Wanted: A Panic To Slay the Bear
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The rousing two-day rally in the Dow Jones Industrial Average of 452 points undoubtedly lifted the spirits of many bloodied investors, although yesterday’s tumble of more than 200 points may have put a damper on the optimism. And yesterday’s downturn may be just what’s needed.
One savvy Florida investment adviser, Michael Larson, contends that a scary, drastic, and painful action is needed to restore investor confidence and get them back into a sustained buying mood. That action is a broad-based selling panic — a vicious down day in the market in which the Dow dives maybe 500 to 1,000 points. “We need that kind of a decline to get everyone’s temperature up,” he says.
Obviously, such a plunge would be a killer for investors, who have already seen the Dow shed more than 3,200 points prior to a bit of a recovery since hitting a high last October 19 of 14,164.
Mr. Larson, a conspicuous figure in this column because of his accuracy in calling market downturns well before the rest of the Wall Street pack, singled out five ingredients — the most important being a selling panic — that he feels must occur before the current bleeding can be stopped.
Despite the 20%-plus market decline that followed last October’s high, Mr. Larson points out there has been no panic or blood in the streets, but rather investors marching down the slippery slope of hope by buying into rallies and then selling when the market goes down.
The associate editor of Safe Money Report, a monthly newsletter out of Jupiter, Fla., Mr. Larson argues that some negative event, such as a bank failure, is needed to spook the market and shake investors out of complacency. “You need capitulation, a cathartic washout where investors throw in the towel, in turn clearing the deck and setting the stage for a meaningful market recovery,” he says. “We’ve already seen capitulation in the financials, but it has to be broader based. We need a panic.”
In brief, he says, the market badly needs a replay of late 2002 (the finale of the Internet debacle), when investors finally caved in, selling en masse and paving the way for an end to that bear market.
What about the two-day rebound earlier this week? Mr. Larson views it as one of those bear market rallies, which he notes, traditionally are some of the sharpest and biggest you’ll see. “Buying into them, however, is a mistake if the market is, as I believe, still in a primary downtrend,” he says.
“Without a giant-sized, knock-’em-dead decline,” he says, “it’s simply continued agony through more of a slow bleed.”
Among the other ingredients he feels are required to slay the bear is evidence that the housing market decay may be nearing an end; a sustained break in commodity prices, notably oil; a bottoming of the economic decline, and a considerable easing of the credit crisis.
“One alone won’t work,” he says. “You need several to happen to restore market credibility.”
Unfortunately, Mr. Larson sees none of these occurring over the near term. More specifically, he doesn’t see any significant broad housing recovery until mid- to late 2009. While he thinks oil could drop further to $110 a barrel over the near term, he’s convinced that the overall longer term trend remains up. As for the economy, he notes that more than $100 billion of tax rebates have helped beef up consumer spending. But these checks are now drying up; the last of this money is practically gone and there is no evidence the economy can stand on its own two feet. And so he concludes, therefore, that the economy, after the second-quarter rebate stimulus, should turn weak again in the third and fourth quarters.
A few weeks ago, the CEO of Merrill Lynch, John Thain, told the financial community that there were no plans to raise additional capital. That wasn’t so, as earlier this week, Merrill announced plans to raise another $8.5 billion of fresh capital to shore up its balance sheet. Since late 2007, Merrill has raised about $12.8 billion of capital following heavy subprime losses.
To Mr. Larson, Merrill Lynch’s moves re-enforces his skepticism about repeated market assertions that the worst of the credit crisis is over. “How many times have we seen this movie?” he asks. Reacting to renewed investor interest in the beaten-up financial shares over the past couple of weeks, Mr. Larson says, “I would stay away from the financials until we see concrete evidence of an improvement (a reduction in loan losses and fewer writedowns). Why try to be a hero?”
Given his bleak view of the economic and financial scenes, Mr. Larson says he would also stay away from stocks generally since he expects the bear market to worsen, with the Dow dropping to the 10,500-10,600 range before yearend and perhaps to the low 10,000s. The Dow fell 206 points, or 1.78%, yesterday to 11,378.02.
dandordan@aol.com