FINDING THE BOTTOM
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FINDING THE BOTTOM
The DOW finished the month of February at 7062.93, a decline of 11.72% for the month and 50% below the record high in 2007.
Is this the bottom?
A number of pundits have predicted a market “floor” at much higher levels. For example, last year Suze Orman famously and confidently predicted a floor at 8,200. I understand that some of her friends also predicted the defeat of the traditional marriage initiative in California.
So much for the audacity of hope.
A floor is an aggregate market price, like that of the DOW index, at which a critical mass of investors will start a buying trend that has the effect of stabilizing and supporting a price level that becomes an effective lower limit -- a floor. By definition, market floors are psychological barriers.
But a bottom is a different animal altogether. This market is terrified of the bottom.
Be reassured: Unless aliens invade, the oceans overflow or there is civil war, the share prices of ongoing businesses will maintain a reasonable relationship to the estimated sales value of the businesses themselves. In the aggregate, this defines a true bottom. Yes, overheated suburban real estate in areas where there are no employed buyers and the “vapor ware” startups of the internet bubble days may have next to zero value. But that is never true of the core economy. Oil, gasoline, wheat, rice, gold, aluminum and hardwood are never free. Right now, the entire business asset valuation process is complicated by debt loads. A business deep in debt may actually have a negative value.
The current economy is undergoing a sort of mass hysteria because a critical mass of investors are frightened to death that there is no bottom. The reason for this hysteria is that a significant number of financial institutions (and their dependent businesses) are much deeper in debt than they dare disclose. This is like a game of strip poker in which a number of the high rolling players are hiding the fact that they are suffering from acute leprosy. Damned if they are going to undress in public. But they want to keep playing the game as long as possible hoping (like any gambling-addict) that their luck will change.
And now we see the scope of the problem. This economy will only begin an authentic recovery if and when an authentic bottom is discovered. This will require a Darwinian sorting period during which ruthless market forces reveal where the cancer is located. First locate the tumors. Then do the surgery...then the chemo...then start the “wellness care” for the patient. Anything short of that diagnosis and treatment regimen amounts to the audacity of delusion.
Pray for realism and courage. We will get through this....