What a horrendous day. Black Monday was just awful for investors. And that’s after Treasury Secretary Hank Paulson called the day’s trading “orderly” considering the bankruptcy of Lehman Brothers Holding on Sunday night. Orderly it wasn’t.
The S&P 500 and the Dow posted their third-worst point declines in history on Monday and are now down more than 23% from their October 2007 all-time highs. The MSCI World Index is now down more than 25% off its high, and the MSCI Emerging Markets Index sits just south of a 40% crash from its peak. Ugly indeed.
Any way you slice and dice it, this is serious bear market territory. We have to go back to 1974 to find similar percentage declines and financial market carnage.
In some ways, this crisis is worse and more on par with the 1930s. It’s definitely a fair comparison as central banks, mainly the Fed, launch an all-out assault on falling prices.
The damage still being done to the financial system is highly deflationary as more busted credits, failed institutions and unemployment rise. Real estate price in Manhattan, I bet, will be sharply lower 6 months from now as Wall Street bonuses all but disappear. If you own euro I would wait several months longer before buying that Manhattan apartment; prices will be lower.
Let me just run some incredible market numbers by you, which again might suggest we’re close to either a bear market bottom or at the cusp of a bear market rally – the third such suckers’ rally since September 2007.
Since 1960, the average bear market has lasted 14 months and has taken stocks down about 31% before bottoming, according to Ned Davis Research. Currently, this is the 11th month of the bear market and stocks are down 23% from their highs.
There’s probably more selling coming our way, but I think we’re approaching the nadir of this crisis. Many stocks, which have nothing to do with subprime, credit problems or financing issues have been savagely hit. Big bargains are out there.
Letting Lehman fail was necessary. The Fed can’t possibly bail-out every bank. The big question now is how many other banks of that stature or size will fail?
The market has completely broken down. The NYSE Advance-Decline line has collapsed with 174 issues rising versus 3,096 issues declining (click chart below). On Monday, 792 stocks hit new lows compared to 23 new highs. Advancing volume was 78,178,439 versus declining volume at 1,678,369,250. These are horrid numbers and strongly suggest this market is oversold.
Traditional portfolios that invest in stocks, bonds and cash should be heavily liquid now. If you don’t buy alternative investments like hedge funds or managed futures, then a reverse-index fund or ETF is a MUST to protect your stock exposure.
Investment portfolios should not have more than 20% invested in common stocks at this point. Despite huge values in many sectors (utilities, oil stocks, gold mining, oil services) investors are being penalized for bargain-hunting because the advance-decline is busted. The odds of making money in this market are almost impossible if you just buy and hold stocks.
In addition to low market exposure, I’d hold a 10-20% position in a reverse-index fund, depending on your appetite for risk. Essentially, if you really like the stocks you own now and you don’t want to sell them then make sure to cover your exposure. If I’m holding 20% in stocks then my reverse-index exposure is about 20% or market-neutral. I just don’t want to lose money.
About the only thing I can say about 2008 is that we’re a little more than three months away from New Year’s. I can’t remember the last time I was this anxious to end the year.
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