November 24, 2008

The Bottom: More Thoughts

I recently did a little thinking on "Where is the Bottom of the stock market?" Here are some more thoughts, mostly from articles by Bill Bonner. He says,

major bottoms don’t happen at the beginning of a recession; they happen at the end of one…when an economy is ready for another big growth spurt.

In the discipline of optimization, a distinction is made between "local minima" and a "global minimum;" that is, some local canyons are pretty deep, but somewhere out there is the very deepest canyon. These are bottoms in space. But what about time? If this recession lasts a couple years, then we might see some short term (local) "bottoms," as well as the long term, deepest (global), bottom.

Bonner also says to keep your eye on the earnings if you want to watch for "the bottom"

when [stocks] are cheap… when they sell for 5 to 8 times earnings, not 10 to 15 times.

He also has some insight in a less quantitative sense:

Most important, a real, major bottom doesn’t happen when you’re looking for it... You’ll be able to see it coming…after you’ve forgotten to look.

Bonner has a prediction for the bottom:

When the Dow gets below 5,000 we might be tempted to buy. Until then, it’s sell… sell… sell.

By the way. I don't buy all of Bonner's libertarian policy views, but some of those libertarian economists do tell it like it is on the numbers.

Sources:

Contrarian Profits, We’re a Long Way from the Bottom of this Bear Market, Bill Bonner, July 15, 2008.

Contrarian Profits, Watch the Dow Hit 5,000 After This Bear Market Bounce, Bill Bonner, October 14, 2008.

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