The massive injections of liquidity from the Federal Reserve for the past five+ years–created by artificially low interest rates–have clearly come to an end. Cheap credit “fixes” are no longer available, and the credit junkie is going to experience withdrawal symptoms. Recently, news of the sub-prime debacle and teetering derivatives hedge funds have registered with investors–at least at the institutional level. Collectively, they have come to the realization that the party’s over. So it was no surprise that Wall Street prices declined 4.23 percent last week. I predict that this is just the beginning of a major bear market cycle that will last several years, bringing the Dow down out of the stratosphere–perhaps to as low as the 9,000 level. I foresee that many trillions of dollars of “on paper” gains will be erased. This bear market will make the 2000 sell-off seem quite small, by comparison.
Sadly, the Generally Dumb Public (GDP) is the last to catch on to these macro-scale market swings. Long after the institutional traders have switched to bonds, TIPS, and other instruments, lots of individual investors are going to continue to stand fast like deer in the headlights, and consequently get splattered. Individual investors tend to be emotional and get attached to particular stocks, or hold out for price points that are determined viscerally. The big traders are down right dispassionate, by comparison. To illustrate: I have some close friends–a couple in their 40s–that had recently sold most of their stocks, but were still hanging on to some Sun Microsystems (SUNW) stock, waiting for it to touch a $5.50 price. (The wife had acquired most of it between $3 and 4 per share, from her stock options while working at Sun.) I strongly encouraged them to sell when Sun was at $5.41, just before Sun reported their quarterly earnings. I had advised them: “Sell your Sun stock within two hours after the earnings announcement, regardless of the exact price. It is only going to go down if you wait.” But they hesitated, because the stock didn’t jump to the $5.50 as they had expected. (Sun’s earnings numbers were good, but the entire market was sliding last week.) The last I heard, after last week’s mini-debacle, SUNW was selling at $4.93. So, presently, my friends are down about 10% from what “might have been.” By selling now, they would still realize a good profit. I have again urged them to sell, but I doubt that they will. Some deer just won’t budge.
For those of you reading this that that are still in the US stock market, my advice is now practically at shouting level. Get out now. Cut your losses. To quote one of my favorite movies: “Eject, Buckaroo, Eject!” You are driving straight toward a mountain, and your vehicle is not equipped with an Oscillation Overthruster. If you “stay the course” or “wait for a big rally” then you are probably going to be disappointed. To mix metaphors, the US equities market is now is a down escalator. Chances are that the Dow will continue to decline–at least until interest rates turn around. That may be a decade away.