Sunday, March 8, 2009

Depression, Sentiment and Market Tells

I already wrote what would be the most important "tell" that we reached the bottom here: headline in the major newspaper, better yet on the front page, proclaiming Great Depression 2.0. But I also wanted to come with some other "tells".

Any crisis, including depression, however bad it is for many people, does some good work of cleaning up economy from inefficient businesses and sometimes, the whole industries. Structural crisis definitely puts industries out. We already have one dead industry as a result of current crisis: newspapers. They might not recognize that, but they are all dead, maybe with some small exceptions. And those exceptions are probably in local, freely distributed press, not in nationalwide monsters. New York Times, Washington Post and USA Today probably think they can save themselves by using Internet better, but they are wrong. Internet business model is completely different and they have no idea how to use it.

But Great Depression have to kill more than one industry. Well, investment banks of the old style are dead, but they just changed their skins and continue as kinda general purpose banks. No, we need something else. Don't know what is it yet. But one more failing industry would be a good tell of a bottom.

Commodity prices. They fell hard in 2008, but there is still room. The news that fertilizer prices are likely to go down is welcome, but we need most commodities prices to fall about 50% from here to get to the bottom. Oil might be an exception. I know, and wrote about it several times, that current price of oil doesn't reflect current cost of production. It's a tail of last year's pop of oil speculation bubble. But sooner or later oil should stabilize around 50 dollars per barrel. Although we might get big surprises on the way, including downward ones. But if oil drops to 30, it would be a sign of a close bottom as well.

China. It's one of the biggest imbalances in the world by itself. Export oriented country, which is bad in depression. Country producing half of the steel in the world, nobody every tried to explain why. Lot's of inefficient state owned enterprises. Still very inefficient agriculture. China might have a very bright future, but I don't believe such future is near. Of course, I don't believe that China will be a savior of the world economy. Reports of crisis in China would be one more sign of the bottom for me.

Emerging countries defaults. We need several of them. Apart from basket cases, like Venezuela or Zimbabwe, there are a lot of other candidates: Baltic states, Ukraine, half of Latin America, three quarters of Africa. Default of Equador last year doesn't count, they have money, just don't want to pay.

I don't expect to see all these "tells" at or near the market bottom. But of four listed, I expect at least two.

Having said all of the above and giving my readers more doom and gloom feelings, I have the feeling that market is about to turn in the nearest days. I have no idea why such gut feeling formed, I don't believe that it's a global bottom. But I feel some kind of local bottom is overdue. Do I believe this feeling? Common sense tells me "NO". Analysis of market tells me "NO". I don't know if I would act on this feeling. But honesty requires that I share this feeling with my readers.

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