16 April 2006

PrudentBear.com -Why a (Looming) Bear Market Can Seem Like A Bull Market The One-Stop Shop for the Bear Case

PrudentBear.com - The One-Stop Shop for the Bear Case: "Why I Am A Bear Just Now

The last time that corporate earnings took such a tumble (down 17%) was in 2001. If it happened every five years, we’d be looking at a similar event right about now. But it probably won’t occur this year. It could have happened in 2004 or 2005, but didn’t. It can also happen in 2007 or 2008. The suspects are the usual ones: High oil prices, low savings rates, and the adjustment of ARMs starting this year and next in a rising interest rate environment will finally bring a halt to consumer spending, a recession, and a drop in corporate earnings. So, too, could a popping of the investment bubble in China and elsewhere in Asia.

Bulls may say that these potential problems don’t matter. A recession hasn’t already happened and therefore won’t happen. But this observation isn’t valid, because it’s the last nail that seals the coffin. I’m a bear because I believe it will happen soon (in calendar 2007 with the U.S. stock market reflecting this in late 2006). It’s optimistic to assume that a recession won’t happen until 2010, which would trigger a market anticipation in 2009.

The X Factor

X, in the above paradox, was just over 13% (13.06% to be more exact). Yes, there can be low teens earnings growth for four years out of five. But the bad fifth year really hurts overall returns.

Get the Balance Right

Bulls react strongly to positive reinforcement, because they’re right more often than not, but they sometimes underestimate the impact that the occasional bad year can have on the averages. Bears, on the other hand, have a more realistic sense of the long-term avera"

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