Tuesday, November 25, 2008

Market Bottom? Again?

Jeff Rubin of CIBC believes we are on the way out of this mess. MSNBC map shows the extent of the downturn. Warren Buffett likes a bargain but we cannot all be Warren Buffett.

Every time we see the light at the end of the tunnel, we suddenly seem to enter another tunnel. Before I left for my holidays, we forewarned that we should expect another drop in the markets. The amount was the unexpected news. To refresh, David Rosenberg, North American economist at Merrill Lynch, studied the 12 major troughs in the S&P 500 since 1932. What he found was that the market retested its lows “without fail” in every case. On average, it took 35 days from the initial trough to an interim peak, and another 35 days to retest the lows before stocks moved higher for good. North American markets bottomed out around the 27th of October. Based on history, can we expect a second trough around December 1st? That would last until early January at which point markets would be expected to rally.
Once again we have seen the evidence pointing out that history does tend to repeat itself - while the price of gas at the pumps looks nice, the corresponding drop in the Toronto Stock market makes people realize you cannot have your cake and eat it too. So this leads back to the obvious question as to where we are going to be in the future. If you polled most economists, they would probably speculate as to another six-nine months of economic contraction. Markets tend to come out of a protracted drop sooner than the economy - does that mean we are near the end?

When Barack Obama announced his "economic team" for the future, he discussed the need for an immediate stimulus package to get people back to work. Realizing that the US economy faces job losses, he wants to spend his way out of the issues. While this will lead to short term economic solutions, it will eventually lead to higher inflation in the future. This will mean higher borrowing costs, mortgage rates etc.
The cycle continues - until people realize that they need to save money and not spend for the sake of spending. The one saving grace in the future is the "downloading" of wealth. That is the expected trillion dollar transfer from those born pre-world war two to their children. Since the baby boomers represented the first major segment of society to "invest in the markets", it stands to reason that the transfer of this wealth will represent a major future economic stimulus.

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