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With investors on the run, bulls may charge back

October 09, 2008|Michael A. Hiltzik | Times Staff Writer

The economic prognosis is relentlessly bleak.

Jobless numbers are soaring. Stocks are plunging. Your co-workers, your fellow passengers on the commuter train and even your dental hygienist are all volunteering that they've converted their 401(k) stock funds to cash.

Could it mean a bull market is just around the corner?

Economists and market strategists willing to call a bottom amid the current market turmoil are thin on the ground, vastly outnumbered by forecasters with distinctly more apocalyptic outlooks.

Yet with the Dow Jones industrial average trading at 34.6% below the all-time peak of 14,164.53 it reached exactly one year ago today, there are signs that conditions are in place for a sharp reversal of sentiment, some analysts say.

For evidence, they cite rock-bottom interest rates, tumbling prices of oil and other commodities and, not least, concerted efforts by central bankers to get the global economy back in gear.

"These are the moments that people look back on and say, 'Man, if I only bought then!' " said economist Zachary Karabell, founder of River- Twice Research. "And nobody ever does."

One glimmer of hope came in Wednesday's coordinated rate cut by central banks in the United States and Europe. Many take the action as a signal that international economic regulators are determined not to repeat the mistakes of the 1930s, when central banks did just the opposite, tightening credit despite an economic slowdown. Further rate cuts may be in the offing.

In the U.S., rates already are approaching historic lows. Wednesday's action by the Federal Reserve will drive the prime lending rate to 4.5%, its lowest level in four years and less than half the rate seen during much of the grinding bear market of 1973-74. That will make it cheaper for many people to buy big-ticket items such as cars and furniture on credit.

Then there's the bailout. Governments worldwide are pumping trillions of dollars into their banking systems, including the U.S. mortgage rescue plan of up to $700 billion.

Many national governments are promising to insure all bank deposits and other bank liabilities, and the U.S. could soon follow suit. Central bankers are finding new and creative ways to keep their systems afloat, with the Fed preparing to lend against collateral it would not have accepted two years ago -- or even against no collateral.

Another positive indicator for a turnaround is the falling prices of oil and other essential commodities. Although this stems partly from expectations for a global economic slowdown, the trend does make it cheaper for businesses to produce and deliver goods, and it puts more money in the pockets of consumers.

Some might even see a positive note in the presidential race, in which Democratic Sen. Barack Obama currently leads Republican Sen. John McCain in opinion polls.

A 2006 study by Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, showed that from 1948 through February 2006, annualized stock market returns averaged 15.3% under Democratic administrations and 9.5% under Republicans.

Had the study been updated to reflect the market's performance since then under President George W. Bush, the discrepancy would have been larger. During that period, the Standard & Poor's 500 index has fallen 23.7%.

One big wild card is emotion. Many of the recent government rescue initiatives attempt to address this fuzzy but fundamental element of the capital markets.

In recent weeks the credit and equity markets have been gripped by fears that, in specific cases, one's trading partner may not be able to meet its obligations, and in general that the global capital system faces collapse.

That has frozen the credit markets and kept investors from focusing on what market mavens like to call the fundamentals -- the capital strength, management quality and business prospects of individual companies.

Instead, hedge funds receiving redemption orders from clients are dumping everything in their portfolios. Retirees and parents with children approaching college age are selling out now, unwilling to bear the risk that their net worth will shrink even further if they wait.

"A huge amount of money is leaving the equity markets because people need cash," Karabell said, "not because they're making cogent decisions about companies."

He points to shares of drug company Pfizer Inc., down 33% from their 52-week peak even though the company holds $20 billion in cash and offers a nearly 7% dividend yield. "It's irrational."

Veteran market observers say that expectations of Armageddon are not unusual during bear markets, in which stock prices decline by 20% or more.

"Every bear market has been caused by something so different from the last one that each looks like the end of the world," said Vince Farrell, chief investment officer of the research firm Soleil Securities Group. "In a bear market, sentiment is always horrific."

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