Barton Biggs Says . . .

"We Are In For the Mother of All Bear Market Rallies"


By Barton Biggs

Published: November 24 2008 16:16 | Last updated: November 24 2008 16:16


Before we all are swept away into total despair, let’s take a step back and imagine what could get stocks around the world going up for a while. Bear in mind that I am hedge fund manager, have been wrong on the severity and duration of this panic, and that at this moment I am close to shore. In other words – I have little risk on.

First, let me point out that by definition the bottom of a bear market has to be the point of maximum bearishness. Thus sentiment becomes a crucial indicator.

The systematic work that we do on measuring sentiment (and we monitor about twenty indicators for the US and a dozen or so for other equity markets) show very extreme and in many cases record levels of bearishness. Obviously not every indicator is at an all-time high, and in some the history is short, but the message is powerful. Furthermore there is compelling evidence that investors, hedge funds, pension and mutual funds, and the public are not just talking bearish, they have raised astounding amounts of cash.

I am chastened by the fact that all the data we look at are from the last forty years which was really just one great magnificent secular bull market of wealth creation marked by periodic bears that were buying opportunities. No one knows what levels of pessimism were necessary to spawn the 40 per cent 1929 rally during a massive secular bear market. Nevertheless I’ve never seen capitulation and despair like this. We must be pretty close to maximum bearishness.

Second, valuations are cheap. There’s no point in going into an elaborate dissertation; it’s an inexact science. Using the best historic measures, normalised earnings, book value, and free cash flow, stocks around the world are very cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom. Nevertheless, the 4 per cent dividend return on the S&P 500 exceeds the yield on the ten and thirty year Treasury bonds for the first time in fifty years. If emerging market equities, where the growth is, at six to eight times earnings are not cheap I don’t know what is.

Third, stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the 1930s, and the spread between the price and the 200 day moving average at 34 per cent is the greatest since July 19, 1932. The US market is down almost 50 per cent from its highs, Europe is off 55 per cent, and emerging markets, 65 per cent with some unfortunates like Russia off 70 per cent. History shows that even in enduring, secular bear markets there are not just 20 per cent bounces but usually one 30 to 50 per cent rally. We should be due.

As far as the economic fundamentals are concerned, investor and consumer confidence have been ravaged by the sudden violence of the global recession. It is going to be deep and it may be long lasting. The bears say at best it will be like Japan’s on-going slow death. At worst, it will be a replay of the 1930s.

I think both these outcomes are highly unlikely. The so-called authorities have learned from the policy errors of the past, and the response this time, while not perfect, has been faster and far bigger. The effects are just beginning to be felt. In fact the stimulus has been unprecedented and there is almost sure to be more on the way beginning with the new Obama Administration. The authorities seem to understand that they have to risk overkill.

And the fabric for economic healing is developing. In the US average hourly earnings are rising at a 3 per cent annual rate and the CPI is probably declining at a 5 per cent rate thanks to the fall in gasoline, fuel, and food prices, so real average hourly earnings are rising at an 8 per cent pace. The savings rate is rising. The sharp collapse in the price of oil while hurtful to parts of the world, is very beneficial to the US, Europe, and Asia. The consumer spending collapse we are experiencing may be short-lived but that doesn’t mean a boom is coming either.

Finally, my guess, and it’s nothing more than a guess, is that the deleveraging that has caused such heavy selling is two thirds done. In listed equities it may be 80 per cent finished. Hedge fund redemptions are substantial and will continue into next year, but hedge fund liquidity is at a record high and hedge funds’ gross exposure and net long is at a record low. Conversely investor liquidity is at a record high. All good contrary indicators.

If I’m bullish why aren’t I in there now? Because I would like to see the credit markets unclog and spreads come in more. At the bottom of a panic, the news doesn’t have to be good for stocks to rally, it just has to be less bad than what has already been discounted. I want the markets to stop going down on bad corporate and macro-economic news. The fact that it still does shows the bad news has not yet been fully discounted. I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.

The writer is managing partner at Traxis Partners, a New York based hedge fund, and the author of Hedgehogging.

http://www.ft.com/cms/s/0/1ef9847e-ba41-11dd-92c9-0000779fd18c.html?nclick_check=1

 

hes a broken record

 

Barton made some great calls in the past but he was completely overwhelmed in this one. Had it wrong since fall 2007.

I think his fund though did nowhere as horrendous as his calls were indicating

 

Every swinging dick knows there will be a huge bear market rally eventually. He really made a bold call there!!:eek:

 

Cut and paste...cut and paste.

 

This tells me that we have one more leg down to go. We might not take out the stock market lows, but they will go back down again. Abandon ship!!
135 bonds?
$40 crude?
$600 gold?
$7.00 silver?
$3.00 corn?
$6.50 beans?
$4.00 wheat?

Then back the truck up?

 

Pretty soon the government is going to stop with the multi-billion dollar bailouts.

What will the market do then?

 

Bigg's is a perma-bull.

We will have SHARP nice Bear rallies like the one right now.

The economy is getting worse and that will last several qtrs and will likely be worse than anticipated.

Earning and fundamentals of co's are declining and will likely be worse than expected and decline over a longer period than the market has factored.

There will be many more companies in need and crying for a bailout. Builders are looking for a handout.

Bear market bottoms don't result in 6 weeks.

We will retest the lows and likely break them.

If you agree go short.

If you don't go long.

Or just trade.

Pretty simple

 

1st off I want to say you beat me to it, I like posting articles such as this one and think that its actually a pretty worthless article due to the fact he talked about a "melt up" at the end of 2007 and instead had nothing but a "melt down" since. HE WAS WRONG LAST YEAR AND WILL BE WRONG AGAIN...

 

Just because I could.