The Bear Market is Not Over

Yesterday might turn out to be an important day. The market should have bounced. It didn’t. Instead, it fell 29 points. It’s September, too…a dangerous month. And this rally has already run longer than the rally following the ’29 crash.

Mr. Market can do what he wants, of course. We’re just trying to read his mind. If we were Mr. Market, what would we do? We’d give investors a fright!

Two things make us think the bear market is not over.

First, there is market history. Bear markets do not end with stocks still trading at nearly 20 times earnings and the dividend yield barely at 3%. And they don’t end when people are hoping, praying and expecting them to end. They end in despair…after people have given up hope. They end with dividend yields over 5% and prices at only 5 to 8 times earnings.

What’s more, stock market trends tend to follow long cycles. The last bear market bottom was in ’82. It came after 14 years of disillusionment and disappointment. By the time stocks were ready to go up investors were sick of hearing about them. And then, you could buy some of the best companies in America for only 5 times earnings…and get paid to hold them, with dividend yields over 5%.

By our calculation, the bear market in stocks began in January of 2000. Since then, stocks went up in nominal terms. But adjusted for inflation, investors made nothing. Still, they didn’t seem to notice…and remained enthusiastic about stocks. Then, in 2007, a new down-cycle began…continuing until March of 2009, when the Dow hit a bottom at around 6,950. But was it THE bottom…or just a temporary bottom?

Most likely, it was a temporary bottom…a ledge from which investors could leap…before falling further down.

We say that because stocks never went low enough to qualify for a genuine bottom…and investors never showed the kind of disgust that you usually get at real bottoms.

We say that, too, for a second reason – the economy. In order to have a booming stock market, you need a booming economy. Earnings need to go up. That justifies higher prices. It also contributes to the positive mood among investors that persuades them that things are getting better and better…and that stocks deserve not only higher prices corresponding with their higher earnings, but also higher P/E multiples. That was the kind of mood that sent the Dow up from under 1,000 in August 1982 to over 14,000 twenty-nine years later.

But now the tide as turned. It rushes out between our toes and takes with it our fondest hopes. After expanding during our entire lifetimes, credit is now contracting. And that means more savings…but fewer sales, fewer jobs, and fewer profits. Can working people reasonably expect to earn more money next year? Five years from now? No. Can businesses expect rising sales and profits? No. Will the feds balance the budget, cut taxes, or increase benefits in the years ahead. No. No. No.

The outlook is not rosy. It’s grim. As we reported yesterday, household discretionary spending is at a low it hasn’t seen in 50 years. A half-century of economic progress wiped out! Real unemployment is closer to 16% than to the official 9% – and it’s rising.

Yesterday came a report from August: companies had cut more jobs than expected.

And even economists who are silly enough to believe the stimulus is working still say unemployment will likely remain stubbornly high for years to come.

So let’s add this up. Fewer people with jobs. Those who have jobs are paying off debt. Less consumer spending (back-to-school spending was disappointing, say the press reports). So, lower business earnings.

What would make stocks go up under those circumstances?

We also get word that insiders are selling stock heavily…and that consumer bankruptcies are up 24% over a year ago.

New economic boom? Not likely. New boom in the stock market? Not likely either.

But stocks don’t stand still. If they can’t go up…they will go down.

What will cause a break in the stock market? Who knows? Here’s a possibility: The Chinese stock market could crack. Maybe it already has. China is the great hope of the world economy. When it becomes clear that China is a bubble economy…and not a genuine growth economy…Western investors are likely to lose heart. Then…watch out!

We like the Bedford Springs Hotel. It is a 19th century resort…with class. It was in ruins in the ’80s, then bought by investors…who spent $120 million restoring it. They went broke 18 months later.

Not hard to see why. When we were there the place was almost empty. Still, it had a full staff…and beautiful appointments.

“Hey…this is pretty nice,” we said to the desk clerk. “No one is here.”

“They come on the weekends. We have a full house this weekend…and a full house in October, when the fall foliage is at its peak.”

“Oh…well…it looks kind of quiet now…”

“Yeah, it is quiet most of the time.”

“It is such a nice place, I think I might want to live here. I know you’ll take care of me. I could live quite well here.”

“Maybe you could give me a good price…and I’ll move in.”

“You need to talk to the management…”

On the wall of the Bedford Springs hotel is a short note telling us that George Washington stayed there when he put down the Whiskey Rebellion of the 1790s.

In fact, Bedford was his Western headquarters. But the real action was farther to the West. Bedford was more like a staging area, as near as we can figure.

The Whiskey Rebellion is a worthy subject for recollection, though a sordid chapter in American history. Accounts of it vary, depending on which history book you read. It is usually seen as a test of the new country…a test which Washington and Alexander Hamilton met with vigor and resolve. But by our reading of the history, the new republic failed on every count.

After the war against England, the federal government was in debt. It needed money. Hamilton saw an opportunity to raise money by taxing the small distillers out on the frontier. They were too far from Philadelphia to cause trouble. He figured they would resist. But this would give him an opportunity to march out at the head of an army, assert the power of the central government over the riff raff, and gain for himself a marshal victory that might elevate his stature closer to that of his boss, George Washington.

Washington himself may have had mixed feelings. He certainly had mixed interests. The tax was set up so to force small distillers to pay 50% more tax than large distillers. Washington was one of the largest whiskey makers in the country. He might be happy to see the small fry pushed out of business. On the other hand, he had spent much of his life out on the frontier. He knew how tough the frontiersmen could be; he probably wasn’t eager to tangle with them.

But the tax was proclaimed throughout the land, and the whiskey distillers took offense. After the war against Britain they had gotten the idea that they lived in a free country. Certainly, out on the banks of the Monongahela there was little to make them think otherwise. They were used to doing what they wanted, free from any sort of authority. So the sight of tax collectors trying to take their money (of which they had little…it was still a subsistence/barter economy out in the woods) probably set them off. At least one of the federales was attacked by a mob of them; his hair was shorn and he was tarred and feathered.

Then, Hamilton called up the New Jersey and Maryland militia…and set out for the West. He forgot, however, to provide sufficient victuals for his men…and soon the soldiers were cold and hungry. Naturally, they did what soldiers do under the circumstances; the robbed the locals. Thus did Hamilton’s army continue its march – in disorder, disgrace and larceny…stealing provisions from the people it was meant to protect from the scofflaw distillers.

Once on the field of battle, the whiskey men were ready for a fight. But cool heads prevailed. After a pow-wow, the feds arrested a handful of men…of whom two – a “simpleton” and an “insane” person, according to Washington – were charged with treason. Washington pardoned them, seeing no profit in hanging mental defectives. The rest paid a fine and were let off. One man died in jail. The rest went on their way.

Thus was the rebellion brought to a close. The distillers moved their stills out to Kentucky and Tennessee, where the feds couldn’t get at them. And the feds went back to doing what they always do – making a mess of things.

Until tomorrow,

Bill Bonner

The Daily Reckoning