By Neil Behrmann

Update May 2009

The sentiment cycle never changes. At the top, delusion and irrational exuberance are followed
by disbelief, anxiety, panic and irrational gloom. Jeremiahs become celebrities during this phase
and make pots of money from selling fear to the anxious. They appear on television and
newspapers quote them regularly as latter day prophets. Interviewers forget to ask them whether
they were right about the bear market for the right reasons. A renowned Cassandra, for example,
had predicted that a dollar collapse would lead to a crash. Instead the greenback proved to be
strong. The true bottom of the market was the panic after the Lehman crash during the early
Northern hemisphere winter. The number of new lows continued to fall when a further slide in
financial stocks caused the S&P 500 to briefly touch the low of around 680 points, early March.
Most other stocks were above their October/ November 2008 lows.
Bear market for prophets of doom
The surge in global markets indicates that pessimism has peaked and gloomsters are
encountering their own bear market. One by one, they are becoming less arrogant and certain and
are attempting to retreat from their original stance. Some are saying that the surge is a bear
market rally. This is a falacious notion as it can only be proved from an historic standpoint i.e. a
chart going back in time. In other words there is no way of knowing whether an upward move in
a market is a bear market rally or the first phase in a bull market. All you know is that the
market is going up, period. If it rises by 20% to 30%, investors have the opportunity to take
profits. One thing is certain. People who followed the pessimists in the latter stages of the bear
market have lost opportunities. They are caught in cash at rates of 1% or less and are now
fretting and are beginning to jump in at higher levels. Therein lies the danger.
Beware dial a quote pundits who talk their book
Once again there is disbelief in recovery, but market participants, as opposed to stressed business
people in the real economy, are becoming confident, even over confident again. Markets have
become increasingly confusing for investors. Overwhelmed with good, bad and indifferent
information from newspapers, continuous financial TV programs, the Internet, newsletters and
tip sheets, many previously conservative investors have become virtual day traders. One pundit
or Charlatan says the market is going up; the other down. They are generally talking their book
and only original ideas are useful. The rest is blah, blah, blah! Pollyanna perma bulls say the bull
market has begun and perma bears warn that we're experiencing a bear market rally that will be
followed by the next downturn. Both say that they are "realists".
The truth, to be sure, is no-one really knows. A seriously successful wealthy multi millionaire
investor and speculator says that he doesn't bother with the information glut and bear and bull
markets. He merely seeks opportunities.
A guess which could be wrong or right
Here's a guess based on longtime experience (see Update December 2008).. The equity markets
have just completed the last stage of the chart below . They have rallied from the "Despair"
irrational gloom phase to the "mean". During the crisis shrewd investors picked up cheap stocks.
Indices are now in the stealth phase while some stocks have prematurely moved into the "takeoff,
awareness phase". The market psyche has changed from depression and fear of losing money to
the fear of being left out. This is the main reason why markets have hardly corrected following
an exceptional surge, as several players and pundits have predicted.
The danger for latecomer jittery money managers and investors is that they could rush in and be
whipsawed by an unexpected swift correction. According to James Montier of Societe Generale,
stocks with the worst fundamentals with unsurprisingly the largest short positions, have
experienced rallies of 70% or more. This spells danger as the analysis tallies with anecdotal
reports of extensive bear covering that caused bombed out stocks to over shoot upwards. Stocks
of hedge fund businesses, for example, are reporting awful results and continual investor
withdrawals. Despite that, they have soared from nadirs by 200% to 700% in some cases. The
same applies to several basket case banks and indebted mining companies that are reporting
losses and production cutbacks. They are surging because they are riding on the back of another
dangerously speculative run into base metals. Stocks of numerous loss incurring companies have
thus outperformed shares of good solid profitable and growing businesses.
This indeed is an amber light. In the event of a downward adjustment following such a steep and
swift rally, the big question is what Wall Street, London and other markets will do next. Will they
shift into the next stage of an upturn on expectations of strong economic revival? On the other
hand will markets languish in a flat, sideways trend? Will they mark time as over borrowed and
highly taxed nations continue to throw money and mismanage failed institutions?
The key is to be like George Christidis i.e be patient and seek opportunities by carrying out
intensive research on sound companies. He refrained from trying to forecast cycles and avoided
problematic companies.

Update December 2008

For those who haven't read the original text, please go to the piece below dated February 2008.
See also, the chart below.
As a veteran financial journalist, I have experienced several booms and busts. What struck me in
all the bear markets was the speed of wealth destruction and treachery of the bear. Time and
time again investors would be sucked in on hopes that the market had bottomed, only to depart
with severe wounds.
I've thought of a possible antidote. Most people look at prices compared to the peak of the bull
market and then believe that they are buying bargains. Perhaps a better idea is to compare
current prices with the bottom of the previous bull market. Take an example. So called experts
were saying that oil was "cheap" at $80 a barrel because it had fallen from $147 a barrel. From
that standpoint it looks an even better better buy around $43. But between 2002 and 2004 oil
was trading between $18 to $30 a barrel. I can't recall anyone then who was forecasting $40 let
alone, $50.
My experience started with the Nixon late sixties bull market (fuelled by the Vietnam War and
Keynesian economics) that led to the 1969/70 bear market. Following the 1973 Yom Kippur war,
there was an extraordinary oil and metals boom and then collapse. A strong equity market ending
in a nasty slide in 1974. There were also commercial and residential property booms in the early
seventies followed by a crash with several bank failures and rescues.
A precious metals boom ended in tears in 1980 and a strong equity market in the late seventies
was followed by punishing lows culminating in 1982. To be sure there were considerable trading
opportunities in the seventies but from the top in 1969 until well into the eighties, stockmarkets
went nowhere and declined in real inflation adjusted values. The year 1982--a time of
considerable pessimism illustrated by an exceedingly bearish article in the New York Times---
was the beginning of an 18 year bull market that ended with the Internet bubble of 2000. During
that period there was a brief but fearsome 1987 crash and a setback during the recession of the
early nineties. The bear market that started in 2000 had several events that aggravated the
downturn, notably September 11 and the Iraq war. Wall Street bottomed late 2002 and Europe
and Asia followed early 2003, weeks prior the bombing of Baghdad.
The boom that followed has been exceptional, as it was fuelled by an extraordinary explosion of
credit and derivatives trading. As we all know now, the subsequent real estate slump has been
the biggest deflationary force followed by the equity slide. Bottom picking has begun in that
market with variable results. The commodity price collapse is a bullish development for
importing economies as it will lesson the strain on businesses and the consumer. This can be
described as a good deflationary force. On the other hand, Russia, Africa and other emerging
nations dependent on raw materials exports, will suffer, although they had a windfall during the
boom.
Private equity is the final bubble that has begun to burst. To be sure, this is such an opaque
business, that the cracks probably appeared some while back.

February 2008 :- The picture tells all:-

The bubble chart of Hofstra University's Jean-Paul Rodrigue, illustrates the behaviour and
emotions of market participants during boom and bust cycles. Equity investors are currently
worried, but are still bargain hunting ahead of a bull trap. Commodity markets are in the delusion
phase. UK and European real estate markets are in denial, but fear reigns in the US. Mortgage
and other credit derivatives are already in "capitulation phase; junk bonds have reached fear
range. Investors in high grade corporate bonds are also nervous.
This is a systemic debt deflation crisis that hasn't been seen for many decades following
extraordinary borrowing, leverage and derivatives expansion in the past few years. The credit
crunch could well be the same as the early seventies and early eighties, but so far the consensus
neither believes it, nor wants to accept it.
The warning signs were there in the summer of 2007 when two Bear Stearns hedge funds
collapsed and the ball began rolling down the hill. See sovereign bonds .
Delusion of Commodity Bulls
Pension funds and other investors suckered into this bubble can draw their own conclusions from
the following chart. CRB Commodity index reaches North Pole, while Baltic freight rates head
south. If there were a boom in global commodities demand, shipments and thus freight rates
would rise. This is a red light, showing that prices are soaring on speculative hot air.

Source:- InvestmentTools.com