I Repeat, Are We Off The Bottom?

If you are alive and investing you have to be asking yourself whether the worst is over, whether this is a bear rally - is the dead cat bouncing - or are we on the way to recovery? All good questions and the true answer is anyone's guess, but some are better guessers than others.
I posted Wednesday that I do not think we are at bottom just yet. I wish we were, but the data seems to say otherwise. Reading today, Nouriel Roubini seems to agree, and he has better reasons than what I gave.

http://www.rgemonitor.com/roubini-monitor/255995/reflections_on_the_latest_dead_cat_bounce_or_bear_market_suckers_rally

Let me summarize some of his key points for those out there without a lot of time to read his sage words. First, with respect to the belief that economies are contracting at a slower rate (so the worst is over), he believes economies are not contracting at a slower rate:

"the latest data don’t confirm this relative optimism. In Q4 of 2008 GDP fell by about 6% in the US, 6% in the Eurozone, by 8% in Germany, by 12% in Japan, by 16% in Singapore and by 20% in South Korea."

My take is that the U.S. still has a good bit of hurt ahead and while it may be further into the curve than most countries, it cannot separate itself from the world. Even being ahead of most countries, we are still in for some hurt. Suprime is no longer the area of greatest concern as we are near peak pain there. Alt-A and prime delinquencies and foreclosures are mounting. Credit card debt (which admittedly is small compared to mortgages) is a double-edge sword. On the one hand the card debt is becoming more problematic. And on the other, credit card companies are significantly reducing credit lines, which is putting the pinch on some needing the credit, though reducing the prospect for those in trouble to get more in trouble. Commercial loans are yet another source of problems facing the U.S. Yet, despite all this, I think the U.S. is in pretty good shape compared to most countries.

The problem increasingly is not the U.S. but other countries that we deal with on a regular basis. Let's face it, we are globalized. Even if the U.S. is possibly reaching its own bottom, many areas of the globe are feeling much more pain and we are not immune to where they are going. We are not immune from pain in Eastern Europe, Russia, China, England, Germany or elsewhere. They sneeze and we need a tissue. Again, Nouriel details this better than me:

"The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression) with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capex spending around the world. And now many emerging market economies – as argued here for a while- are on the verge of a fully fledged financial crisis starting with Emerging Europe."

Now Nouriel continues to his second point, that the fiscal stimulus is not, well, very stimulating - as in not working. He describes it as pushing on a string. He notes in passing that some countries and regions, like the EU and Japan, are not doing sufficient fiscal stimulus compared to us. To me this is a significant point worth some focus as we can do all the stimulus in the world but if certain other key countries fail to do so, we are doomed to failure.

Nouriel also he notes that even the U.S. stimulus has little hope to stimulate this year. Of the $800 billion to be spent in the U.S. on stimulus, only $200 billion will hit the ground this year with the rest through 2010. There is a limit on how fast you can spend this money. And of the $200 billion to be spent this year, most will be tax rebates to people who will save it or use it to pay off debt (thank God individuals know what to do). Seriously, I think individuals need to save and pay off debt now, i.e. deleverage, rather than spend like there is no tomorrow - like Summers would like us to do:

"Of the $800 billion of the US fiscal stimulus only $200 bn will be spent in 2009 with most of it being back-loaded to 2010 and later. And of this $200 half is tax cuts that will be mostly saved rather than spent as households are worried about jobs and about paying their credit card and mortgage bills (of last year’s $100 bn tax cut only 30% was spent and the rest saved). Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capex spending of the corporate sector, business inventories and exports) the stimulus from government spending will be puny this year."

Nouriel's third point is on how most assert that the U.S. markets are oversold. He seems to disagree in the extreme:

"If you take a macro approach earnings per share (EPS) of S&P 500 firms will be – quite realistically in 2009 - in the $ 50 to 60 range (I say realistically as some may even argue that in a severe recession they could fall to $40). Then, the question is what the multiple, i.e. the price earnings (P/E) ratio will be on such earnings. It is realistic to expect that the multiple may fall in the 10 to 12 range in a U-shaped recession. Then, even in the best scenario (earnings at 60 and P/E at 12) the S&P index would be at 720. If either earnings are closer to 50 or the P/E ratio is lower at 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000. And using a similar logic we argued that global equities – following the US - had another 20% plus downside risk.

These predictions were made when the S&P 500 was close to 900 and the DIJA was close at 9000. This basic macro approach was the reason why we argued that the latest bear market sucker’s rally – the one going from late November 2008 to early January 2009 – would fizzle out and new lows would be reached. Indeed, like previous bear market rallies of the last year this one went bust – falling over 20% - and the DJIA and the S&P broke below the 7000 and 700 upper limit of our range for US equities. With the DJIA and the S&P now well below the “7” range the next test for the markets may be 6000 and 600 for the two indices.
I have also argued that another bear market rally may occur some time in Q2 or Q3 of this year and may end up like the previous six. Indeed in the last 12-18 every time something dramatic happens (that leads to a lower stock market low) and the government reacts to it with a more aggressive policy action optimists come out and say that this is the dramatic and cathartic event that suggests that a bottom has been reached: they said that after Bear Stearns, after the collapse and rescue of Fannie and Freddie, after Lehman, after AIG, after the TARP was announced, after the G7 communique’, after the $800 fiscal stimulus package was announced last November (the onset of the latest sucker’s rally).
And after a while markets are again “shocked shocked” (to paraphrase the French police inspector in Casablanca) to discover that the macro news are much worse than expected in the US and abroad, that earnings news are much worse than expected not just for financials, realtors, home builders and consumer discretionary firms but also for most other non-financial firms, and that financial markets/firms shocks/news are worse than expected.

As repeatedly argued here these financial markets/firms worse than expected news are many: news that more and more financial institutions are effectively insolvent and will have to be taken over by the government; news that highly leveraged institutions – such as hedge funds – will be forced to deleverage further and thus sell illiquid assets into illiquid markets; news that even non-levered investors (retail, mutual funds, etc.) that lost 50% plus into equities are burned out and want to reduce their exposure to equities; and news that a number of emerging market economies are on the verge o a contagious financial crisis."

Nouriel goes on at length, more so than usual for him, about how we are not yet at the bottom of things. I used far fewer words, but I agree with him for most of the same reasons. The facts say a bottom is not here yet. I only hope I am wrong.

Disclosures: None