The Secular Bear… Is A Big Bear

The Daily Reckoning
Weekend Edition
September 21-22, 2002
Paris, France
By Addison Wiggin

The Dow arrested its free-fall Friday with a meager 43 point gain. But as we noted in yesterday’s rip-roaring edition of The Daily Reckoning since the summer rally topped out on August 22nd the “big board” has lost over 1,000 points. The Dow closed the week at its lowest point since July… and, at 7986, it’s only 284 points from lows it hasn’t seen since Clinton was video-taping depositions in the West Wing.

Housing starts are down… cars and truck sales are slowing… but in the absence of any interesting news this weekend – or speeches from our great leaders to pick apart… and starving as we are for “reliable forecasts” about the outlook for the economy and corporate profits… we might take a pause this weekend and look at the market itself for guidance.

Ask any technical analyst and he’ll tell you – the outlook for the stock market is far from encouraging. Our friend Marc Faber puts it in his Gloom, Boom and Doom Report, “Unless stocks start to perform better without delay, the US economy is headed for a very difficult period.”

“In particular,” suggests Faber, “we continue to be concerned by the financial, housing, and consumer sectors, which depend on continuous accelerating credit growth. The stock charts of all these sectors, which are very closely connected, suggest that consumer and mortgage credit growth will shortly slow down considerably, and that if for one reason or another the credit tab is closed altogether, economic activity will be at high risk.”

Analyzing a series of rather technical charts that plot rising and falling P/E ratios on the S&P 500 with average rates of return from the stock market, another Daily Reckoning cohort, John Mauldin, draws these conclusions: “there are very clear periods when returns are better than others. These relate to secular bull and bear markets. No big insight there. But… in general, when P/E ratios begin to rise, you want to be in the stock market. When they are falling, total returns over the next decade will be below par.

“With the exception of WWII, when periods of falling P/E ratios start, they just keep going until P/E ratios top out. Generally, this topping period comes prior to a recession…”

“Our charts show the high probability that a secular bear is currently in progress,” says Mauldin. “High and falling P/E ratios, along with negative returns, are always associated with the beginning of such markets. If it is high, it historically has correlated with the beginning of a secular bear, which always takes years to work itself out. Fighting this trend is frustrating at best.”

When we speak of a “secular” bear market, mind you, we’re describing the market over a very long-term period… as opposed short-term rallies like we saw peaking out on August 22nd. Secular trends typically last 5-20 years and consist of one or more primary trends in sequence. According to work done by IM Vronsky on the website, there have been 23 Bear Markets during the last 100 years.

“Bear Market declines over the past hundred years ranged from -16% (1998) to -89% (1929-1932),” Vronsky states, “Consequently, if the current Dow Bear Market were to fall the average amount (34%), one would expect the DJII to find its nadir at about 7800″… and you might expect much of the pain to have run its course.

“However,” Vronsky continues, “since market excesses in the late 1990s approached those of 1929, we believe this Bear Market will be far worse than the 100 year average. The numbers suggest this Bear Market will be at least as bad as the 1973-1974 debacle (-45%), which translates to a Dow of 6500.”

And that, my friend, is at least another 1400 down from here. Trouble is… if this bear market was, in fact, following the trajectory of 1973-1974 “debacle”, the Dow would have reached the big bottom after 23 months… or some time back in January 2002.

We lay no claim to clairovoyant abilities, heck we can’t even tell what’s going to happen by the end of the weekend, but we’re not afraid to hazard a guess: You ain’t seen nothing yet. The excesses of “irrational exuberance” have only just begun getting worked out of the system. Sell the rallies.

Bon weekend,

Addison Wiggin,
The Daily Reckoning
September 21, 2002

P.S. As everyone seems to know, the month of September has historically been the worst-performing month of the year. “Conversely,” suggest Dr. Faber, “the period from mid-October to early January has seasonally been the best-performing stretch.” If you’re interested in trying to time the market… and the end of September or in October the markets look particularly bad, “some buying to capitalise on a trading rally [can be] be considered.”

P.P.S. Dr. Faber offers some anecdotal evidence – from three continents – that suggests a slowdown in consumer spending may have already begun. Once consumers stop spending… what then? See Flotsam & Jetsam below…

– Daily Reckoning Book Of The Week –

Bear Market Investing Strategies
by Harry D. Schultz

The International Harry Schultz has been identifying bear market warning signals and teaching people how to prepare a profitable survival portfolio for over thirty seven years… take a look what a few notables have to say about his latest book:

“The first investment book I ever read – in the late 1960s – was Harry Schultz’s Bear Markets. After watching the late 1990s lunacy and inevitable fallout, I feel every market student and investor should read a great book on bear markets and thus become wise through the printed word not later through painful disillusion. To the rescue at the right time again comes Harry’s new take on the subject, Bear Market Investing Strategies. Full of wisdom and practical advice, this book is an utter necessity for anyone who wants to learn how to make money in all market trends, not just rising ones.”

–Robert R. Prechter, Jr.,
Elliott Wave International

“Harry Schultz probably has more bear market experience than anyone…and plenty of experience in pseudo-bull markets too. Now, he’s come up with a book that can be very important for investors at this awkward stage of the world economy and market. Buy the book…it could save you a lot of money.”

–Bill Bonner,
The Daily Reckoning



by Bill Bonner

“…As recently as a month ago, consumers thought they could borrow money without worrying about paying it back. Jobs would be no problem. The cash would keep flowing. Stocks may crash, they believed…but the housing sector is still growing and solid….but yesterday brought news that the housing bubble may have foundits pin…”

09/19/02  GREENSPAN’S BUBBLE by John Mauldin

“…If the Fed, short of destructive policy, can do nothing to stop a bull market, then why do so many analysts assume that the Fed has some power to forestall abear market?…”

09/18/02  BAD TIMES, GOOD MONEY by Bill Bonner

“…Both the credit bubble and Mr. Greenspan’s own bubble reached their zenith about a year ago, by our reckoning. Both now seem to belosing gas…”

by Dr. Kurt Richebacher

“…Assessing the prospects of the American economy, the big split between consumer-related and investment- related activity is of greatest relevance. Considering furthermore that it has developed over years, it cannot be discarded as cyclical. Clearly, the overall poor profit and capital spending performance is structural. And with the economy’s slowdown it has dramatically worsened…”

by Bill Bonner

“…We’ve come to believe that Mr. Greenspan’s fame and fortune seem to vary inversely with the price ofgold…”


HEADLINE, NEWS And INSIGHT: Paralyzed At The Turning Point…Has The Internet Radically Altered The Way The World Works?… Plus, Anecdotal Evidence The World Economy Is Already In A Slump…

Timing Your Leap to the Unpopular
by Dr. Marc Faber

“…At most major turning points or milestones in financial history, the minds of most investors are as if paralyzed: they simply cannot understand that the rules of the investment game have radically changed. Thus, the majority of investors will miss the dynamic and powerful first upward move in the new major theme of the investmentuniverse…”

The Most Significant Technological Invention of All-Time
by Raymond F. Devoe, Jr.

“…To qualify as ‘most important’ technological development does not necessarily mean changing the way the world operates, which the Internet certainly has done. It should also be a radical departure, not a line extension of existingtechnology…”

Perception Versus Reality
by Dr. Kurt Richebacher

“…It is generally hoped that the spendthrift consumer will sustain overall demand until rising business capital investment kicks in. The latest data show the exact opposite development on bothcounts…”

FLOTSAM AND JETSAM: Anecdotal Evidence of A World-Wide Slowdown?

– Dr. Marc Faber
The Gloom, Boom and Doom Report

“…I was recently in one of Zurich’s expensive taxis and asked the driver how business was. According to him, his income had dropped by about 25% in the last year. A few days later, I was in Chicago and had a drink in a restaurant while waiting for a friend.

En passant, I asked the barman how business was. He said that it was very quiet and had declined compared to a year ago. Then, on my way back to Chiangmai, where for the last few weeks I have been very busy writing, I stopped in Hong Kong for a few days. In the taxi on the way from my hotel to the city airport train terminal, the driver tried to talk me into letting him take me all the way to the airport. Normally, the fare from Hong Kong to the airport, with all the tunnel and highway charges, is around HK$370 (US$47), but this driver was prepared to charge me only HK$200 (US$26).

During my time in Hong Kong, I also visited some of the city’s night entertainment spots. I have been doing this fairly regularly during the 29 years I have lived in Hong Kong, so I have some insights into its nightlife and its ancillary businesses. I have never seen Hong Kong’s bars so empty. At several place, which until recently had never offered special prices during the early evening hours (“happy hour”), prices had been cut by 40%.

Moreover, there were about three or so entertainers for each customer (which amounts to a bull market in friendliness and the quality of service – a very unusual occurrence in Hong Kong!).

I mention the above because if you listen to government officials and the majority of economists, the economy is growing and the risks of a double dip recession are minor. But when you talk to ordinary people, most of them will tell you that business is sluggish or down.

In the case of the US, it seems that the strength of the economy is largely based on the housing and automobile industries, which in turn owe their vibrancy to extremely rapid consumer and mortgage credit growth…”

Editor’s note: How long will mortgage refinancing and consumer credit keep the economy afloat? That seems to be the 64 trillion dollar question. You can read more anecdotes, analysis and investment advice from Dr. Faber in your current issue of…

Strategic Investment

The Daily Reckoning