Last Thursday Was the Bottom - It's Time to Get Back in

by: Tacitus November 28, 2008 | about stocks: BAC / DIA / DRYS / HERO / QQQQ / SPY    

Tacitus

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Last Thursday, November 20, was the lowest finish for the market since the bear began last October. Since then we have had four consecutive double-digit gains, something that has happened only 45 times in the history of the market, dating back to 1896.

So was last Thursday the bottom? I think it was.

Much has been written over the last few months about how to tell when this market would hit bottom. Several well-done pieces noted the five (or six, or ten) signs that the market has bottomed out and noted that nearly all were in place a month or more ago. For instance, more than one essayist argued that when a "Perma-bear," such as Jeremy Grantham, begins talking bullishly about the market, that is a surefire sign of a bottom. Gratham has indeed argued the current market is more favorable for the equity investor than any he has seen since 1982. Other essayists focused on technical indicators, capitulation, mutual fund outflows, and other factors, most of which seem to have been present for some time.

However, the one historically consistent sign of a market bottom that has not been in place heretofore has been the market's discounting of bad news. That missing element finally appeared on Wednesday, November 26, when a stream of bad news came over the wire before the opening about weak durable goods orders and other negative factors.

But for the first time in months, negative news did not take the markets lower. Though stock futures pointed lower Wednesday morning, and though the market started down more than 100 points following the opening bell, the market quickly began a surge northward and finished more than 250 points above its Tuesday close. There was no positive news to account for this determined show of optimism, unless you want to count the official announcement of Paul Volcker's appointment to head a new committee of economists advising Barack Obama-- an appointment that has been hinted at for weeks, and it therefore appears that this bear market has finally gotten tired of dropping and intends to rise regardless of the news. Together with the various factors discussed above and elsewhere, that is the unmistakable sign of a market bottom. Another is the breadth of the bounce, which has affected nearly all sectors-- including, notably, the financials. Bank of America (BAC) is up more than 25% from its low, and even poor old Citigroup (C) has bounced back.

But doesn't the continued weakness in the economy mean that this cannot be a true bottom and is instead a dead-cat bounce? Not at all. The market always starts its upwards move months before a bad economy has even bottomed. In his book Stocks for the Long Run, Jeremy Siegel documents how the bottom of the market always precedes the trough in the economy as a whole, typically by 4 to 6 months, and on average by 5.1 months. Looking at the current downturn, it makes sense that we would be at or near the bottom at this point in the cycle. We have been in a recession for two quarters, and it is likely that we will continue to be for two more quarters. A one year recession would be one of the longest in the postwar period. But if the trough in the economy occurs late next spring or early next summer, as most economists believe, that would mean we should expect a market bottom around here.

In short, it's time to get back in. I am buying good companies that have been unfairly beaten down over the last few months and now sell at substantial discounts to book value-- companies like shallow-water driller Hercules Offshore (HERO), dry bulk shipper Dryships (DRYS), and solid financials like Bank of America (BAC) that look like they will not only survive but thrive after the shakeout.

One word of caution, however; I suspect the coming bull-- whether you consider it secular or cyclical-- will be short-lived. The feds have force-fed the economy with three-plus trillion dollars in the last few months, and as soon as the crisis is over and the economy seems stable, expect the Fed to begin tightening to keep inflation from running wild-- with correspondingly negative effects for the market as a whole. In short, buy aggressively here, but keep trailing stops on your big buys and be ready to move into gold and TIPS when the bill for the bailout begins to come due next year or in 2010.

Disclosure: Author holds long positions in BAC, C, HERO and DRYS

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This article has 108 comments:

  •  
    Nov 28 06:30 AM
    Why do you like Dry ships DRYS
    Reply | Link to Comment
  •  
    Nov 28 07:14 AM
    You say;

    "In short, it's time to get back in. I am buying good companies that have been unfairly beaten down ... companies like shallow-water driller Hercules Offshore (HERO), dry bulk shipper Dryships (DRYS), and solid financials like Bank of America (BAC)"

    which sounds like you do not yet have them but will buy since you think market have bottomed.

    But the disclosure says;
    "Disclosure: Author holds long positions in BAC, C, HERO and DRYS"

    Which tells me you already bought these shares. So you are here to pump shares you already own. Will you be here telling people to sell before you sell? Or are you just a stock pimp?
    Reply | Link to Comment
  •  
    Nov 28 07:35 AM
    According to the author, "we've hit bottom" - again. This is the third time in less than two months we've done that. Why do I think that we'll be seeing another "we've hit bottom" article sometime in January???????????
    Reply | Link to Comment
  •  
    Nov 28 08:39 AM
    I agree bought DRYS Wednsday....sooner or later coal,food,metals have to go across the pond! If the authors own it is wrong, if they don't own it is wrong! Get real!
    Reply | Link to Comment
  •  
    Nov 28 08:41 AM
    ^^Shakeout??? You call this past year a shakeout???^^

    Something here has hit bottom, that's a fact, but it may not be the market!

    If you've been long the stocks you're recommending (BAC, C, HERO and DRYS) for more than a week or so, then your post is most disingenuous. Either way, your investment strategy appears to revolve around HOPE and little else.

    Market bottoms are processes more than they are singular events. This is a time for nibbles rather than big bites, and nimble, disciplined trading with a very watchful eye on risk management and capital preservation!

    Jeremy Siegel's BUY & HOLD strategy and the research that supports it belong to the last bull market that came to an end with the 1998-2000 topping processes. You'll have a very tough time convincing many folks here that BUY & HOLD in a post 1999 investing world is much of an investing strategy. Even your friend Jeremy has begun to backtrack!
    Reply | Link to Comment
  •  
    Nov 28 08:47 AM
    The S&P (to pick a broadly-based index) is up 18+% percent in FOUR DAYS, and NOW is the time to buy? Are you, by chance, long the rearview-mirror industry as well? I hope so, as you seem to be their best customer. How about providing the same advice (if that is your belief) after a 5% pullback? I'm long HERO as well (mixed company at best ... unfortunately for you ... ha ha ha) ... and I have been buying as well starting last Thursday (call it blind luck), but I actually lightened up a bit on that new money, taking 1/3 off the table on Wednesday. My crystal ball is a bit fuzzy, but a 50% move in GS and JEC seemed like pretty big moves to me in 5 days (even including the drop I took last Thursday) ... FYI, I'm still an idiot (in case there was any doubt), b/c I included a "lottery ticket" investment in Nortel (which is down in the past week of course).
    Reply | Link to Comment
  •  
    Nov 28 08:48 AM
    Just a corrective move up after a public liquidation. Nothing more. 20 % up in 5 days.

    Not much more upside left. Stock pimpers bid it up to get out.


    On Nov 28 08:41 AM Jim Hawthorne wrote:

    > ^^Shakeout??? You call this past year a shakeout???^^
    >
    > Something here has hit bottom, that's a fact, but it may not be the
    > market!
    >
    > If you've been long the stocks you're recommending (BAC, C, HERO
    > and DRYS) for more than a week or so, then your post is most disingenuous.
    > Either way, your investment strategy appears to revolve around HOPE
    > and little else.
    >
    > Market bottoms are processes more than they are singular events.
    > This is a time for nibbles rather than big bites, and nimble, disciplined
    > trading with a very watchful eye on risk management and capital preservation!
    >
    >
    > Jeremy Siegel's BUY & HOLD strategy and the research that supports
    > it belong to the last bull market that came to an end with the 1998-2000
    > topping processes. You'll have a very tough time convincing many
    > folks here that BUY & HOLD in a post 1999 investing world is
    > much of an investing strategy. Even your friend Jeremy has begun
    > to backtrack!
    Reply | Link to Comment
  •  
    Nov 28 09:04 AM
    Bank of America is a stock I've owned at various times over the last two years. I have generally made money with the stock, the last time buying 200 at 39.xx and 100 at 19, then selling out at 36, and I was lucky to get out at the one-time return to the 30s. I recently bought again at $12.90, hoping that the dividend will hold at 1.28. This is a stock which got out of subprime in 2002 or so. Ken Lewis is a very good retail banker, but he may have overreached with Countrywide and Merrill Lynch, but at $12.90, or even under $15, the stock is just too cheap to pass up. This stock will never be in the teens again, in my opinion. Buy now and keep it forever, it's just too big to fail. It has a huge investment in China Construction Bank, and that will be an incredible investment when normalcy returns to Chinese stock prices.

    What little I know about water transport stocks scares me, and that is volatile prices, spot markets, and ship inventories. Good dividends when times are good, though.

    Oil? Well, anybody that doesn't believe oil will come back is crazy. The bottom we are seeing here has delayed people solving the problem of oil dependency, so we're no better off than we were before. Demand is down now, but will return when things perk up a bit, and any sign of shortage lures investors and hedgers into the market. I mean, a barrel could be $100 in March--it's just that volatile.
    Reply | Link to Comment
  •  
    Nov 28 09:06 AM
    There is logic to the article about the bottom being in place but after everything is considered, I still feel best to hold cash and leave some for trading long/short with stop loss. Looks like it still not time to be fooling around, the financial landscape is rocky and treacherous.
    Reply | Link to Comment
  •  
    Nov 28 09:24 AM
    LOL.another bottom.the only bottom here is the one the author sits on.sooner or later goods have to move over water.sadly it will be later.just wait till after the new year to see the malls collapsing.unemploymen... will go up more.todays headline here in ct. informs that the unemployment fund does not have enough funds for the new high #s.states cant print monopoly money like the feds.if we got rid of all the state workers it would not cover our deficit.the world is flooded with our phony AAA rated worthless paper(more than enough to wipe this authors new found bottom) & until this mess is cleared be careful how you invest.
    Reply | Link to Comment
  •  
    Nov 28 09:48 AM
    I think you are dreaming. The worldwide macro economic situation is absolutely horrible and getting worse all the time. Have housing prices stabilized? Hardly. Has the derivatives market leverage unwound yet? Its hardly gotten started. Are the unemployment, bankruptcy, and bank failure rates going down now? They've just started going up. Do the people in charge of fixing things know what they are doing? Ya think?

    And you are saying that all these things are probably going to turn around in the next 6 mo?

    Just because the world's governments are throwing money around and the market bounces up a little, doesn't mean anything except that there are a lot of impatient investors who really, really, really want to make some money right now. So what else is new?

    This isn't a normal recession we're heading into, and it cannot be realistically compared to any of the recent recessions. This one is very different and the bottom is nowhere in sight.
    Reply | Link to Comment
  •  
    Nov 28 09:50 AM
    Like a wise man said about profits,"You can have the first and last 20%. I'll take the middle 60%.
    Reply | Link to Comment
  •  
    Nov 28 10:54 AM
    Written by "an attorney and investor" under a pseudonym touting his best guess as to where the market is going?? Why is this even being included on this website?
    Reply | Link to Comment
  •  
    Nov 28 11:10 AM
    Your response, in my opinion, is right on. This is a very different recession/situation than we have had in the past. When did we ever see the U.S. Treasury throwing money at so many businesses (and the public) all at the same time. And, for that matter, when have we ever seen practically the entire world doing the same thing. We have a financial system that is teetering on the brink of collapse. Indeed these are very different times.

    I find it quite unbelievable that anyone could say (at this point during this mess) that we have seen the bottom and it's time to buy. Good luck!

    Personally I think we will be in a trading market for some time to come. There has been too much damage done in this economy to think it's "up, up and away" for a few years from this point in time.
    On Nov 28 09:48 AM You're Kidding wrote:

    > I think you are dreaming. The worldwide macro economic situation
    > is absolutely horrible and getting worse all the time. Have housing
    > prices stabilized? Hardly. Has the derivatives market leverage unwound
    > yet? Its hardly gotten started. Are the unemployment, bankruptcy,
    > and bank failure rates going down now? They've just started going
    > up. Do the people in charge of fixing things know what they are doing?
    > Ya think?
    >
    > And you are saying that all these things are probably going to turn
    > around in the next 6 mo?
    >
    > Just because the world's governments are throwing money around and
    > the market bounces up a little, doesn't mean anything except that
    > there are a lot of impatient investors who really, really, really
    > want to make some money right now. So what else is new?
    >
    > This isn't a normal recession we're heading into, and it cannot be
    > realistically compared to any of the recent recessions. This one
    > is very different and the bottom is nowhere in sight.
    Reply | Link to Comment
  •  
    Nov 28 11:41 AM
    Obviously, the author has money to burn. The "talking heads" have been calling bottoms for months. Last Thursday will look like a "high" before this bear hibernates.
    Reply | Link to Comment
  •  
    Nov 28 01:24 PM
    DRYS has real debt problems and may in fact implode. There are only two shippers worth looking at right now: DSX (drybulk) and NAT (oil transport).
    Reply | Link to Comment
  •  
    Nov 28 01:26 PM
    Bottom's in, is it? "No recession, mild dip in growth, strong second half recovery, already in the 8th innings, $50billion problem - will be contained, everything bad's already discounted"......... yatter, yatter. Wake up: this time it IS different.
    Reply | Link to Comment
  •  
    Nov 28 01:39 PM
    It takes guts to call a bottom, especially when things look so grim.
    The point about not reacting to bad news is well taken.
    Only time will tell.
    Reply | Link to Comment
  •  
    Nov 28 06:10 PM
    ..."when a "Perma-bear,"... such as Jeremy Grantham, begins talking bullishly about the market, that is a surefire sign of a bottom."...uh, you want to document that claim in some fashion?...maybe, on the contrary, when "perma-bear"... start becoming bullish, it's time buy a gun and start stocking up on canned goods.
    Reply | Link to Comment
  •  
    Nov 28 06:49 PM
    Is the market an entity unto itself? Stock pitchmen types would have you think that 'The market' is isolated from reality. In the mind of those that have embibed in a serious dose of the 'Market" Kool Aide, perhaps it is. For the rest of us, there is a notion that equities are related to the companies they represent, and therefore, in some odd way, are related to the economy and world events. Novel as these ideas may seem, CitiBank, Wachovia, WAMU, L-Brothers, Fannie, Freddie, etc, etc. may be a reflection that the world is experiemcing some difficulty. Perhaps I am wrong, but when the OCC states that US banks are liable for 147 Trillion in derivative debt, I am not feeling too confident that the market could find one of its orafices with a flash light and a funnel. Finally, if you did not see this 'correction' coming, please don't tell me when it is leaving.
    Reply | Link to Comment
  •  
    Nov 28 08:50 PM
    this bear market rally is Paulson's buddies at the primary dealers trading desks using TARP MONEY to window-dress end of month. Volume is not institutions, they buy the market for earnings. It's short covering, next week is jobs.
    Reply | Link to Comment
  •  
    Nov 28 09:06 PM
    TACITUS
    What about energy? The reason that oil is down from $120 is "demand destruction" caused by the recession. As soon as the economy starts to recover the price of oil is going to skyrocket. This built in inflation will cut the market off at the knees. I'm glad that you and your friends are jumping in. As soon as this market starts to rally I'm going to short the daylights out it.
    Reply | Link to Comment
  •  
    Nov 28 10:26 PM
    Another crysal ball reader without valid credentials. Proceed at your own risk.
    Reply | Link to Comment
  •  
    Nov 28 10:29 PM
    Apropos of the author's pseudonym and the present state of affairs, but unrelated to the topic at hand, a favourite quote from the fabled Roman historian:

    "In seasons of tumult and discord bad men have the most power; mental and moral excellence require peace and quietness."
    Reply | Link to Comment
  •  
    Nov 28 10:36 PM
    anyone predicting anything is a fool - or a pimp. you deserve the whipping you are getting here.
    Reply | Link to Comment
  •  
    Nov 28 10:53 PM
    Another bottom picker with smelly hands.

    If the author's ultimate definition of a bottom sign were true -- i.e., the market's discounting of bad news -- the bottom would have come earlier this year, as the market consistently discounted all the bad numbers.

    In the last market crash, the bottom didn't come until more than two years after the March 2000 crash.

    This one is much worse, as it affects not just a market sector, but the whole financial system.

    As others have said, the bottom will come when all are looking only for respite from the anguish.
    Reply | Link to Comment
  •  
    Nov 28 11:20 PM
    Agreed: Reading a "pseudonym," "pen name," or "alias," one can't really evaluate the seriousness of the author when the identity behind the stance isn't presented. The possible hubris of choosing the name Tacitus may be indicative.



    On Nov 28 10:54 AM mc2406 wrote:

    > Written by "an attorney and investor" under a pseudonym touting his
    > best guess as to where the market is going?? Why is this even being
    > included on this website?
    Reply | Link to Comment
  •  
    Nov 29 03:56 AM
    Go gold,silver, oil,& coal stock for now -screw the bank Bast%*ds.Jim Rogers was right about US banking system. Enter at your own peril.
    Reply | Link to Comment
  •  
    Nov 29 05:49 AM
    Go look back at 1929-33. How many people said the same thing? The market is falling apart IMO and the earnings in 2009 and 2010 will be abysmal with some sunshine in 2011 MAYBE.

    In short, I think you are catching the falling knife.
    Reply | Link to Comment
  •  
    Nov 29 07:39 AM
    Simlpy another person that is either in Denial of the Facts or just very little understanding of what is coming. I think it is a shame that Seeking Alpha even published your article. This market has a long way to go before hitting bottom.
    Take a look at the Commercial Real Estate market...due to really tank within the next 3-6 months. You have a very "Shallow Thinking" thought process based on just stock prices and historical stock prices.
    The current market <B>can not<B> be compared to the past to determine what is going to happen or to predict the bottom. We are currently in a totally different investing world than any before now... time to "Think" and roll with the punches!
    Reply | Link to Comment
  •  
    Nov 29 12:00 PM
    an anonymous bottom call doesn't take much courage; more likely a short term rally which may last a few months in a market headed further south


    On Nov 28 01:39 PM oldgoldbug wrote:

    > It takes guts to call a bottom, especially when things look so grim.
    >
    > The point about not reacting to bad news is well taken.
    > Only time will tell.
    Reply | Link to Comment
  •  
    Nov 29 12:05 PM
    The hostile responses to the article are very disappointing and the caliber of people visiting this site has decreased significantly. I thought this was a place for healthy debate, not childish name calling.

    I commend the author for a researched and thoughtful article.
    Reply | Link to Comment