In the face of the stock market's gloom, it may be refreshing to learn that things look good over here on the sunny side of the street. "The market climbs on a wall of worry," is a common phrase on Wall Street.
With the broad market averages flirting with the magic 20 percent downdraft that defines a bear market, what straws can we grasp that give us hope for the future?
Well, for openers, one of the best contrarian indicators signaling a future rise in market averages is the relatively high percentage of investment advisors that are "bearish" (those who think the market has further to drop.) The percentage represented by "bulls," convinced that the market will begin rising soon, is only 33.7 percent.
Historically, the experts have tended to be wrong more often than they have been right. The simple fundamental is best described in Norm Fosbach's book, "Stock Market Logic." He points out that the market is poised for a rise only when there is cash on the sidelines. When everyone is thinking positive, they have all their chips on the table already. There is nothing left as additional investment fodder to drive prices higher.
Apart from these basics, there are specific aspects of the financial services meltdown which may not be as severe as the values currently reflected in their market prices. For one thing, a new accounting rule enacted just last year required banks to value all assets at the value that any assets of the same type could be sold for on a given day.
This is the concept known as "marked-to-market" that can create a huge disconnect between the actual value of an asset and it's stated value based on this accounting mechanism.
For instance, right this minute, there is almost no market today for some of the loan packages that were sold as part of the sub-prime mortgage mess.
"The markets," as they say, "are frozen." If only a few individual speculators will step up to the plate and buy those packages at 50 cents on the dollar, then that establishes the 50-cent value on all the rest of the mortgage packages still on the books at the bank. In fact, some people are now saying that those mortgages may be worth 85 cents on the dollar.
As a percent of the total, not that many are in default. Prior to last year's new law, the banks' accountants would have made an educated guess as to the value of what the bank still owned and would have ignored the fact that a small, unrepresentative sample were selling at the time for far less.
Given a little more time for some of this realization to sink in, I think the banking industry will prove to be stronger than it looks right now.
Setting aside their contorted balance sheets, they are making money on an operating basis â€” which means that on a day-to-day basis, they are pulling in more revenue than they pay out in rent, salaries, phone bills, etc.
In October of 1987, the stock market lost 25 percent of it's total value in a single day â€” history's purest expression of values that were "marked-to-market." The fact that nobody wanted to buy stocks that day theoretically wiped away 25 percent of the entire value of corporate America.
We knew that such an extreme gyration couldn't reflect reality.
A friend of mine betting that it didn't made $180 million in the few months following his single trade on an otherwise silent trading floor in Chicago â€” a bold act by a single individual that marked what the Wall Street Journal determined was the absolute bottom of the market.
Think about the market's decline that ended in March of 2003 and the subsequent 30 percent rise by the end of that year.
In the following four and a half years, the market averages increased by a total of 70 percent.
Today's value, even after the 20 percent decline from the October high, still represents about the annual 7 percent return that Warren Buffet predicted as a 10-year result in Fortune about 7 years ago.
So, the term "far out" in this context may be more than just a sixties-vintage expression of jubilation. It should also apply to our investment time-frame and the need for some patience.