, at which time stocks will not be priced at great values -- examples are the lows of 1957, 1962 or even 2002. The other type of bottom occurs when stocks are selling at great values as they were in 1942, 1949, 1974, 1980. These are the historic bottoms that occur once or maybe twice in a generation. What I'm watching for now is a temporary bottom that could possibly appear in the days or weeks or even months ahead.
I've been wondering whether such a temporary bottom might be coming up ahead, assuming the Transports stubbornly refuse to break below their January lows.
Question -- Russell, what are the chances that the Transports will refuse to violate their January lows?
Answer -- Frankly, I'll be surprised (and happy) if the Transports refuse to violate their January low, but why guess, why jump the gun -- let's just see what happens.
Last week we saw a great amount of damage to the price structure. We saw the January lows violated by the Wilshire 5000, the S&P 500, the D-J Industrials, the D-J Utilities and the NASDAQ Composite. But neither the D-J Transports nor the D-J 65 Composite confirmed.
Question -- Russell, talk is talk, but what have you personally done with your own investments?
Answer -- I took my own advice. I've held large positions in gold, smaller positions in SLV and GDX, and the rest (about 60%) in T-bills. Not much income in this mix, but who needs it with the precious metals acting the way they have.
Steve Leuthhold does research for Weeden Leuthold and writes "Perception For the Professional." Steve does a prodigious amount of research and has been doing it for a long time. In his latest report, Steve opines that the recession started in November 2007. He notes that since WW II recessions have tended to become shallower and shorter with the median length about eleven months. If this recession holds true to form, this recession should end around October of 2008.
Since the stock market typically hits bottom around the middle of a recession, then working backwards Steve thinks that the stock market could hit bottom around April or May. But if this is fated to be BIG recession, say a sixteen month recession, then the stock market should hit bottom about nine months into the recession, which means a market bottom in the July-August 2008 period.Question -- Russell, I note that many top analysts are posting lists of good stocks that may be held during a bear market. A few analysts are saying that one should hold "value stocks" rather than "growth stocks" in a bear market. What do you think?
Answer -- My preference during a bear market is to hold few or no stocks. During a bear market usually at around 85% of all stocks will decline. Many investors during a bear market hope that it will be a shallow bear market -- and therefore, in view of tax considerations, it doesn't pay to sell their stocks. My own view is to hope for the best but prepare for the worst. On that basis, I'd prefer to be out of stocks, rather than finding myself "hoping for the best." Sometimes, hoping can turn out to be an expensive proposition.********
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://ww2.dowtheoryletters.comMarch 10, 2008
The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.