How low can stocks go? DOW drops to 7997. Panic or just … Palindromic?

Answer:  Very low, though I wildly speculate (putting me in the same expert category as any expert you can name) that DOW at 7000 and S&P at 700 will be the bottom of this megabear market, after which we’ll continue to see major trouble with the economy continue for at least 2 years during which many businesses will die, successful ones will consolidate and just keep in the game, and a handful of nimble and clever new businesses will thrive and lead the new “post recession” economy forward, probably based on impressive technological innovations now testing in a handful of big company R&D departments and literally *millions* of small business efforts around the globe.

Thanks to the internet, the rise of highly social media, and the plummeting cost of powerful computing I remain optimistic that technological innovation will pull us out of this crisis and remain for yet another century the key force behind most socioeconomic progress.

What’s pushing things down in stocks?    I think the main factor is simply that the market, which is predictive rather than reactive, overvalued how fast technology would trump other considerations and continue to lift mediocre companies ever higher.    It’s not as if many companies were doing profoundly brilliant stuff out there – on the contrary the auto companies were up to the same old stupid nonsene they’ve been doing for decades.   Financial companies were gambling with Credit Default Swaps and fueling the mortgage crisis with fundamentally irresponsible and misguided profiteering.   Even high tech companies, home to many of the globe’s best and brightest working for Yahoo, Intel, [Google?], and MSN found themselves in huge battles to protect market share and profitability while containing the onslaught of online spam.    Google may be something of an exception here as their profitability and advertising brilliance has – until recently – kept them squarely above much of the fray and on the path to more innovation.

About eight years ago this foolishness led to the bubble of 1990 where the internet company valuations were out of line with their potential for innovation.    The commercial internet revolution was an amazing thing in the 1990s and remains the most profound new development in history, but the companies were not all that inspired and most companies were destroyed by the very markets they had convinced to fund them in the first place.

So a far better question than “why are my stocks dropping?” is “Why were all these companies valued so highly in the first place?”     We needed a contraction to square the values with the prices, and now we are watching that happen.

Why 7000 DOW and 700 S&P?    At that point the markets will have dropped just over 50% from the highs of a few years ago.    I see that as a significant practical and psychological milestone.    “half off” is a very accessible notion as we know from retail, and we already know there’s a lot of money waiting on the sidelines to buy into a “market bottom”.     It’s reasonable to assume that at least some, and probably many of the companies hammered by this have been penalized irrationally by the broader market downturn.  As prices drop to 5 and 10 year lows some of these bargains will be irresistable to those with cash on hand, and this buying should  stabilize the market.

Will it rise quickly from 7000?    I say no – I think the globalized chickens have largely flown the coop and many of the unfair advantages we have enjoyed as Americans … will be no more.      I see no major depression looming and I see the USA as the economic “safe harbor” and leader for at least the next decade, but the days of easy prosperity are probably gone for some time so … buddy …. can you spare …. a dime?

11 thoughts on “How low can stocks go? DOW drops to 7997. Panic or just … Palindromic?

  1. 6000 by year end for DOW.

    Unemployment estimates going forward are going to be radically adjusted. We are unfortunately at the tip of the iceberg on this. We may see many consecutive quarters of bad results.

    The bail-out isn’t working at all and by the next election cycle we will see every politician running from this. I can’t wait to hear their spin…

  2. Joe I also think there is a significant amount of uncertainty and as long as that continues the markets cannot stabilize.

    We still have no idea what Obama is going to do and as long as he keeps up this fluid concept of governing the markets will not recognize anything positive.

  3. OK Tommo, fire was pretty cool and I suppose you could make a case it’s a necessary condition for the rest of the fun we’ll be seeing in the next two decades:

    Fire -> Popcorn -> Movies -> Terminator -> Skynet -> Real Skynet -> Fin

  4. I think you’re about on the number, Joe, although I wouldn’t be surprised to see a brief flirtation with 6500 on the Dow during December when the tax loss selling and fund redemption forced sales hit their stride. The bigger question is what’s going to drive the long-term recovery in the economy? Is there a transformational technology percolating in somebody’s lab someplace? You’d know better than I, but I’m guessing it will be an energy innovation. What I’m hoping–probably in vain–is that the health care money sink doesn’t get lost in the shuffle. That particular segment of our economy is like the 900-pound tumor on our backs.

  5. Dave I agree that the HUGE question looming is long term recovery prospects, and even though I’m hoping for a transformational idea I’m *betting* that we’ve got 5-10 pretty lean years ahead.

    I don’t see a collapse but I think we’re basically getting knocked back to where we belong – farther if a lot of companies collapse rather than reform.

    As you know from your work in Africa we really have nothing to complain about – those folks have endured hardships we can only imagine over here. IMHO Globalization brings advantages to everybody, but we’ve been at the top of that food chain and that can get precarious as the rest of the world would like increasingly bigger pieces of our action (and deserve them if they do a better job with the work!).

  6. Market was trading down when the Treasury appointment was announced and reversed and rallied sharply on the news. Means nothing really, but Geithner is well qualified and the good news is the announcement did not cause the market to plunge. In this environment we need someone with better credibility than Paulson.

  7. You’re so right about Africa, Joe. Whenever I start fretting about my brokerage account, I try to remember the people I met whose proudest possession is a 13-inch TV set they run off an old car battery. When there’s a soccer match showing, all the neighbors gather around to watch. And when the battery runs low, they take turns carrying it six miles to the nearest diesel generator for a re-charge. That was in Zambia in what amounts to a fairly prosperous village.

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