Bear market "one of longest since 1930s."

SELDOM has a stock market correction crept up with such stealth, and struck before we were braced for the pain. In London the FTSE100 slid 3% to a new nine month closing low of 4630.8. Like a burglary in the bedroom while we’ve been watching the World Cup downstairs, billions of pounds have been lopped off the value of our pension funds and Individual Savings Accounts (ISAs) before we noticed what was happening.

In the past week as we sat mesmerised by England, Argentina, Senegal and Cameroon, the FTSE100 has been stripped 320 points, or 6.5%. On Wall Street, where distractions such as the Golden Jubilee and the World Cup have mattered much less, the reasons for the plunge are that much better understood. But here, few seem to have noticed outside of the City that burglars have sped off with a van full of furniture.

We knew it was coming, or said that we did. For months Wall Street and London stock market reports have repeated almost daily the mantra of the corporate world that there is no recovery, or not in profits at any rate. And we know profits are the vital driver of any investment and activity upturn.

...But as we nodded, we happily bought into two false rallies, the first soon after the September 11 terrorist attacks and the second in the February-March period, when we thought those struggling tech stocks were recovery plays.

We knew it was coming, or said that we did, when repeated warnings were given that our house price rises were unsustainable and that interest rates would have to rise. We nodded sagely but were happy to push that prospect into the autumn and beyond. Now a rise looks upon us.

Tempting though it may be to see the slide as a technical correction of no concern to the real economy, tumbling markets are a blow to hopes of a speedy recovery many had predicted. The attack on the real economy is two pronged. First, falling share values impact on household assets - especially in the US where equities or mutual fund savings plans form a larger proportion of those assets - and may cause Main Street America to spend less on goods and services, thus threatening the recovery.

Second, they reflect the absence of any big and sustained profits recovery, and it is a profits recovery that is needed to rekindle corporate spending and investment.

Meanwhile the correction looks set to intensify. Last week’s slide was on relatively low volume, suggesting that a final torrid sell-off has still be to come. Market analysts now fear that the FTSE could be driven down to the 4,500 level this week, with the post-September low of 4,220 "a definite target", say chart analysts.

So far the Dow Jones has fallen by just 18% from its all time high in January 2000 though the Nasdaq index of high tech stocks has plunged almost 70%. In London the FTSE100 has fallen by one third from its peak, a modest fall relative to the 1973-75 bear market which wiped some 70% off share values before a rally set in. But it is less the depth of this bear market than its duration - now into its third year - that has caught many by surprise. This is turning out to be one of the longest bear markets since the 1930s.

Nowhere is this market slide being watched with greater apprehension than among Britain’s leading pension funds and insurance companies. The longer it goes on, the more damage, not only to their reserves but also to investor confidence in equity based savings products. Several have already had to make good the damage done by the equity slide to their free reserves by going to the money markets. Last week Standard Life, Europe’s largest mutual life office, raised £1bn in the bond market to fund future growth and bolster its solvency position.

Andrew Milligan, head of global strategy and one of the top brain boxes at the Edinburgh headquarters of Standard Life Investments, is one who sees no early recovery. Indeed, the relative mildness of the falls to date may have lulled investors into thinking a recovery was just around the corner. That is why it may have taken the month after month spate of "cupboard is bare" earnings warnings to impact on investor expectations.

"The 1980s and 1990s", he says, "were the two best decades for equity investing in the twentieth century. By and large we had two decades of annual double-digit returns. It was an exceptional period that many assumed would just carry on after a mild correction. But the gap between double digit and single digit growth is an enormous one when it comes to equity market valuations."

There is no doubt that distrust of corporate earnings has left a big vacuum of certainty over what is the "right" level for the market. As evidence of the depth of the market’s confusion, he points to assessments by Andrew Smithers that Wall Street is still overvalued by 25% and a counter-assessment from the economist Arthur Laffer last week that is undervalued by exactly that amount. "Two extremely capable people with rigorous analysis", he shrugs, "can come to diametrically opposed conclusions."

One way out of the post-Enron distrust of corporate earnings statements is to concentrate on how much cash a business generates, partly measured by the level of dividend income (how piquant; long in the tooth observers will note you never have to wait long at Standard Life before the talk turns to dividends).

Last September, Milligan points out, about 25% of FTSE100 companies had a dividend yield higher than the government bond yield. On Friday there were only 16 companies in the FTSE100 yielding over 5%. "There is clearly value in the market", he concludes, "but not as much as there was in September." And, of course, until the lows of September are breached, we are technically not in a bear market of repeated falling lows.

He is not as upset as some over the disappointing US retail sales numbers last week. "What’s fascinating", he points out, "is that in every major economy everybody has been expecting consumer spending to slow. Yet no country has changed its trend spending to a downturn. The second quarter should see US consumer spending growing at 2-3% year-on-year and if that carries on, the US will not go into recession."

But the US stock market still has to take fully on board the reality of much more modest growth in earnings and thus lower share ratings. Many will nod sagely, of course. But the reality is now far less sanguine, whether you are a private investor or a professional. It is the length of this bear market, as much as the prospect of further falls, that is doing irreparable damage to equities as an asset class.

Everybody wants to talk about something else - - - Middle East, Salt Lake City, forest fires, Hillary - - but the big news, the 800 pound elephant in the room, is that your retirement account is disappearing faster than you can say, "thanks for all those 1999 interest rate hikes, Alan Greenspan," or "thanks for the steel tariffs and the avalanche of new federal spending, Mr. Bush."

I voted for Bush and probably will again, but why isn't he getting much tougher on the corporate pirates who inflated their books --- and will do so again if there's no real punishment? Won't the market stay sick if we aren't assured that honesty will be enforced?

George Bush is a Keynesian demand-sider, though that's probably giving him too much credit. I think he actually has no understanding of economics.

In his defense though, he's just the latest in a long-line of well-intentioned airheads. The market is sick because the money spigots have been on full blast for so long and because the State is gobbling up ever greater amounts of private wealth. Bush's much-vaunted tax "cuts" have not resulted in a single penny's reduction in government expenditures. The government is papering over the gap with money created out of thin air.

In the real world, as opposed to the State's credit-bubble one, double digit returns are extremely rare. Inflation has conditioned us to think otherwise. Reality is reasserting itself, just like it always does.

At his present pace, King Dubya will go down in history as Herbert Hoover II.

The corporate problems are leftovers from the Clinton era. The cleanup is contiinuing. GW has already spoken on retirement plans, executive malfeasance and so forth. Just this morning RiteAid and Merck are under investigation for accounting irregularities.

Probably I will also vote for GW again although I think he needs to get in touch with some real concerns at the people level, notably illegal immigration/borders and 4th amendment/privacy issues.

Al Quaida is waging war on our economy

Disagree. Al Qaida has nothing to do with fiat money, $6T in public debt, billions (perhaps more) in inter-agency debt, corporate legedermain, confiscatory taxation, fascist economics, and artificially cheap credit. These are our own chickens coming home to roost.

...$6T in public debt, billions (perhaps more) in inter-agency debt, ...

Actually, I believe that 2.5T or so of that $6T is inter-agency debt.

See:FAQs about the Debt

Tax cuts and government spending don't have to go hand in hand. As a matter of fact since tax cuts generally cause the economy to grow most have resulted in an INCREASE in tax revenue. That's why we always know dems are lieing when they say we can't "afford" a tax cut. We also have to remember that the market and the economy are not one in the same. I'm friends with brokers and they've been saying for a loooooong time (like around 7 years) that the market's PE ratios are insane and the whole thing is in need of a reshuffle. Notice that the indicators OTHER than the market are looking good: GDP is up, unemployment is starting to drop, consumer spending is up. But the PE column in the paper still has a lot of 3 digit numbers and that's rediculous.

I'm aware of that website and have also heard the accusation that the inter-agency holdings are under-stated. Further, this page appears to omit the IOU's held by the Social Security Trust fund. The only reference I could find is to the "Social Security Equivalent Benefit Account, Railroad Retirement."

I hope it isn't as bad as I think it is, but it's still bad, period.

Assume that I pay 25% on $100,000, yielding taxes of $25,000. The supply-side argument is that a tax cut to 20% will still yield the same or more taxes. With the extra $5,000, I'll be able to increase my income to $125,000, yielding $25,000.

This is pure theory--I may or may not be able to increase my income sufficiently for the government to make up its loss. Of course, the government doesn't wait to find out.

In truth, not even the beloved Gipper was a true supply-sider. He slashed marginal rates, but eliminated numerous deductions and increased the money stock. At the same time, SS/Medicare withholding increased, and the borrowing from those funds continued.

Finally, I don't put much faith in the GDP. It includes too many elements like inventory build-up and public works, neither of which are really new wealth. Nor, so far as I know, does it discount for increases in the money supply. It is also impossible for the econometricians to account for inefficiencies which will be eliminated later.

You are correct that the market is only one slice of the economy; it is not the whole picture. We shall see.

I'm friends with brokers and they've been saying for a loooooong time (like around 7 years) that the market's PE ratios are insane and the whole thing is in need of a reshuffle.

I'm betting your friends didn't issue any "sell" ratings or advise their clients to stay out of stocks & corporate bonds until the correction! ;^)

But it doesn't go by individuals, it goes by the whole country. The math is simple: you get an extra 5Gs which you spend, and it becomes someone else's salary which the government taxes, eventually other people's spending results in your getting paid more but it's not your 5Gs that bumped your income it's everybody elses. Call it a theory if you want but there's a reason why tax revenue sky rocketed after both the Reagan and Kennedy tax cuts. And tax revenue dropped with both the Carter and Clinton tax hikes. It's trying to explain those events that's caused all the number crunching.

a final torrid sell-off has still be to come.

This is the most important point of the article. Capitulation has not yet come? What is capitulation? It is when you, everybody you know, and every investor from coast to coast picks up the phone at the same time and yells "Sell, Sell, Sell, Now, At Any Price, Just So I Don't Lose All My Money!"

That is capitulation. You will know it when it happens because you will be on the phone yelling at your broker!

My theory is that Bush wants to kill all volatility in the stock market to make it "safe" for investing Social Security funds. Of course, he'll also be destroying most of the vibrancy and growth in our economy. Note how he plays up the agricultural sector in most of his economic speeches, while staying silent on any sector younger than a hundred and fifty years old.

That advice is worth more than all the tips all the retail brokers in the entire U.S. could give you. If you are itching to own stock, keep it all overseas in markets that are not overheated. U.S. PEs are still not maintainable.

Your advice is identical to what prevailed at the beginning of the Great Depression. But other than that, it's normal for P/E's to be high at the bottom of a business cycle. The real question is the prospect for future earnings growth. P/E's look at the past.

Given our President's attitude toward the stock market and private sector investment in general (negative), innovative business sectors (negative), the cost and size of government (much larger), I'll let others decide what the prospects for future private sector growth are.

And I'm wondering if Bush's prayer initiatives are related to his foresight of a future nesessity to pray for government assistance.

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