Crash or Bear Market?
Aug 8, 2007
By Daryl Montgomery
The Bull Market Has Been Gored
• Liquidity makes markets move up and the
liquidity (private equity, stock buy backs, real
estate loans) has dried up.
• Non-US Government Interest rates are
skyrocketing (spread is widening).
• If there is insufficient liquidity, even good
earnings will not make the market move up (the
market discounts future earnings anyway)
• The Federal Reserve bailing out the Credit
Markets will seriously damage the Dollar.
• Volatility is out of control. Short-covering rallies
are the source of future upside.
Recap from July Meeting
• This bubble like all others will deflate.It is likely
to cause a spike in Interest rates, which in turn will
make the Stock Market Decline (Bear Stearns).
• Sub-Prime and other iffy mortgages have been
monetized and sold as multi-part bonds (RMBS).
Barron’s estimates that $1 Trillion of this paper
exists, most held by major financial institutions
and a 7% default rate could wipe out its value.
• Two million sub-prime mortgages will have their
interest rates reset in the next several months.
• Mortgage defaults are increasing rapidly even
though the economy is in good shape.
What is Taking Place
• A number of mortgage companies have failed so
far, first in Dec 2006, AHM and LUM being the
latest. More will follow.
• BSC has had 2 Hedge Funds Fail, 3rd in Trouble.
Failure/Take Over of a Broker-Dealer possible.
• Independent Hedge Funds have Failed, many
more will follow.
• Rumors of impending Bankruptcy for BZH. One
or more Homebuilders likely to Fail.
• Trouble in Australia and France. More Contagion
Internationally will occur.
• Market for Sub-Prime and Alt-A Debt has
disappeared. It will not return. Jumbo Rates Rise.
American Home Mortgage
One Year Daily
LUMINENT – 3 Months Daily
Bear Stearns – 5 Year Weekly
CISCO – 10 Year Weekly
Beazer Homes – 5 Day/5 Minute
Home Builders – 3 Year Weekly
US Dollar – 10 Years Monthly
Crash vs. Bear Market
• Crash is basically a VERY short Bear Market.
• A Crash takes place in Days (>5% drop in a Day,
or waterfall decline), while Bear Markets can last
a Year or more.
• The ‘Bubble’ Sectors of the market suffer the most
damage in both (now Finance and Real Estate).
• New Leadership arises from the ashes. (likely to
be Technology).
• Biggest Danger: Buying Too Late in Crash,
Buying Too Early in a Bear Market.
Crash Specifics
• Panic reigns, Everything is Sold. Extreme
Negative Breadth, Huge Volume. There appears
to be No Bottom.
• In a Major Crash, you will have no access to your
Broker, Charts, or even reliable Quotes.
• Market Bottoms and Recovers Quickly.
• To Buy at the Bottom, need to Guess where it will
be and enter orders the day before the Crash. Use
Charts to Determine Buy Points.
• Best Buys: High Beta Stocks with (actual) Good
Fundamentals, Less than $10. This time Tech.
Bear Market Specifics
• Usually take a year or more to Finish.
• At least Two (powerful) Counter Rallies
• Only Bottom when everyone turns Negative
on the Market. NO ONE recommends you
buy stocks at the Bottom.
• There can be crashes at Beginning or End.
• Must Wait and Wait and Wait to Buy.
DJIA – One Year Daily
SP 500 – One Year Daily
NASDAQ – One Year Daily
Russell 2000 – One Year Daily