Saturday, April 19, 2008

Are We At The End Of The First Half Of The Recession?

More and more CEOs and economist are now saying publicly that we are in a recession, a subject that I’ve discussed previously in We Are In A Recession But What Type? A Comparison To Two Recent Recessions. As more people climb on the recession bandwagon, it seems that the nadir may be near.

Just as Punxsutawney Phil is a an unofficial arbitrator of the start of Spring, Charles Peabody, head of research at Portales Partners, an independent research firm in New York, and a near perma-bear on financial stocks, is being the unofficial arbitrator of calling the bottom of the current recession. With his track record, he may not be that far off in calling it a bottom. Unfortunately, it is not going to be a “V” shaped bottom that the bulls are hoping for. Optimistically, it may be a “U” shaped bottom, where we will tread the bottom for a few quarters before heading back up to the surface. I estimated that this process would take approximately 8 to 14 months. I am in good company as Nouriel Roubini is also looking at a “U” shaped recession lasting 12 to 18 months through the middle of 2009.

So how can one determine whether we are at or near the bottom? The short answer is: no one can. Calling the bottom or even the start of a recession is a highly subjective matter. While the data is the same, the way the one interprets the data will result in different results. This is because different set of data can contradict each other, leading to widely varying results and therefore it is only an educated guess at this point.

MarketWatch is also making an educated guess with its article on the five signs of the bottom of the stock market. While the article makes for a great read, it appears to be a bit short on its analysis, which is the reason for having so many caveats. The problem with the MarketWatch article is its reliance on anecdotal data such as the Investors Intelligence survey, Ratio of New highs/new lows, and discretionary consumer spending. Relying on a set of anecdotal indicators like the one in MarketWatch is not a smart strategy. Even the Investors Intelligence website offers this caveat: “…bear in mind that this is anecdotal evidence of how advisors feel towards the market not necessarily how they, or their readership, acts.”

So do not fall in to the easy trap of feeling that one can trade using these methods. The best method has always been to (1) read the financial statements, especially the balance sheet, of the company that one is interested in investing; (2) read all their caveats and risks listed in their 10k and 8ks; and (3) source reliable references and periodicals and see the trends occurring in local and global economics, geopolitics, and world events. Yes, it is a lot of work but if done steadily and with discipline, it will yield a handsome reward.

May Yours Trades Be Profitable.

Ed Kim

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