I'm starting to see a few articles pop up suggesting that we have seen a secular bear market low. I remain doubtful. First off remember secular bear markets historically don't bottom until fear has moved P/E's to completely irrational levels, usually in the 8-10 range.
I'll also note that the degree of the decline is often proportional to the excesses of the preceding bull. This secular bull topped out with P/E's above 40. If that's any indication we should probably see resulting bear market lows eventually reach historic levels. My guess is that we could see P/E's in the 4-5 range before this is all over. Current estimates for reported earnings next year are now down to $42. Even if we some how manage to stop P/E compression in the 8-10 range we could still be looking at an S&P trading between 350-400 before this bear has run it's course.
Here's my problem with trying to call a bottom right now. First off our economy has been based on credit and consumption for sometime now. An economy based on people borrowing money and buying big screen TV's, Hummers and granite counter tops isn't exactly a healthy economy. Now we are faced with what will probably be the worst recession since WWII and possibly even the next great depression. That means rising unemployment.
Consumers that are unemployed can't spend money they don't have. If Americans can't spend then businesses in the US that live off of selling baubles to consumers are going to start hurting. When profit margins get squeezed businesses have one option either layoff workers or go under. As unemployment rises we have less and less consumers to hold up our "borrow and spend" economy. A vicious circle starts.
The government isn't doing us any favors. For some reason they seem to think that borrowing ever larger amounts of money and spending it on bailouts will somehow cure the problem. In a deflationary climate debt is a killer. I suspect a great many home owners are finding this one out the hard way right now.
As the economy sinks further into recession taxes will continue to drop making it harder and harder for government to pay it's debt. I fail to see how adding more and more debt at a time when it's getting harder and harder to pay for it is going to help us.
If Joe Sixpack loses his job but continues to increase his spending patterns, living off of credit cards, I fail to see how that leads to prosperity. What I do see is Joe eventually declaring bankruptcy. When that happens not only does Joe go under but the credit card companies get hit also.
Is the US is any different than Joe Sixpack? Can we continue to borrow ever larger amounts of money at a time when we are less and less able to pay this debt back and really think there will be no consequences? Not only are we on track to bankrupt our selves we are going to damage everyone who is lending to us.
It seems to me that the powers that be are doing everything they can to make this worse. Until that changes I don't see an end to this bear.
Let's face it, the leg is already broken, all the bandaids in the world aren't going to fix it.
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