bizzXceleration: Performance, Value and Profit

Market Performance: What Bear Rally ?

Shares Near 6-Year Low, With More Losses Feared As the stock market tumbled to its lowest level in nearly six years on Wednesday, Wall Street traders and many ordinary Americans were asking the same question: Where, oh where is the bottom? After a yearlong slide in stocks and a giant bank rescue from Washington, even some pessimists had hoped that the worst might be over. But now, after the Dow Jones industrial average fell below 8,000 on Wednesday, the financial crisis and the bear market it spawned seem to be taking a new, painful turn. Once again, investors’ confidence in the nation’s financial industry is draining away. And once again, people are rushing for ultra-safe investments like Treasuries. Many analysts agree that the short-term outlook seems grim now that the Dow has fallen below 8,000, a level that had lured buyers again and again in recent weeks. But how much more to go? Dow 7,000? Dow 6,000? Many analysts are reluctant to say, having been proved wrong so many times before. The Dow has lost nearly 40 percent this year, and many of its blue chips, from Alcoa to General Electric, are down even more than that. Much will depend on the course of the economy, but there is little good news on that front. On Wednesday, a new report raised concern that the economy might be beset by a debilitating decline in prices, or deflation. But another big worry is that the credit markets, where this crisis began, are coming under even more stress than they were before. Junk bonds, for instance, fell to their lowest levels on record on Wednesday, driving the average yield on these high-risk corporate bonds to more than 20 percent. Yields on Treasury bills, meantime, fell to nearly zero. Investors were willing to accept almost no return just to know their money was safe.
Individual Investor Stock Allocations

S&P 500's Worst-Ever Year Leaves 64 Industries, 483 Companies With Losses The worst annual decline in the Standard & Poor's 500 Index since 1931 has dragged down every industry in the benchmark gauge and 96 percent of its stocks. All 64 of the S&P 500's so-called level-three categories, groups such as ``distributors'' and ``leisure equipment'' with as few as one company, dropped in 2008. Four hundred eighty-two companies slipped as the 500-stock index slumped 46 percent, poised for its biggest yearly retreat in eight decades. ``There seems to be no bottom,'' Laszlo Birinyi, who oversees more than $350 million as president of Birinyi Associates Inc. in Westport, Connecticut, said on Bloomberg Television. ``We have no tools that tell us where to go now.'' More stocks decreased in the current bear market than in the 49 percent rout after the technology bubble burst in 2000. The breadth of declines this year is leaving investors without defensive strategies to protect against losses that erased more than $8 trillion from U.S. equities in 2008. During the S&P 500's retreat between March 2000 and October 2002, nine industries climbed, including two -- tobacco and health-care -- that rose more than 80 percent. Since the S&P 500 peaked in October 2007, nine stocks in the index advanced, according to data compiled by Bloomberg. At least 10 times as many rose in the 2000-2002 sell-off.
Record Options Trading Dries Up as Hedge Funds Fold, Volatility Skyrockets

Major Damage The velocity and ferocity of the market movement -- mostly downward -- on a tick-by-tick basis has induced a buyers' paralysis disguised as patience. Many of those with cash have been too perplexed to bid, then stocks have cracked more and their delay was validated, reinforcing the buyers' inaction. Keith Lerner, a quantitative strategist at SunTrust Robinson Humphrey, refers to this dynamic as "stock deflation," an ingrained expectation that prices will keep falling. While this feedback loop is always eventually broken by an abundance of cheap stocks piling up knee-high as investors stand still, when this happens is unknown. But the longer this assault lasts, the less important it will be for a buyer to pluck the exact low or select the precisely right stocks, so nipped are prices and, in many cases, values. The virtually unwitnessed level of damage in a short period almost defies hyperbole. After Thursday's drop to an 11-year low on the S&P 500, the index was farther below its all-time high than at any time since 1949. The year 2008, had it ended then, would rank as the worst since 1872 at least. The S&P hadn't been as far below its 200-day average since 1932. Nearly 40% of S&P 500 stocks were below $4 billion in market capitalization, the minimum new stocks must meet to be added to the index. More than 40% of the stocks in the Russell 3000 were trading below $10. Investment-grade corporate bonds have outperformed stocks since 1980. The S&P 500's indicated dividend yield rose above the 10-year Treasury yield for the first time since around the time the Giants and Colts faced off in their classic 1958 championship game. All this helps explain the wild 6.5% snapback to the upside in Friday's final hour. At some point, the market requires fresh, and ever more dire, excuses to keep falling, and such excuses temporarily ran out. Yet that sad litany of woe also suggests that equities, as an asset class, are in the process of being discredited in the public mind. We're not quite there, lacking as we do the perfectly culminant magazine covers declaring equities dead, among other things. But, ultimately, it strongly suggests that the direction of long-term mean-reversion is becoming more favorable for stocks.

Why 'Powerful' Rally Won't Last: 'A Lot of People Still Have to Deleverage' "The rally was probably going to happen anyway, it was just looking for an excuse," says Mark Dow, hedge fund manager at Pharo Management, which has about $2 billion of assets. "When markets are ready to rally, any catalyst is enough to get things going. Then it starts feeding on itself." Obama's talk about a major fiscal stimulus package "could infuse more hope" and stocks could be in for a "powerful" short-term rally, the money manager says.But "it's hard to see it being sustainable," says Dow, whose firm is in positive territory this year (he declined to specify further). "A lot of people still have to deleverage — [they] need to sell into the upticks." Those "people" include hedge funds that haven't fared so well this year. "A lot of hedge funds are going to die," Dow says. "The only thing keeping more funds from blowing up is they're gating things," or not allowing investors to take their money out, something ailing funds can only do for so long.

Insight: The bear's about to roar Before we all are swept away into total despair, let's take a step back and imagine what could get stocks around the world going up for a while. Bear in mind that I am hedge fund manager, have been wrong on the severity and duration of this panic, and that at this moment I am close to shore. In other words - I have little risk on. First, let me point out that by definition the bottom of a bear market has to be the point of maximum bearishness. Thus sentiment becomes a crucial indicator. The systematic work that we do on measuring sentiment (and we monitor about twenty indicators for the US and a dozen or so for other equity markets) show very extreme and in many cases record levels of bearishness. Obviously not every indicator is at an all-time high, and in some the history is short, but the message is powerful. Furthermore there is compelling evidence that investors, hedge funds, pension and mutual funds, and the public are not just talking bearish, they have raised astounding amounts of cash. I am chastened by the fact that all the data we look at are from the last forty years which was really just one great magnificent secular bull market of wealth creation marked by periodic bears that were buying opportunities. Second, valuations are cheap. There's no point in going into an elaborate dissertation; it's an inexact science. Using the best historic measures, normalised earnings, book value, and free cash flow, stocks around the world are very cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom. Third, stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the 1930s, and the spread between the price and the 200 day moving average at 34 per cent is the greatest since July 19, 1932. The US market is down almost 50 per cent from its highs, Europe is off 55 per cent, and emerging markets, 65 per cent with some unfortunates like Russia off 70 per cent. History shows that even in enduring, secular bear markets there are not just 20 per cent bounces but usually one 30 to 50 per cent rally. We should be due.

Long-term Outlook and Positioning

What's scary about this recession That global circus of leverage and the unwinding of that leverage -- what we call the global financial crisis -- has had five big impacts on the shape of the recession we now face: It means consumer demand will show a protracted, two-stage decline. I'd call what I described in No. 2 above the first stage of consumer decline. It's a version of the typical drop in consumer demand we see in a recession, although its arrival was delayed by the global abundance of cheap money. It finally arrived when the deleveraging of the global financial system reduced or, in some cases, eliminated the supply of cheap money that companies could use to keep consumers buying. It will mean we're likely to see a second drop in corporate spending in response to the delayed decline in consumer spending. That will stretch out the recession. Once consumers slow their spending, companies will launch a second round of cuts of the sort typical in normal recessions. At this point companies will take the same steps to reduce production that they take in any recession. These cutbacks are just now becoming visible in the economy.  It will mean ending this recession will be tougher than usual. The standard medicine for a recession is more government spending on infrastructure (roads and bridges), an extension of unemployment benefits to prop up demand (and relieve suffering), grants to cities and states so they can keep spending and not add to the recession with their own set of cutbacks, and interest-rate cuts. Those fiscal moves are exactly the package of fixes that the Democrats in Congress have proposed for a second stimulus package. I think that kind of plan would indeed be good news for infrastructure companies and local governments, and could well reduce how far the economy will fall in this recession. However, the amount of money Congress is talking about -- and the amount in the first stimulus package (remember those checks that some of us got?) -- is small compared with the amount that the credit crunch has taken out of consumer buying power. Add to that the flip side of the wealth effect -- people spend less when their houses and stock portfolios are worth less -- and you can see why this recession is a lot more likely to look like the long recessions of 1973-75 and 1980-82 than the blink-and-they're-over recessions of 1990-91 and 2001.

Cheap stocks? They're an illusion For most growth stocks, I think the answer is "not yet." But I've found three that are close. One of these I'd buy if it dropped back to its Oct. 15 low. One I'm putting on my Jubak's Picks watch list. And one I already own in that portfolio and will hold on to even in this tough environment. Classic growth stocks such as Apple (AAPL, news, msgs), Coach (COH, news, msgs), Google (GOOG, news, msgs) and Whole Food Market (WFMI, news, msgs) certainly look cheap. As of Oct. 21, these four stocks were down 53%, 31%, 46% and 67%, respectively, for the year. You could say they're selling for about half off. But with the economy headed into what looks like the deepest recession since it contracted by 3% in the fourth quarter of 1990 and 2% in the first quarter of 1991, I don't think these stocks are bargains. You can't rely on the usual ratios (for example, the price-earnings ratio to growth rate, or PEG) or expect screens based on last year's earnings or on Wall Street projections for next year's growth to find true bargains for you. You've got to pull on your asbestos gloves, reach deep into the fire and look at things such as debt loads and cost structures -- things that most growth investors leave to the value-stock crowd -- to find bargains now. I've found three stocks that fit the bill by following these rules for finding bargain growth stocks in today's market. Rule No. 1 Look for companies with flexible production and low fixed costs. Rule No. 2 Look for free cash flow that covers debt payments and is large enough to finance the company's growth. Rule No. 3 Look for companies whose customers have the cash or credit to keep buying.
P/E slippage is a matter of perspective, Autumn Is Here. Now for the Fall...

Smart risks for cautious investors Even if you're a relatively conservative investor, you have to own a share of these markets once the bear has taken its claws out of stocks. That's especially true if you have any hope of rebuilding the wealth you've lost in this bear market. The emerging stock markets and the developing economies of the world -- and not the developed markets and economies -- are where the action will be in the next decade. Aren't these markets too risky? Fair question. They sure aren't your standard widows-and-orphans investments, and these markets haven't lost all of their historical and hysterical volatility. But relative to the stock markets of the developed world, the world's emerging stock markets have become less volatile and more rewarding. I can make a case that these markets are far and away the risk-return leaders of all of the world's stock markets right now.

The market's crystal ball is broken I can't remember a time when views on the short- and long-term direction of stocks, the financial markets and the global economy were so thoroughly at odds. One of these views is going to turn out to be very wrong. Either the next 10 years will look much like an attenuated version of the current crisis, or they will show this crisis to have been just that, a crisis, and the major investing themes of the past 10 years will reassert themselves as the drivers of the global economy and financial system. I'd bet the short-term view of the long-term future, which is so dominant right now, will turn out to be, well, shortsighted. Long-term investors -- and not just Warren Buffett -- see the current market collapse as a buying opportunity. On Nov. 19, a day the S&P 500 dropped more than 6%, Norway's $300 billion sovereign wealth fund announced that it was increasing its allocation to stocks to 60% from 40%.But the short-term money is selling, which in this case means hedge funds and their investors. Hedge fund investors pulled a record $40 billion out of the funds in October, the most since Hedge Fund Research started compiling figures in 1990. Hedge fund managers have been selling, too, and some of the industry's biggest funds are now 50% in cash. How's that for divergence? Of course, you could argue that that kind of divergence is exactly what you'd expect in a bear market. It's just business as usual in these unusual times. But it's not just views of the long- and short-term direction of the stock market that so divide investors. It's everything, including the direction of prices for food commodities, the direction of oil prices, the direction of inflation and the direction of interest rates. There's a gulf between the long- and the short-term view in each of these areas that's big enough to swallow an oil tanker, a dry-bulk carrier and a deep-water drilling rig.