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Was Dow 6,000 Optimistic?

throwing_away_money.thumbnail.jpgOctober 7th I suggested that once the market broke 8,000 the likely bottom was 6,000.  Today the DOW hit 7.114.78 but I’m beginning to wonder if 6,000 is really the bottom.  When I made my estimate I was using price to earnings ratios. The historical norm for bear markets is 7x Price/Earnings.  Unfortunately, as Peter Corless notes, earnings continue to drop.  What looked like forward earnings in October look rather optimistic right now.

The general consensus seems to be that this is driven both by the vagueness of Geithner’s plan and by the fact that the Geithner/Bernanke put (the likelihood that they would not just bail out financial institutions but their stockholders) is looking more dubious.  The more the administration refuses to rule out nationalization, the more people think it is bound to happen.  In addition to these issues, when Geithner said 1 trillion was the top number for his private/public plan, that was less than the banks think they need (4 trillion is their bottom number.)  Geithner isn’t promising a full bailout anymore.

There’s also a technical phenomenon going on.  The more losses investors take, the more they have to meet margin calls.  Good securities are sold to meet bad bets, driving down even the price of good investments.  A friend of mine who advises various investment funds has seen even good ones hammered by redemptions, people selling the investments that are working to cover their losses in investments that are going south.  This is a phenomenon which is self-reinforcing.  The more people who have to sell, the lower prices go, forcing even more people to sell, and so on.  

So, where’s the bottom?  I don’t know, but I think 6,000 for this year is now a conservative estimate.  Of course, markets have ups and downs and this one may well bounce back up.  No one should think this is trading advice. Still, I’ll be very surprised if the downward trend doesn’t continue.  The economic fundamentals are not going to get better for some time and forward looking earnings estimates will continue to go down.

At the same time, there will come a point where bottom buying makes sense.  There will be a generational opportunity to buy up stock at lows most of us will never see again.  But when that bottom will occur is not yet clear.  It could be this year.  Or it could be further out.

So hang onto your hats, while we wait to see what the market gods, whose members include Bernanke and Geithner, have in store for us.

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Ian Welsh

Ian Welsh

Ian Welsh was the Managing Editor of FireDogLake and the Agonist. His work has also appeared at Huffington Post, Alternet, and Truthout, as well as the now defunct Blogging of the President (BOPNews). In Canada his work has appeared in and BlogsCanada. He is also a social media strategy consultant and currently lives in Toronto.

His homeblog is at