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Signs of Bottom: Brian Reynolds, Chief Market Strategist, WJB Capital Group

1) Several Wall Street analysts were asked what signs they are looking for to indicate that the stock market has hit bottom and a recovery is beginning. 2) One analyst said that credit markets need to improve significantly, with lower interest rates on corporate bonds, before stocks can rebound steadily. Currently, extremely tight credit is limiting stock prices. 3) Another said investor apathy and near-zero interest rates would signal a bottom. Most investors need to give up on the market through a series of disappointments before a lasting buying opportunity emerges. 4) A third thinks a lasting recovery is still six months away, as last week's market plunge eliminated any false sense of a bottom and uncertainty remains high over the

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52 views3 pages

Signs of Bottom: Brian Reynolds, Chief Market Strategist, WJB Capital Group

1) Several Wall Street analysts were asked what signs they are looking for to indicate that the stock market has hit bottom and a recovery is beginning. 2) One analyst said that credit markets need to improve significantly, with lower interest rates on corporate bonds, before stocks can rebound steadily. Currently, extremely tight credit is limiting stock prices. 3) Another said investor apathy and near-zero interest rates would signal a bottom. Most investors need to give up on the market through a series of disappointments before a lasting buying opportunity emerges. 4) A third thinks a lasting recovery is still six months away, as last week's market plunge eliminated any false sense of a bottom and uncertainty remains high over the

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Signs of Bottom

Investors are frantically stretching their toes, feeling for a stock-market bottom, but can't find solid footing.
The Dow Jones Industrial Average fell 5.3% last week and is down 36% so far this year. The blue-chip
index is off 41% from its record high in October 2007. It was off 47% from that high Thursday, making this
the worst bear market since the Dow fell 49% in 1937-38.
At some point the selling has to end. Investors have moved mountains of cash to the sidelines and have
started to use it every now and then to hunt for bargains. That suggests to some market watchers a
bottom might finally be near.
But how can investors trust that the foundation will be lasting? The bear market is already in its second
year, the bottom has been tested and retested repeatedly, and stocks have continually plumbed everlower levels.
We went to some Wall Street pros, people who deal with hundreds of millions, billions, of dollars every
day. We asked them what they are looking for. What sign? What market signal? What will tell them that
the worst is finally over and the market is beginning to recover?
Here are some of their answers:
Brian Reynolds, chief market strategist, WJB Capital Group
Looking for easier credit, lower rates on corporate bonds
Mr. Reynolds, like many other analysts, believes the credit market must improve significantly before
stocks can begin a lasting rebound.
Certainly, the flood of money being pumped into the system by the Federal Reserve and other central
banks has thawed some corners of frozen credit, especially for banks lending to other banks.
But credit for everybody else is still extraordinarily tight. And that keeps a lid on stock prices.
Corporate-bond yields are critical gauges of credit tightness. Interest rates on bonds issued by companies
that credit-rating agencies consider below-investment-grade, or "junk," yielded nearly 20 percentage
points -- a record -- above safe Treasury bonds on Friday, according to Merrill Lynch data.
Investment-grade corporate bonds yield nearly six percentage points more than Treasurys, the highest
since 1932.
Such high yields suggest that investors believe companies will go bankrupt at levels not seen since the
Great Depression.
Many economists still doubt that is the case. In the meantime, however, companies that wish to borrow
money still must pay usurious interest rates. Until those yields fall, corporate profits, and stock prices, will
continue to suffer.
"Stocks bounce, and bounce hard, in bear markets," says Mr. Reynolds. "Yet we've gotten more ominous
signals from the credit market that stocks will eventually put in significant new lows."

Tobias Levkovich, chief equity strategist, Citigroup


Investor apathy, near-zero interest rates
Many market watchers are on the lookout for what is known as "capitulation," or peak panic selling, when
the market suffers one dramatic, final swoon that creates a lasting opportunity for the bulls.
They take heart in the fact that the Chicago Board Options Exchange's Volatility Index, or VIX, a closely
watched indicator of market fear, last week set a record high, on a day that also happened to bring the
stock market's fresh lows. That suggests to some that there was so much panic that a lasting bottom has
been reached.
But the VIX has peaked, fallen and peaked again repeatedly this year, with the market later finding new
bottoms each time. Mr. Levkovich doubts the final moment of surrender will be quite so obvious.
"We rarely get cataclysmic crescendos of capitulation," he says.
Mr. Levkovich would rather see apathy than fear -- a shift that would cause volatility to fall rather than rise.
Unfortunately, it often takes time and a series of disappointments to create so much disgust with stocks
that most investors give up on the market, presenting a better buying opportunity.
Right now, too many people are talking at cocktail parties about all the great buying opportunities in
stocks, Mr. Levkovich believes.
And Wall Street estimates of corporate profits for 2009 are still far too optimistic, another sign that hope
has not been flushed from the market.
"What I'd look for is more realism on earnings," said Mr. Levkovich. "And then we need very low interest
rates, almost zero, to push people back to taking risk."
Robert Pavlik, chief investment officer, Oaktree Asset Management
Thinks a lasting recovery is still six months away
Until last week's market swoon, Mr. Pavlik thought stocks had already found their bottom and were simply
stuck in a trading range. Long among the more optimistic market watchers, he had expected the S&P 500
to end 2008 at 1175. But he admits that forecast is highly unlikely now; it would entail a 47% rally in the
final weeks of the year.
Like other market watchers, he had taken heart in the market's ability -- until last week, at least -- to
repeatedly rebound above its lows for the year. That suggested there was a price at which investors were
willing to buy stocks, which typically lures other investors out of the woodwork.
Last week ended that hope -- not only did stocks blow through their lows for the year, but the S&P fell to
its lowest level since 1997 and the Dow to its lowest since 2003.
Any bounce from these levels will likely be short-lived, Mr. Pavlik now believes. Investor confidence has
been pummeled by the series of false bottoms in the market so far this year. And there is far too much
uncertainty about the outlook for the economy and corporate profits for a lasting stock rally.
Mr. Pavlik doesn't expect clarity until after the second quarter of 2009, when corporate profit reports will,
he hopes, start to hint at a recovery.

"Something significant has to change in order to get any kind of lasting rally," he said. "Nothing has
changed yet."

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