Farrell: Is There A Bottom?

Where oh where is the bottom ? Is there a bottom ?

The market is taking a look at the November low on the S&P of 740 (intraday) and trying to decide if it was a temporary low, or a bottom to be bounced off of.

A few thoughts to try and put the question in some perspective.

A bottom usually is a very lengthy, messy, and scary process.

Most bottoms take a year to establish themselves. One fact that lends some hope is that on Tuesday when the market breached 800 on the downside only 8% of stocks on the NYSE hit new 52 week lows. Last October when the market bounced off 840 - only to subsequently fall to 740- 93% of stocks hit 52 week lows. In November when the aforementioned 740 was touched, far fewer stocks hit new lows. And then yesterday only 8% as just mentioned. The rate of decline for the average stock has slowed and that is a good thing.

But if 740 is not to hold where do we then look. David Rosenberg of Merrill Lynch is a lot smarter than I am and has been correctly bearish. He has lowered his earnings estimate for 2009 to $46 for the S&P 500 and to $55.50 for 2010. He feels that the 2010 estimate should be valued at 12 times for a target of 666 (that's a bad number isn't it—sign of the devil or something like that ?) I would argue that with a very low rate of inflation a more appropriate multiple on depressed earnings would be more like 18 times, but, like I said, Rosenberg has been correctly bearish.

Another way to figure where a lower bottom might be is to look at the general correction of major bull markets. The bull market started at 105 or so on the S&P in 1982 and rose to over 1500 in 2007. A two thirds correction of that move would give a rough target of 650 or so as well.

There is now $4 trillion in money market funds which is almost 50% the value of the stocks in the S&P 500. At the last peak after the dot com bubble collapsed the number was 28%. I don't think this is stock market money but it's not money content to earn 0% either. I hope some of this will start to move to the bond market and credit spreads continue to improve. If credit spreads improve, stocks can stabilize.

Also, Doug Kass passed along the fact that 46% of stocks in the average yield more than the 10 year Treasury. That's four times the total in 2002 and compares to a long term average of 5%. There will be some more dividend reductions but it does seem to me that we are at an extreme in valuation.