Monday, July 5, 2010


Dave Rosenberg with some excellent commentary:

Every single low in an equity market selloff occurred because of some major exogenous positive shock. Consider the following:
  • The double low in October 2002 and November 2003 came about as the Fed cut rates 75bps and the Bush tax cuts kicked in.
  • The bottom was put in following the LTCM fiasco in September 1998 as the Fed cut rates a total of three times.
  • The lows in late 2004 were aided and abetted, again, by the Fed's move to cut rates three times the following year, which began to get priced in just as the S&P 500 was forming an interim trough.
  • The bottom in October 1990 followed on the heels of a 200 basis point easing out of the Fed, as well as a rolling-over in peak oil prices from $40/bbl at the time to $20/bbl four months later.
  • The lows again following the October 1987 crash were turned in as the Fed came to the rescue with a 50bp rate cut.
  • And, the lows in August 1982 came on the back of an aggressive 300 basis point rate cut out of the Fed during the prior three months coupled with the effects of the first Reagan tax reductions (from 70% to 50% for the top marginal rate).
The question that must be answered is what the catalyst will be this time around — if at all. Policy rates are at zero. The deficit is at 10% of GDP and there is little public appetite for more fiscal largesse. If oil prices do come down sharply — a de facto tax cut — it would likely only come about if China heads into an economic downturn, which would carry with it its own set of complicated economic and geopolitical repercussions.

Maybe, just maybe, we will have to wait for a bottom that is premised on a market that simply gets so cheap that it won't even need the helping hand of Uncle Sam to precipitate a firm and durable bottom to feed off. That, in turn, could mean a trough multiple of 10x on a forward earnings estimate of $70, rather than a 15x multiple on some consensus $95 EPS forecast that so many cling to. Look at the good news from this math — at least we don't break below the March 2009 low!