Tidings of a bear market rally

By J Saft
October 29, 2008

James Saft — James Saft is a Reuters columnist. The opinions expressed are his own –

By James Saft
NEW YORK (Reuters) – Some time before the end of the year it is a good bet that stock markets will throw off their gloom and begin a powerful rally of as much as 15 or 20 percent.

Some time one to three months after that it is a good bet that the prospect of a deep global recession and shockingly bad earnings will send them right back down again to make new lows. Rallies in the midst of bear markets can be sustained, powerful and feel very much like the ones that often mark the beginning of a real recovery.

So, why should we believe that we could get an early, if transient, Christmas present from the stock market?

Global markets are more scared, tired and depressed than at any time in my reasonably long memory, excellent breeding conditions for a rally. Given that most people are now on the same side of the debate, it would not take terribly much by way of money being committed to developed market stocks to send them higher. There may even be some momentum investors left who will pile on if a rally can get just a little traction.

The Vix index of stock market volatility hit a record high of 89.53 last week while the ratio of bulls to bears is at a several year low. And stocks have absolutely cratered — the S&P 500 index is down more than 40 percent this year and was heading lower at the time of writing.

Secondly, in historical terms valuations are as good as they have been in quite a while and increasing numbers of stocks are appealing to even the most hard-bitten value managers.

Perhaps most compelling, bear market rallies are simply what often happens in these circumstances. Nothing, not the housing market, nor the Roman Empire nor Alan Greenspan’s reputation keeps going in a straight line in one direction.

“Whether they are bull or bear, markets move in waves,” said Albert Edwards, the famously bearish global strategist at Societe Generale in London.

“You typically get three or four rallies by 25 percent within a bear market. And even though I think the S&P is going to 500 we should get a fairly healthy bounce at some stage.”

Edwards, who has been not just bearish but structurally bearish and who in September predicted a crash, has started to put a toe back into the water, raising his weighting of equities within a diversified portfolio.

He is still underweight equities, but has moved away from more extreme levels.


And it’s not just him. Both Warren Buffett and famed value investor and long time bear and bubble detector Jeremy Grantham have recently become more positive on equities, to varying degrees and in Grantham’s case with a proviso that we will ultimately go lower.

I hate arguments of authority; a long string of them have got us where we are today. The deal must be safe, the ratings agency called it AAA. It must be sensible to borrow five times my earnings to buy a house that just tripled in value, after all the bank is willing to lend me the money. The Fed must know what it is doing.

But that said, the arguments that we may have a rally soon, even an evanescent one, are pretty good.

Grantham looked at 28 bubbles which met his criteria since 1920, all of which, including now the recent bubble in the stock market, reverted to the trend line of growth. Earlier in October, he called S&P at 900 good value and said he would be a steady buyer, though he says he is reconciled to buying too soon. He acknowledges that in the largest bubbles, 1929, 1965 and Japan’s in 1989, the market overcorrected by substantial amounts. He thinks the index, which was trading on Monday at around 880, will bottom at between 600 and 800.

Given that reverses are always part of market trends, and especially given that few awful things in life are as terrible as they seem when first the shock sets in, I do think it is reasonable to expect a rally. It could be quite powerful and will immediately get strategists and talking heads reminding us that large portions of bull market gains usually come in the first few weeks of a recovery.

But though I wouldn’t bet against such a rally, I also wouldn’t buy it a season ticket. Let’s all hope that the financial system doesn’t fall over, but let’s not confuse it remaining standing with a recovery.
Analyst expectations for earnings in the developed world are still at laughable levels. And though everyone laughs at them, stocks still get sold off when they disappoint.

The ongoing deleveraging of the Western economies has further to go and anyone with any sense will admit they don’t really know what this crisis may throw up.

So, prepare yourself for a bit of holiday season cheer, but remember that a long lean period usually come after.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –


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Shame on you Reuters for leading off with an “off-hand” and misleading headline with the notion about the markets, leaving me, a person who follows Saft and thinks he probably should be in charge of the FED!! believeing Saft has “gone off.” Saft has a great ability for prediction. But, that said, for those who did not read the column, they may think we can spend and spend again. But, that is not me. I never will or have put one dime in the stock market.

For those who did read his Column they found that he went on to get the “rally” if there is one, with a high probability close to right, followed by a trough and possible deep recession.

There may be a “rally” and a Merry Christmas for most or some in the Rich World. Since, I don’t celebrate that holiday, except for food and feeding the homeless, I only care for the sake of the children wishing that it not be Dickensian!

However, since Americans have become what I call, Texas “spoiled brats” who think it O.K. to have it their way all of the time, while the remainder of the world might go hungry, as the Americans play with their Christmas toys, perhaps a rally for Christmas might not be such a good idea. But, if it happens, people should at least bring it down to sharing “organically agriculturally grown food!” Learn to avoid the big grocery chains and find a farmer’s market somewhere. Also, don’t purchase that “thing” that is going strait to the “dump” of lead and plastic! Cleaning up the environment and helping global warming slow down might be a Christmas present for the globe. Try it for THAT WOULD BE A VERY GREAT CHRISTMAS INDEED! Someone needs to stop the “Texas plague of Money and Greed.”

Since GWB has bankrupted everything he has ever touched, he is certainly not anyone to follow in his debauched “desires.” But, neither is Buffett or Grantham. As, Saft is not the only “economist” to predict a possible “rise” followed by a large “fall” as in the 1929 degression with 5 months of rally and years of jobless starvation and hunger, then I might not invest in Goldman Sachs at all if I were you!

I agree with Saft, and I advise as a political economist not to go “wild” over a rise in markets just now or in the near future. And, I have to say I don’t see Buffett as a money “guru,” he’s not that smart. His math is 2nd grade arithmetic… buy up everyone’s equity and some good stuff cheap, put in your own money to get the majority stock, and then catch ‘em down and they have to sell. So, that is a win/win in rational choice. But, you don’t have to be very smart. His tactics are used in the school yards with marbles. Perhaps, that is where he learned his “craft”? I wonder if the stock-holders of GS know that Buffet is now their boss?

And Saft I think you are very close on this prediction.
I am a political economist who studies “oil wars,” as well as being an econoomic anthropologist and ecologist who hopes Buffett does not get a chance to buy “equity” in “clean” environmental credits and then sell them into the “one pot” of trades to people who have “filty” businesses and need a “bailout”n. First of all those “swaps” are not going to work. We don’t live in a bubble! And, most people are not educated enough to be playing capitalism with the environment. That is an evolutionary ecology problem. So please refrain and let the scientist, not the money grabbers and the pseudo-scientist of GWB tinker with your world, your nest.

Liz Goset”s comments speak to the authority of her ecomomic expertise, she may be a political economist but apparently missed a lesson or 2 before graduating from that correspondence course. James Salt writes about economic history, Liz Goset her politics, I think I’ll stay away from that organic food.

Posted by J Edwards | Report as abusive

As a young boy I learned from my parents not to steal or to borrow if I couldn’t pay it back (same thing) and if I wanted something to work for it. Also, that the more I learned about my work the more I would earn. Please tell this to the crooks in Washington! John

James is right.Market is oversold in the Short Term and a rally is coming – a dead cat bounce to trap the last of the hopefuls.Well we are back to square one.Greenspans 1% Interest rates fueled speculation and Fed wants to use the same trick again.
Good Luck !

Posted by F.Daruwala | Report as abusive


American economy need to learn few lessons from ancient Indian civilization,sooner the better for their economy and for the entire world.

1) Live within your income. The concept of borrowing and eating will not last long.And the day you will fall you will not be able to get up again.

2) Don’t try to create a artificial world of dreams as true facts will come out.

3) The world economies will move back to socialism as we have started seeing the negatives of capitalism after seeing the positives.

Posted by ANIL AGARWAL | Report as abusive

Well, it’s a fact now, Crooks are running the show..
it’s all about positioning your point of view..if it didn’t work, well let’s reposition it again..
next time i will major in quantum physics, maybe i will have a chance to knock a trillion or 5 down.

Posted by jean | Report as abusive

Although I am certain there are some investors waiting on the sidelines for a bottom so they can pump money back into the markets, judging by the extremely low savings rate and the very high consumer debt levels, we are talking about an obscure and relatively minor segment of the investment population.

One reason to argue for a structural downturn is the fact that, at least in theory, an efficient free-market system produces a saturated environment over time. If a sector is booming, competition drives others to enter the same market to produce similar products. Eventually profit margins decline along with growth rates to the extent that external capital is not required. In past years the production was constrained geographically. But these days the entire world has formed a productive web – and there is no escape.

I haven’t lost any sleep during this downturn. This is mostly because I don’t stay up late at night trying to determine when to jump off and on the bandwagon. I think rather than focusing on nominal fluctuations in the stock market we really have to rethink our perspective on sustainability and what constitutes growth and wealth.

Posted by Don | Report as abusive

I asked a year ago what it was about the track record of the Fed/Treasury/Congress combine that recommends them as stewards of anything, and I am still asking. Somehow Paulson and Bernanke appropriated the ability to take a huge share of the world money supply and gamble it into the biggest Black Swan/ Minsky moment we have ever seen, based on an academic study and experience at a firm that gave us the term “quant”.Nobody has experience or models to deal with the leverage and deficits we have created so sure we are going to have market volatility while the great ones experiment with our future. We all know that the leverage and deficit spending are the root of this problem, so where is the new thinking and leadership that deals with the problem instead of the symptoms?
I liken what is going on now to treating alcoholism by increasing the supply and lowering the price of booze.Let’s get out of this crisis management mindset before we turn it into an infamous phrase.
Let’s also get away from letting sitting politicians and candidates set the issues. By focusing on polarizing right /left issues like taxation and abortion, we take our eye off the ball and let the important issues like deficit spending get pushed off into the background, which is exactly where the creators of the problem want it.

Posted by Gary Leeper | Report as abusive

What the world should do at this juncture or in the past is to leave the US to do it’s own house keeping, the way in which the world left Japan alone for 15 years. Asian growth is key to this very fragile market place but let’s stick to this trend. Use the Mass Media to drive up confidence in Asia/Europe and CIS. A sick patient needs rest and that is what we should encourage as physicians to the ailing US economy.

Posted by Dan | Report as abusive

The unprecedented wealth of Americans, over the last 50 years, has lead to a cultural decline in which the true value of anything (ie: material, stocks, activities, relations, experiences, faith, philosophy) is lost in marketing/media hype, commercials, distortions, distractions and reductions to soundbytes. We no longer know the true value of anything. We no longer understand what is required of us to obtain that which is valuable. We no longer grasp that all our actions have consequences and that there is no such thing as a “free ride” or individual solution that ignores the common good. Our great wealth has allowed us to place image over substance, quick fixes over long term solutions, “me and mine” over the common good, and fantasy and escapism (drugs, TV, videogames, etc.) over personal development and interpersonal interaction. We have made bad decisions, or no decisions and allowed the unscupulous and uninformed to “run things for us”, while we were diverted with “things” without substance and pursuits without lasting “value”. Now, we Americans find ourselves divided, disconnected, incapacitated, disoriented, stunned and bewildered by the consequences of our actions/inactions. We look for a quick fix. We look for someone/something to blame for the reality of an economic crisis which has yet to deliver its hardest blows. We still deny the demands for personal education, responsiblity and involvement in a government whose stated purpose is “to provide for the common defense, promote the general welfare, and secure the blessings of freedom for ourselves and our posterity” (preamble to the US constitution). Our government doesn’t work when the majority of our populace put “me and mine” at the expense of the common good. Our government and economic system don’t work when the majority of our populace don’t know about what’s going on and don’t get involved in what’s going on. Our economy doesn’t work when the majority of the populace is trying to get something for nothing or demanding inflated wages for poor work. Our economy doesn’t work when the majority of our populace spends more than they can afford and lives above their means. Who is responsible for this financial crisis? We are. There is no one big, bad individual, group, or entity which brought us to this place. We are all complicit, whether by comission or omission. Who will help us out of this crisis? With God’s help and guidance and a commitment to what is true and valuable in our nation and in ourselves, we will. God won’t do it for us, we must take responsibility and do it our part. How long will it take? We will decide, by the length of our denial or by our commitment to do what it takes to made things better. How hard will it be? It most likely inversely related to amount of decadence which has gotten us to this point.

Posted by L. Schaffer | Report as abusive

Lord knows we’re due for a bottoming out in global markets, and since Bernanke’s handling of the crisis in short-term lending markets will soon bear fruit, who can say the current recession will not be short-lived? America is a rock, and Americans are the hardest working and most optimistic people in the world—we can’t lose!

Posted by Seer2008 | Report as abusive

People seem to talk about markets like they’re some sort of living thing that you have to try to predict based on investment guru blather. They aren’t. The stock market is simply a collection of company stocks that are available for sale which are competing with bank accounts, bonds, gold, houses, cars and hamburgers.

If you take the Warren Buffet approach, you totally ignore where the market is and buy a company based on its current valuation and future profits. This seems to work given Buffet’s success.

And if you extend this to the rest of the market, it’s hard to see how profits over the next five-ten years can justify current valuations, given that you can buy corporate bonds yielding 15-20%. Or 70% if you are willing to bet on Ford.

So until individual companies look like they can make at least a 20% return in the coming recession, they’re not attractive investments. Given that profits are starting to plunge, it looks like we’ll need a trailing P/E of about five before stocks start to look attractive vis-a-vis bonds. In the current environment, that looks to be about 30-50% south of where we are now.

And another point, Seer2008, Americans can only be hard working when they have jobs. And right now, the number of hard working Americans with jobs is declining so rapidly that I can’t see them working their way out of this recession in a hurry.

Posted by Peter | Report as abusive

Let’s see how far the bear market rally travels. I will not trade in it. I will be patiently wait on the sidelines until it tops (likely January 09) and buy inverse etfs. The depression coming dow the road will be worse than the 30′s. That 800 billion is a small fraction of junk real estate paper (mortgages and insurance) that needs to be reconciled on balance sheets.

Posted by roberto | Report as abusive

The thing that worries me is politicians with mealy-mouths, a technique perfected by ex British Prime Minister Tony Blair (he distracted the entire country for more than half of his tenure with his “Anti Fox Hunting” campaign whenever an important issue reared it’s head… now the politicians have “Climate Change” to trot out as a distraction), which permits the unsustainable antics of the last decade or so to be viewed as purely opportunities rather than potential risks, and permits our “leaders” to be seen to be doing something important… I can think of a couple of other “distractions” cobbled together during this same period as well.
For example; the by-and-large global property prices sky-rocketing, an “opportunity” to invest that could have, and should have been reined-in rather than encouraged with ever dropping interest rates; and another example being the export of industries and jobs on a wholesale basis “off-shore” which to my way of thinking robs the country of origin of jobs, hence tax and spending power but most importantly the tools to rebuilt the economy from the bottom up. What’s going to happen now? is it going to be rebuilt from the top down, maybe with marketing agencies, think-tanks, accountants, lawyers, bankers and consultants leading the recovery?

Posted by Peter H | Report as abusive

Just watch out for triple witching at the end of December……. could be some nasty margin calls and assignments

Where is Washington going to find a SUCKER to loan it 3 Trillion dollars so it can spend 3 Trillion dollars more than it has? Take this overspending out of Washingtons pockets not mine. They should pay it back not my Grandkids. John

Posted by John Dinneny | Report as abusive

The president elect has been flirting with the idea of another stimulus check/bailout. Is that a sound idea? I wonder. No doubt this is a vicious cycle at the moment. No doubt the artificially fattened bulls will be back – perhaps even in time for Christmas. But might it be more prudent to let them come roaring back on their own, after a little sojourn in the pasture, rather than set up bait? It seems to me that when the bulls are over-fed, they just tune out and go for a really long walk (to work off the carbs, you understand?) But if folks insist on serving these beasts chemically enhanced hay, we could kill em next time.

By Marion TD Lewis, Esq. New York