The Bear Market Has Just Begun

by: Bill Cara May 29, 2008    

Bill Cara

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When the price of oil starts to come down there will be some relief to the US airlines. I anticipate some form of government intervention before most of the airlines go bankrupt again. The "New" shares will soon be required to become "New New" shares.

From the pockets of US airline employees to those of the Middle East oil sheiks. You'd think somebody other than Texas oil people who are running this Administration and the past one would be able to take control after the government changes hands in January. Rather than taking a unified political stance against Sudan, as they did this week, you'd think the three Presidential candidates might first line up against the urgent problems that exist today in America, which is the food and oil one that is bankrupting the country.

With commodity prices soaring, the commodity-based producers are being forced to raise prices, regardless of what happens to demand, which is likely to fall off. Dow Chemical’s (DOW) announcement is being followed by many others, including Monsanto (MON), General Foods, Hershey (HSY). Cost inflation is the focus today—wage inflation will follow.

Inflation will bring lower demand as well as higher interest rates. The banks simply cannot afford a higher rate structure at this time. That would trigger another round of the housing market crisis and that will worsen the asset-backed securities valuation problem of the banks, leading to more write-downs and hence the need to raise more capital, lay off more staff and also to tighten lending standards. Everybody suffers.

The bottom line is that Stagflation is worsening, and I have never seen such conditions do anything but tear apart the prices of equities and bonds. That too will really hurt the whole financial group, leading to more losses and more staff cut-backs in future.

As I see it, the Bear market has just begun. Unless there is a sudden and sharp pull-back like 1987, the Bear could linger. As long as fuel and food costs stay high and the housing industry remains in shackles, I think the equities Bear could last through 2009.

Traders ought to be able to make money long and short though.

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This article has 13 comments:

  •  
    May 29 11:30 AM
    I thought all the doomsday bears from 9 months ago went back into hiding? The world is ending, blah, blah, blah - who cares?
    Reply | Link to Comment
  •  
    May 29 12:23 PM
    Human nature is to over-simplify issues and become over-exuberant in one's own stance, minimizing opposing views. Same can be said of market sentiment. Only the most disciplined investors fully weight pros vs. cons. I appreciate hearing from the bears even if I don't agree, it keeps me vigilant of the portfolio killer: risk.
    Reply | Link to Comment
  •  
    May 29 12:31 PM
    Damn,Bill,you just wake up from a six month nap??
    Reply | Link to Comment
  •  
    May 29 12:39 PM
    You have some interesting ideas, but maybe a little too bearish. It seems true that interest rates will rise modestly, and it will have some negative effects on home sales. As for equities it will likely be sideways. I suspect that some floating rate income funds will be attractive to investors. Traders may be in for a dull market.
    Reply | Link to Comment
  •  
    May 29 02:30 PM
    Blah-Blah,
    I thought all the head-in-the-sand bulls might have learned something in recent months? The clouds are parting, the American economy is invincible, blah, blah, blah...
    Reply | Link to Comment
  •  
    May 29 03:02 PM
    Good article... Im by no means a pesimist at all, and am a vocal critic of the doomsayers, but I can see a bearish market lingering longer than 2009. It can be argued that the bear period hasnt really started yet.

    I think, rational or not, a lot will depend on public mood following the election.

    There is also a need for real regulatory action on the commodities side (ie - limit or eliminate swaps) Not sure how likely that is to happen though
    Reply | Link to Comment
  •  
    May 29 06:03 PM
    Ahhh..nothing as valuable as offering an opinion without doing any analysis...try to publish that offers some value next time supported by charts, figures, and facts...
    Reply | Link to Comment
  •  
    May 29 10:30 PM
    I do agree with you Bill. We have seen nothing yet.
    Reply | Link to Comment
  •  
    May 29 11:44 PM
    That's why they rate consumer 'sentiment' so much. The psychology, bear or bull, affects much more than people think. People 'thought' they could make money in tech stocks, then real estate, and now in oil futures and gold. Now people are 'afraid' to buy a home, to invest in the stock market, etc. People 'think' that the worst is yet to come, and so on.

    IMO oil will crash, whether it's end of 2008, or in 2009, but it will happen, just watch. The dollar will rebound, it will happen, just a matter of time. Housing will rebound, faster in some markets than others, but it will. And then there will be the doomsdayers, they'll remain, and complain, and they'll stay the same.

    There are so many ways to profit off of all this 'thinking' and 'sentiment' and 'confidence' yada yada. If you have the cash to buy beat down housing, beat down stocks, and wait a few years, you'll profit from the psychology of this turbulent market. It's absolutely hysterical that so many people right now, the so-called 'analysts' and 'experts' ALL have their predictions for the future. Yet, if ANY of them could predict anything at all with reasonable accuracy, they'd be rich and sitting on a beach somewhere - NOT on our biased media spouting their crystal ball delusions, right or wrong. In a market such as the current one it takes absolute precision to 'predict' anything at all. We're in a corrupt society that's all about making the next buck, and to heck with all of our 'experts'. Like it or not, this will all pass, and things will get better. Just a matter of time...

    Have a nice day.
    Reply | Link to Comment
  •  
    May 30 05:40 AM
    It matters whether there will be a major paradigm shift in the economic model in the US. If US can keep growing on excessive consumption based on increasing credit bubbles, this market could be fine. If not, we are heading for big problem.
    People hate major economic transitions and always hope they can avoid it. But transitions happen every 10 or 20 years.
    Reply | Link to Comment
  •  
    May 30 09:20 AM
    The emerging markets, China and India are starting to ship us their higher inflation costs because of increased commodity costs. How many things in your home are manufactured from overseas?

    My paycheck is buying less. Thats why Costco and Walmart are posting good numbers. People are doing everything to save what they can..... Big disconnect between Wall Street and Main Street here.. Inflation is creeping in.
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  •  
    May 30 09:30 AM
    Bill, the cheap-money bell has everyone trained like a Pavlovian dog. The incredible deflation offset of 900 billion in fiat shows a morbid fear that the Fed will lose control of their inflation monopoly. Consumers are broke and will buy less - that means deflation. As painful as it will be, it is necessary to restore some value to the buck before it descends below the value of the paper it's printed on. Look for falling prices and great buys for anyone with disposable cash.
    Reply | Link to Comment
  •  
    May 30 06:06 PM
    Cardica (CRDC) is a good long-term stock. Great piece of equipment they developed -- sews together blood vessels as small as 1mm. Do your research.
    Reply | Link to Comment
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