Investing strategies and secular bear markets

[Hoop]

The c wave is presently occurring (capitulation) and stock markets around the world are falling rapidly.

Arco produced a PE Ratio chart post #73 showing rapidly falling P/E ratio values for the S&P 500.

Noting the P/E Ratio.. if this present bear cycle shake out continues and P/E falls below 10, once the P/E Ratio rises again, it will signal the end (prematurely) of the secular Bear Market cycle and a commencement of the new secular Bull market cycle.

At the moment this is not yet the case but as the situation stands at the moment, the life of the secular bear market cycle is at risk of being shortened or even prematurely terminated

Previously on this tread we have mentioned the duration of the secular bear averages about 11 -13 years but the determination depends on the P/E Ratio, not time. The Wall St crash in 1929-1932 those 4 years drop killed the secular bear in 4 years. We estimated (earlier postings) that under "normal" situations that the secular bear would survive until about 2014 it seems it could be now 2008/ 2009 ?? that is if this bear market lives on into 2009.

It seems even the very black clouds have silver linings.

If (and when) a secular Bull market is created investment strategies would have to be altered, long term investing will become a much more profitable venture.


***This post refers to the DOW index in particular, but S&P500 would be similar.

[Lizard]

Just for interest, I've been tracking NZX price/sales data for a while now. I reckon that at least takes out the issue of "peak margins", even if it doesn't allow for changes in debt levels.

I have only gone back as far as 1998, due to data problems - trying to stay consistent and sticking to NZX50 stocks which were still listed back then. Clearly that limits the pool a bit, but with P/S varying alot between types of stocks, I wanted to use the same companies.

This week's dramatic fall finally saw P/S ratios fall back below where they were at the low of 1998, after roughly a 30% decline in the NZSE40, following the Asian crisis and NZ drought. Also now 18% below P/S at the beginning of this bull run (2003) and 34% below the peak (2007).

That means that with static share prices, revenues could still drop 18% and we'd only fall back to the levels at which the last bull run started. Though I guess with NZer's having been overspending by around 14%, then 18% falls in revenue are not unrealistic?

[Hoop]

While watching CNBC this morning they had a programme on when the bear would end one of the people on the show being interviewed was Russell Napier.
Below is a review from his book which is starting to be noticed at the moment.
I might wander down to the library this week.


Book Review: Anatomy of the Bear

29 Jan 2007 11:00 pm Book ReviewsJeff White
I love to read trading books, so when I was asked to review Russell Napier’s book, Anatomy of the Bear, I happily obliged.
In the book, Napier examines 4 major bear market bottoms on Wall St., with a portion of the book devoted to each of the major lows created in 1921, 1932, 1949 and 1982. Napier looks at the history of these bear markets, the events leading up to them, and how the investors of those times were impacted throughout the bottoming process. In his research, he examined some 70,000 articles from the Wall Street Journal from the two months before and after the final lows were made, adding some valuable perspectives from the media and traders of the day. These article tidbits give some great insights into life in the trading trenches at the time, which is incredibly helpful in painting the picture of the doom and gloom which ultimately accompanies a lasting market bottom.
Anatomy of the Bear by Russell Napier
Napier also takes the reader back to the situations of each of the major lows, essentially transporting you to the time and the events which led up to the bear phases. He examines wars, monetary policy, politics, economic factors, and anything else which had an impact on the buying and selling motivations of traders, making this book an incredible resource for anyone wanting to learn from lessons of the past.
Here are a few things I found noteworthy:
* Earnings Trailed Price. In the 1921 bottom, price found a low about 4 months before earnings found a bottom. Earnings bottomed some 5 months after price bottomed in the 1932 bottom. That makes for some interesting fundamental vs. technical discussion! (You know which side I’m on)
* Short Interest Stayed High After Lows. Napier discovered that short interest remained rather high even after price made a low, serving as a good reminder that even bears get greedy. In turn, as the shorts end up having to buy to exit their positions, it propels prices even higher, perpetuating the newfound momentum. Napier notes that a large short interest combined with a market that didn’t decline on bad news was an excellent signal in the 1921, 1932 and 1949 lows.
* Bear Markets Don’t Scare You Out. The results of Napier’s research flies somewhat in the face of theories which indicate that capitulation marks a lasting low, revealing instead that bear markets typically end with a final decline on no volume. Essentially, bear markets wear you out, not scare you out.
* Commodities Count. The end of commodity price declines also marked all 4 major equity lows, with copper playing a prominent role as it preceded or coincided with every equity rebound.
The book also ends with a great number of strategic and tactical conclusions drawn from the study of these 4 great bear markets - plenty of reason alone to check out this book.
Thanks to Russell Napier for the chance to review this fine study of the past, I enjoyed the read and learned a great deal from the bear markets of the past.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Technorati Tags: Stock Market Books, Bear Market, Stock Market Lows, Russell Napier

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[shasta]

While watching CNBC this morning they had a programme on when the bear would end one of the people on the show being interviewed was Russell Napier.
Below is a review from his book which is starting to be noticed at the moment.
I might wander down to the library this week.


Book Review: Anatomy of the Bear

29 Jan 2007 11:00 pm Book ReviewsJeff White
I love to read trading books, so when I was asked to review Russell Napier’s book, Anatomy of the Bear, I happily obliged.
In the book, Napier examines 4 major bear market bottoms on Wall St., with a portion of the book devoted to each of the major lows created in 1921, 1932, 1949 and 1982. Napier looks at the history of these bear markets, the events leading up to them, and how the investors of those times were impacted throughout the bottoming process. In his research, he examined some 70,000 articles from the Wall Street Journal from the two months before and after the final lows were made, adding some valuable perspectives from the media and traders of the day. These article tidbits give some great insights into life in the trading trenches at the time, which is incredibly helpful in painting the picture of the doom and gloom which ultimately accompanies a lasting market bottom.
Anatomy of the Bear by Russell Napier
Napier also takes the reader back to the situations of each of the major lows, essentially transporting you to the time and the events which led up to the bear phases. He examines wars, monetary policy, politics, economic factors, and anything else which had an impact on the buying and selling motivations of traders, making this book an incredible resource for anyone wanting to learn from lessons of the past.
Here are a few things I found noteworthy:
* Earnings Trailed Price. In the 1921 bottom, price found a low about 4 months before earnings found a bottom. Earnings bottomed some 5 months after price bottomed in the 1932 bottom. That makes for some interesting fundamental vs. technical discussion! (You know which side I’m on)
* Short Interest Stayed High After Lows. Napier discovered that short interest remained rather high even after price made a low, serving as a good reminder that even bears get greedy. In turn, as the shorts end up having to buy to exit their positions, it propels prices even higher, perpetuating the newfound momentum. Napier notes that a large short interest combined with a market that didn’t decline on bad news was an excellent signal in the 1921, 1932 and 1949 lows.
* Bear Markets Don’t Scare You Out. The results of Napier’s research flies somewhat in the face of theories which indicate that capitulation marks a lasting low, revealing instead that bear markets typically end with a final decline on no volume. Essentially, bear markets wear you out, not scare you out.
* Commodities Count. The end of commodity price declines also marked all 4 major equity lows, with copper playing a prominent role as it preceded or coincided with every equity rebound.
The book also ends with a great number of strategic and tactical conclusions drawn from the study of these 4 great bear markets - plenty of reason alone to check out this book.
Thanks to Russell Napier for the chance to review this fine study of the past, I enjoyed the read and learned a great deal from the bear markets of the past.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Technorati Tags: Stock Market Books, Bear Market, Stock Market Lows, Russell Napier

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Thanks for posting that Hoop.

Wouldn't mind grabbing myself a copy (interesting comment re Copper )

[Hoop]

An Audio interview with Russell Napier. Remember this interview was on 10 Dec 2007.

Excerpts from this interview

...With all bears market bottoms there is an issue about Banking instability and a huge degree of uncertaincy....

....Key tings that people get wrong is when we get into a period of defation or risk of deflation they can't see the change in stability....

...At the bottom (bear market) there is a rally in the Government bonds market and treasury market prior to the rise in equity markets,also a rally in corporate bond market which is of short duration usually about one month before the rise in the equity market. Also about this time there are signs that prices are stablising in the Commodity markets, also signs of demand coming back in the high end goods market(luxury items) as the rich start pulling their money out of hiding.....

...Expect a seies of recessions to occur during the period 2000-2014 similar to those experienced back in the last secular bear period of 1966-1982. Although times are difficult there is good trading opportunies for the fleet-footed investor as so of the biggest bull market gains happened here as well as bears....

Russell Napiers Crystal Ball what the world would see at the bottom of this latest Bear Market

(Remember interview was Dec2007)

People will be saying equities will be a bad investment
There will be fears of Bank Collaspes
There will be fears for the safety of holding money in a bank
There will be talk of falling prices
Inflation will be very low with possible deflation
Low global confidence in America
New skills have to be learn't to survive in a changed environment after the Bear
Year 2014 onwards when assets look attractive again PE ratio 10 or less in the equity markets. etc.

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Quote from Art Collins Review of Anatomy of the Bear

Napier's portrait touches everything from literature to the evolution of our consumer society. sections of the book convey information via Wall Street Journal excerpts. Their inclusion corrects one popular misconception about market bottoms, that they occur when sentiment is at its most negative. Entry after entry demonstrates that in all four timeframes, speculators were receiving straightforward confirmation that market strength was building.

Another challenged axiom is that bottoms are accompanied by high volume as longs capitulate. Actually, turnarounds are ushered in with low volume and malaise.
Several bottoming signals, some of which may surprise you, are presented. Probably the most telling is the extreme undervaluation of stocks as measured by the Tobin Q ratio, which is the market value of a company's assets divided by their replacement value. At these key buy-friendly times, stocks dip to about 30% of the startup value of the respective companies. Meanwhile, previously softening commodity prices begin to firm.



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Anatomy of the Bear
Posted on 14th June 2006
by Chetan Parikh


<<<<< Back

Anatomy of the Bear

- Russell Napier

This insightful book based on painstaking research by Russell Napier uses financial history of over a hundred years to understand the anatomy of bear markets.

The author defines using the lessons of financial history: “If there is a legitimate role for the study of human judgment and decision making under uncertainty, then financial history is redeemed. What is financial history if not such a study? The behaviouralist school of psychology, around for nearly a century, is based on observing reactions to selected stimuli. Financial history looks at market prices, which are a reflection of the behavior of thousand of participants to certain stimuli. In behavioural economics, history is a useful tool for observing how financial markets work, rather than theorizing about how they should work.

Such historical studies have not yet lent themselves to the comforts of empiricism. This, in itself, may be enough of a reason for many to reject the approach. However, the inability to translate all understanding into binary code does not necessarily denude it of value and insight. If psychology is a soft science, then using financial history to assess human decision-making in times of uncertainty is softer still. For those who accept that human judgement and decision-making cannot be divided by equations, financial market history is a guide to understanding the future.”

Some of the conclusions that the author makes on studying the common characteristics of the great bear markets and the buying opportunities that they present are as follows:

“It is axiomatic to say equities are cheapest at the bottom of the market. One indicator of value available to investors at the time was the q ratio. It fell below 0.3x at all four bear market bottoms. The cyclically adjusted PE provides the next best contemporary indicator of value, but its range has been rather wide at the bottom - from 4.7x in 1932 to 11.7x in 1949. Even calculating cyclically adjusted PE using inflation* adjusted earnings, the range is still a wide 5.2x to 9.1x.

Equities become cheap slowly. On average, it took nine years for equities to move from peak q ratios to their lows. If one excludes the 1929-32 bear market, the average period for the adjustment in valuations was 14 years. The US equity market reached its highest-ever valuations in March 2000, and all extremes of valuation have been followed by this slow move to undervaluation.

With the exception of 1929-32, our bear markets occurred against a background of economic expansion. On average, real GDP expanded 52% over the course of our three long bear markets. Nominal GDP expanded by an average of 285%.

Reported corporate earnings growth, at least in real terms, is muted during our bears, but it too has a wide range. Inflation-adjusted earnings growth ranged from -67% to +28%. For nominal earnings in the four bear markets, the range is -67% to+ 119%.

A material disturbance to the general price level will be the catalyst to reduce equities to cheap levels. On three occasions - 1921, 1949 and 1982 *- the disturbance was a period of high inflation followed by deflation, although in 1982 deflation was confined to commodity prices. There was no initial inflation in 1932, but there was still a material disturbance to the general price level in the form of severe deflation. In such periods of price disturbance, there is great uncertainty as to both the level of future corporate earnings and the price of the key alternate low-risk asset *government bonds. This in turn leads to a decline in equity valuations.

We have seen that all four of our bear-market bottoms occurred during economic recession. We have also seen that a return of price stability, following a period of deflation, signals the bottom of the bear market in equities. In particular, stabilising commodity prices augur more general price stability ahead and signal the rebound in equity prices. Of all the commodities, the change in the trend of the price of copper has been a particularly accurate signal of better equity prices. In assessing whether price stability is sustainable, investors should look for low inventory levels, rising demand for products at lower prices, and whether producers have been selling below cost.

We have seen that a sell-off in government bonds accompanies at least part of the bear market in equities. Things were slightly different in 1929-*32, when bonds rallied from September 1929 to June 1931. Only then did a sell-off begin, lasting until January 1932. But even in the two bear markets associated with high levels of deflation - 1921 and 1932 - there was some sell-off in government bonds.

Tactical

Investors should look out for the key strategic factors when attempting to assess whether the move from overvalued to undervalued equities is nearing completion. When the strategic factors suggest this process may be coming to an end, there are a host of tactical considerations to be considered in attempting to find the bottom of the market. As we have seen, a recovery in government bond prices precedes a recovery of equities. In 1932, equity prices bottomed seven months after the government bond market. In 1921, 1949 and 1982, the lags were 14, nine and 11 months respectively. The price decline in the DJIA following the bottom of the bond market was 23% in 1921,46% in 1932, 14% in 1949 and 6% in 1982.

The birth of a new bull market for corporate bonds will precede the end of the bear market in equities. The recovery in corporate bond prices led equities by two months in 1921, one month in 1932 and five months in1982. In 1949 the lead was much larger - 15 or 17 months - depending on how one defines it, but this was probably due to the distortions to the bond markets in the post-war era.

In our three long bear markets, reductions in interest rates by the Federal Reserve preceded the bottom for equity prices. The lag before equity prices bottomed was three months for 1921 and 1949, and 11 months for 1982. On all three occasions, the decline in the DJIA over the period of the lag was less than 20%. It was a different story in 1929-32. The Fed cut rates in November 1929, while the bear market was still in its infancy.

A number of further tactical conclusions can be summed up briefly:

Economic and stock market recoveries roughly coincide. Recovery in the auto sector precedes recovery in the equity market.

Bear market bottoms are characterised by an increasing supply of good economic news being ignored by the market. While numerous bulls bang the drum for equities even at the bottom of the market, they will be ignored.

Many commentators will suggest the worsening fiscal position will prevent economic recovery or a bull market in equities. They will be wrong.

Decline in reported corporate earnings will continue well past the bottom of the market.

The bottom is preceded by a period in which the market declines on low volumes and rises on high volumes. The end of a bear market is characterised by a final slump of prices on low trading volumes. Confirmation that the bear trend is over will be rising volumes at the new higher levels after the first rebound in equity prices.

There will be a large number of individual investors shorting stocks at the bottom of the market. Short positions will reach high levels at the bottom of the equity market and will increase in the first few weeks of the new bull market.

Dow Theory works to signal a buy for equities.

These are the identifying features of the bear and its bottom. Just as the possession of fur does not, of itself, permit the identification of an animal as a bear, the possession of anyone of the features above should not be considered as constituting positive identification of its financial equivalent. Our list is the financial equivalent of Einstein's questions. In trying to identify the bear-market bottom you will have to find the answers to most, if not all, of the questions.”

A classic.”

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[Hoop]

* Commodities Count. The end of commodity price declines also marked all 4 major equity lows, with copper playing a prominent role as it preceded or coincided with every equity rebound. Russell Napier

[Lizard]

Here's some more calcs on P/E ratios from one of the Minyanville team:
P/E Scenarios for a Volatile Time

Below is the main table from this article which is fairly self-explanatory:



I'm not completely convinced that the difference in earnings between "great times" and "terrible times - deflation" is only 35%.

[Hoop]

Here's some more calcs on P/E ratios from one of the Minyanville team:
P/E Scenarios for a Volatile Time

Below is the main table from this article which is fairly self-explanatory:



I'm not completely convinced that the difference in earnings between "great times" and "terrible times - deflation" is only 35%.

Sometimes company earnings rise during terrible times (re: equity market)

Liz the figures in the table quoted by Minnyanville team seem to be similar to those by Crestmont Research see page 9 / of 12 (PDF) "The Latest Stock PE Report"

A recovery from both terrible times scenarios would see the death of the present secular bear phase (born 2001- ) and the birth of a new secular bull phase

[Hoop]

* Commodities Count. The end of commodity price declines also marked all 4 major equity lows, with copper playing a prominent role as it preceded or coincided with every equity rebound. Russell Napier

Update from two weeks ago. The Spot Copper price is still downtrending but it is decelerating causing steep downtrend line breaks.

[Hoop]

UPDATE

Although Copper is a very reliable bottom picking indicator..it is just one indicator of many.

Has the bottom been reached on the DOW?? ..copper says ..not yet determined.

Once Copper establishes a convincing uptrend then it is "safe" to call a bottom (90% safe)