Bottoms Up!


In November of this year, Integrity Research published a ResearchFocus report profiling different providers producing investment strategy research.  Recently, a number of these same strategists have called a bottom to this bear market.

E.S. Browning recently wrote an article for the Wall Street Journal discussing just this very subject.  Browning notes that Steve Leuthold of Leuthold Group, Laszlo Birinyi of Birinyi Associates, and even some analysts at Ned Davis Research are willing to say that a bottom is near.  Both Leuthold Group and Ned Davis received top picks in Integrity’s recent ResearchFocus report.  Mr. Leuthold has been on record as stating that he believes “the November low will mark the nadir of this bear market.”  Leuthold’s call is particularly important to mention as he has a general reputation as being quite bearish.  In fact, he was one of the first to call the bear market in 2008.  Mr. Leuthold is so confident in his views that another article even has him quoted as saying the “stock market is presenting you with one of the great buying opportunities of your lifetime.”  Tim Hayes of Ned Davis is slightly less optimistic yet still allows that though they “aren’t quite ready to make the call yet, everything has been following the script for a bottom.”  Browning also has Mr. Birinyi quoted as saying, “I don’t think the market is going to go down any more, I think it is time to get out of the foxholes.” Doubters of course still point to the fact that some analysts, and even on occasion those mentioned above, have been too quick to declare a bottom in the past.

Speaking of the past however, the Bespoke Investment Group recently put out a report which examines each of the recessions the US has faced since 1900.  The group examined the duration, the total decline of the Dow, the maximum decline of the Dow and the duration into the recession that the bottom was reached.  What they found was quite interesting in that the average duration of a recession was 14.4 month and the bottom was reached on average about 60% of the way into the recession.  The company also found that there was a demarcation between recessions pre and post WWII.  Of course, for this information to be useful, we would have to know when exactly this current recession started.  As B.I.G. points out, we can’t exactly rely on the National Bureau of Economic Research (NBER) to point this out for us, in most instances they have been sorely behind the ball in their calls.  To be fair of course, the NBER did release a report around the beginning of December which stated that the recession began a year ago and that it is currently believed to be the longest and deepest since 1982.  Ultimately however, one thing the report does make abundantly clear is that “typically the Dow has reached its low point well before the recession ended and the headlines turned positive.”

In light of all this talk about whether or not we have finally hit the bottom, a valid question arises.  Exactly what factors are being considered in this discussion that has given rise to this newfound (or according to some not so newfound) optimism?  Luckily for us, David Bogoslaw of BusinessWeek has recently written in an article talking about just this very thing.  In it, Bogoslaw mentions “five key factors investment strategists say are needed to send equities off to the races again.”  In it, Bogoslaw mentions downward revisions to GDP growth, the government stimulus package, redemption-related selling by hedge and mutual funds, increased lending and tax cuts as the five most important issues to keep in mind when debating the topic.

Of course the flip side of the coin still exists and not everyone shares the aforementioned optimism.  Integrity posted a blog in early November entitled Top Down which cites some analysis from Yardeni Research, another strategist mentioned in Integrity’s report.  Yardeni points out that in bear markets multiples tend to contract to around 7.  Aggregating this math out to our current conditions shows that since a 7 multiple on $70 earnings is 490, we are still a little way away from reaching the bottom.

While it always pays to be cautious, each of the articles mentioned above certainly allow for at least a glimmer of hope.  I’ll raise a glass to that.


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