Spiga

How low can we go?

For several years I have been posting what is now a real threat to the US economic system, "systematic risk". Please do a search on this site to find the posting.

Now the question becomes, where are we and when will this be over? A few things to keep in mind

1) The US lead the world in falling equity markets and rising debt spreads.

2) The US Dollar will continue to weaken against most other currencies.

Those trends have to break the downside. Our markets will probably stabilize as other parts of the world begin to deal with issues of systematic risk. Its all about capital and cash flow, in that order - and if you business doesn't have a strong #1 and a decent #2, you will either downsize big, get taken out or risk going bankrupt.

What do historical events suggest about our current fall?

The S&P 500 has had
eight previous bear markets since 1962, according to data compiled by Birinyi
Associates, a stock research firm based in Westport, Connecticut. Stocks have
fallen an average of 33 percent over 382 days during those retreats. The S&P
500's retreat from its peak has lasted 274 calendar days so far. The Dow has had
11 previous bear markets since 1962, averaging a decline of 29 percent over 322
days.


So we can expect another statistical 48 days average of a bear market before a turn. That could coincide with the shorterm Dow 10,800 target we have for this cycle to clear us for a base. But is this time different? The answer, we believe is YES. Becouse this is not 1962, or anything since. The major difference is the derivative destruction that is occuring behind the scenes, causing multiple securities and debt markets to undwind in ways not calculated by sophisticated modeling software.



Where do we see the rest of the future? 2009 will be a very bad year for consumers and companies with negative cash flow and no reserves. The thin will die, and the thinning will be ready to die a corporate death. Now lets compare where equities could go.. based on a list of worst bear markets (which is what i believe we shold be comparing this current trend to)


Its very difficult to read but this list is a bit easier to understand. Image above is borrowed by Political Calculations.

1901-03
Fall in the Dow: 46%
Losses recovered by: July 1905

1906-07
Fall in the Dow: 49%
Losses recovered by: September 1916

1916-17
Fall in the Dow: 40%
Losses recovered by: November 1919

1919-21
Fall in the Dow: 47%
Losses recovered by: November 1924

1929-32
Fall in the Dow: 89%
Losses recovered by: November 1954

1937-38
Fall in the Dow: 49%
Losses recovered by: December 1945

**Disillusionment among the business community was by then so strong, however, that the New Deal was abandoned soon after. (words to the Obama Supporters)


Fall in the Dow: 45%
Losses recovered by: December 1982

What does this mean? It can take an average of 6 years to recover to the previous highs. We're close to completing year number one. But in this cycle, i would give it three years from the bottom to get back to the old highs.

The average drop was over 35%, which means we could enter the Dow 9K range in 2009.

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