naked capitalism

The greybeards are not only chastened by the state of the economy, but as the example of Eli Broad illustrates, they are speaking up about it. That’s telling, because there is an unspoken rule in American business to stay upbeat, lest you unnecessarily scare investors and consumers who supposedly aren’t sophisticated enough to handle bad news.

Thus the significance of business leaders like Broad saying that the economy is in lousy shape is that it is so obviously doing badly that there is nothing to be gained by mincing words.

From Bloomberg (hat tip reader Saboor):

Billionaire investor Eli Broad said the U.S. economy is in the `worst period’ of his adult life as a housing market recovery remains “several years” away.

“This is worse than any recession we’ve had since World War II,” Broad, 75, said in an interview yesterday. Broad, the founder of homebuilder KB Home, said the U.S. should avoid a depression on the scale of the 1930s because the country now has sufficient “safety nets.”…

“This is the worst period of my adult lifetime,” Broad said, speaking about the U.S. economy. “I do not think things are going to get any better” before the next president takes office in January….

Selling off vacant, unsold homes could take “several years,” Broad said.

“The problem is, people don’t believe prices have bottomed out,” he said. “You’ve got to induce people to buy houses” with federal policies including tax incentives….

Broad said in a television interview that consumer confidence and home sales won’t improve this year, while unemployment will rise….

The U.S. government stimulus checks helped support economic growth and more federal help is needed to fuel growth, he said.

“I think housing is going to continue to have a corrosive effect on consumer psychology and the economy in general to a far greater extent than people think, or even far greater than I thought about a month or two ago,” he said….

Repairing the damage to the U.S. economy will require political leadership on U.S. energy, health care and education policies, Broad said. Those areas are the focus of his foundation.

“I worry about the future of America,” said Broad. “It’s time to regroup and redefine our place as a country and that’s tough to do.”

Contrast this with Mark Hulbert in “Was Friday the bottom?” via MarketWatch

Did the Dow’s close Friday represent the closing low of the correction that began last fall?

When I last reviewed the sentiment evidence from a contrarian perspective, 10 days ago, I argued that advisers had yet to throw in the veritable towel and that, therefore, the capitulation that contrarians look for to mark a bottom had yet to take place. I quoted Ned Davis of Ned Davis Research as saying: “We may need more extreme pessimistic sentiment before we can call sentiment clear-cut bullish.

Since I wrote that column, the Dow Jones Industrial Average has fallen more than 700 points, and — not surprisingly — advisers have grown more discouraged.

But have they become discouraged enough to satisfy contrarians’ requirement that pessimism become extreme?

Let’s take a look at the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average recommended stock market exposure among a subset of short-term stock market timing newsletters tracked by the Hulbert Financial Digest. When I wrote my June 19 column, the HSNSI stood at minus 24.5%. At the close on Monday, June 30, the HSNSI stood at minus 35.9%.

So, in the wake of a greater-than-700 point drop in the Dow, the average recommended equity exposure among short-term market-timing newsletters has fallen by 11.4 percentage points.

That may be low enough to qualify as capitulation, but I’m not so sure. It’s a close call….

To be sure, bullishly-oriented contrarians can find at least some degree of support in the sentiment data. At minus 35.9%, the HSNSI is now lower than it’s been any time this decade – lower even than where it stood at the end of the 2000-2002 bear market.

That’s a bullish omen.

Another bullish omen: The slightly higher low to which the HSNSI descended at the market’s March lows (minus 29.4%) was still bearish enough to be the springboard for a rally of more than a thousand Dow points…

Richard Band, editor of the Profitable Investing newsletter, is forecasting a bounce. He wrote after the close Friday, “We’re in a very tough phase for the stock market, and there may well be more thunder and lightning before the storm passes. But a sharp bounce is coming.”

Band, you may recall, was forecasting in late March that the Dow would reach the 16K level by late this year or early 2009.

Band didn’t mention that forecast in his communication to subscribers Friday. But, in any case, the rally that he is forecasting this time around is on a smaller scale than what he was recommending then: “We’re due for a rebound,” he says, “possibly a furious run-up lasting three or four weeks.”

Feel free to ignore my humble views. First, market timing is a great way to lose money quickly, or at best underperform.

Second, historically bear markets show an average fall in the S&P 500 of over 30% and last more than a year.

Third, it’s been so long since we have had a really bad market for equities that I don’t think most people know what it looks like (and it’s weird that Hulbert appears to have forgotten, since he started out roughly when I did, in 1980). The public at large was very skeptical of stocks (save maybe utility stocks and Ma Bell). The earnings multiple for the S&P 500 was around 10. There is too much of a subtext in his piece of eagerly looking for a bottom. The reports now coming out of China say that investors see rallies as a selling opportunity. That’s a real bear market. Instead, I still hear the mantra, “A lot of cash is sitting on the sidelines.”

Fourth, per Broad and a lot of others, this is not going to be an average recession. We are going to see patterns well outside historical norms. I’d put a lot of emphasis on preservation of capital.