One of the misunderstood facts about bear markets is that they must be resolved in two distinct ways – TIME AND PRICE. History is full of examples of where markets should bottom based on a plethora of metrics. But when earnings estimates are nearly impossible to guess as the global economy spins out of control, we must revert to other measures that are far more tangible; price/tangible book value (note that I use tangible book value, which excludes those nearly worthless assets like goodwill), price/Tobin’s Q Ratio (Tobin’s Q is the replacement value of a particular company), and price/free cash flow.
While predicting future PRICES is a dangerous affair, it is even more difficult to grasp the other element of resolution – TIME, and how long it may take to reach the final destination at the bottom of the market.
My price targets over the past few years were for an initial stop of the S&P 500 at 750, then 600-650, then 500, then the eventual 450 level. Despite my expectations of miserable earnings and of global de-leveraging, I am sad to say that my ultimate targets may have actually been a bit too optimistic. My price target now for the S&P 500 is in the 350-400 range which is still a decline of 40-50% from current levels. My target in terms of time for the ultimate low for the S&P has been early to mid October 2010, which coincided with the typical October low in the second year of a Presidential Term.
As long-time readers may recall, I find the Presidential Cycle to be the strongest and most predictable cycle within the past century. A report out of Pepperdine University several years ago suggested that since 1952, if you had been invested in the S&P 500 from Day 1 of a Presidential Cycle until mid-October of year 2 of the term, a $1,000 investment would have turned into roughly $650, without even adjusting for inflation. If on the other hand you had invested from mid-October of year 2 of the Term and sold on the last day of the Presidential Term, your $1,000 would now be worth $71,000. Without a doubt, this is due to the relationship between stock prices, economic circumstances and Presidential Gallup Approval ratings which are amazingly synched.
Even if we are lucky enough to “guesstimate” the ultimate bear market bottom, this is only part of the equation. Making it through the bear market with the bulk of one’s capital intact is obviously Job #1. Buying at depressed levels, even within the confines of a secular or super bear market can be highly profitable.
Assuming we get the guesstimate even close to correct, we must then again guess just how long it will take before we start the next secular bull market. My guess is that it will take (holding my breath here) a period of 10-15 years from the secular bear market low, which I guess will be in 2010.
This decline has not been your garden variety bear market. Instead it has been a nasty, sometimes frightening, relentless move lower in equities, one that will be remembered for generations to come. Investing habits for many people will change for the remainder of their lives. Many will be forced to work well beyond their planned retirement age, sometimes at jobs they would not generally desire. The rebuilding of the banking, insurance, auto and other industries may take well over a decade as well.
There may be many cyclical markets lasting anywhere between 6 to 24 months along the way, market moves I fully intend to participate in. But my expectation as it regards the time to repair the economic problem is “Welcome to the Long and Winding Road”, or for me “When I’m Sixty Four” (I am currently 49).
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* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.