An article on Seeking Alpha the other day caught my eye – entitled “10 Reasons Why We Still Haven’t Hit Bottom,” it oversimplified a number of points and unnecessarily dramatized others. Comments on the points, which I’ll number to match the author’s system:

1.) It’s much easier to say that people are looking for a bottom two weeks after the market actually put in a low, and has risen by 20%, than to consider what happened at the point in time when the low occurred. So, what was sentiment actually like? First, this chart from Bespoke shows their poll at the November 2008 “Citigroup (C) Bottom” – note that 90% of voters are expecting lower lows, and the modal response looks for a 20% loss.

The Dow quickly popped more than 15% from that point. So what about sentiment at the March 2009 low? It was remarkably similar, with 89% negative responses and a modal projection of another 23% downside.

Perhaps more anecdotally, what are people literally looking for? Using Google Trends, which captures search volume for specific phrases, consider the searches for “market bottom” over the last several months. A pair of false bottoms have materialized earlier and been revealed to be false, and the number of people searching for the term has declined over time as well. Take this for what you will; I am not defending it beyond a simple assertion that there appears to be less interest in the market as it declines further.

2.) This point confuses liquidity with insolvency brought on by leverage. The Fed is putting liquidity into the system, and the yield curve has a large slope. If the Fed deserves credit for anything, it is bringing down short rates enough that banks with significant deposit bases have a cheap source of funding.
Now, many markets are struggling with liquidity issues (money favors markets backed by government guarantees), and I think the prevalence of covenant-lite loans during the last boom has postponed bankruptcies toward the latter part of the cycle. This is one of my potential sources of future pain.

3.) This is a real recession, alright. But in what sense is it different this time? In point #6 the author suggests knowing something about the actual companies one invests in, as opposed to using technical analysis. Likewise, perhaps better to make judgments on the merits of a company’s value-creation strategy as opposed to a blanket judgment that being an owner of businesses (i.e., owning stocks) is a bad idea.

4.) In a sense, buy-and-hold (via indexing) has been dead for some time. Annualized returns over almost any long time horizon are awful by historical comparisons; so, let people think they cannot win by owning stocks. Equities are rigged? Please, take your money out of the market and buy gold, or foreign currencies, or hide from risk (and simultaneously return) by purchasing Treasuries. Less competition will mean better future returns.

5.) Maybe earnings estimates need to be cut more, and targets need to be lowered further. Will this necessarily drive stock prices lower? Difficult to tell. What is less difficult to tell is the effect restoring confidence to earnings estimates will have; waiting for the uncertainties to be removed will not get you in around the bottom.

7.) America, like all countries, has its problems. It also has the most extraordinary economic system in the world, which has created unparalleled prosperity over time. Again, this says nothing about whether or not the market has bottomed, but it does give an open forum for the negative to raise concerns.

9.) The author acts as if this spiral is self-perpetuating, with no hope of stopping. But all things that cannot go on forever must end, as the saying goes. For example, risk premiums eventually widen and become attractive for new investment – this leads to new jobs, more production, etc., and the cycle reverses – and, not surprisingly, it’s more likely that risk premiums are attractive when the S&P 500 is at 770 than 1,470.

10.) Talk about meaningless and shrill statements. Discretionary income falls faster than household income, alright. But simply declaring “everything is 10 times worse than you think” smacks of trying to cheaply drum up fear, or round out a top-ten list.

So, now that I’m done painting myself far too firmly into the bullish corner, let me say that while I went (almost) fully invested on the day of the March lows, it was not about anticipating broader market lows. I have my own concerns about the health of the economy, and the policies pursued by our government, but I separate those from finding investments offering attractive returns with a reasonable margin of safety. Creating a differentiating thesis requires more thought than simply extrapolating present troubles indefinitely into the future.

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