I Call Bottom

With the market still neck-deep in turmoil, the worst might be behind us. At least that's what Rick Munarriz thinks. Playing the darkest-before-dawn card, along with reasons why he thinks the stock market will recover sooner rather than later, somebody will eventually call the bottom and get it right. Why not him?

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By Rick Aristotle Munarriz (TMF Edible)
July 11, 2002

If an optimist falls in the woods, does he make a sound?

I have to ask because I'm a little rusty on the protocol. Here I am, about to give an upbeat treatise on the stock market, and I know I'm alone. I relish that, actually. Bottom fishing is out of style, and I'm about to open the only bait and tackle shop for miles.

Just so we're clear on this, let me go ahead and say it: I call bottom!

Even if it were strictly a random call, taking first dibs on the gloriously long month of July, based on its chunky width and a lack of willing dibbers, wouldn't be a bad strategic move. The market's going to bottom out eventually, and my chances of nailing it based on pure luck this month are roughly better than that of winning the bingo jackpot at the corner parlor.

Folks such as Marty Zweig and Elaine Garzarelli donned halos for far longer than their mediocre mutual funds and newsletters deserved after making the right calls in 1987. So, heck, why not swing for the brass ring in the dark? You've got crooked executives, questionable valuations, and a dearth of capital spending. You've got jaded investors, daily corporate implosions, and faith on life support. You've got liars, divers, and bears. Oh my!

The market's booby-trapped. But haven't most of the stunts been set off already? I mean, go back to March 23, 2000, when the Nasdaq Composite briefly broke through the 5,000 barrier and you couldn't hear the warnings over the din of jubilant hysteria. Here we are, nearly 28 months later and 73% poorer, and pompoms are in short supply.

Rightfully so, you might add. The fundamentals are running thinner than Greenspan's hairline at a lot of companies, and for the market to turn things around, you need more buyers than sellers. But let's put all this into perspective. We have to adjust the Nasdaq decline for inflation. Yes, inflation. It marches on. Just as perpetual record box office totals are often more the work of higher ticket prices than the actual headcount, price tags will nickel-and-dime their way higher. Asking prices. Potential profits. Theoretically speaking, they get marked up over time.

You also have corporate Darwinism flexing its evil death ray. Last year, 257 publicly traded companies filed for bankruptcy protection. The pace hasn't slowed much so far, with more than $400 billion in assets placed under Chapter 11's umbrella over the past year and a half. Meanwhile, new equity offerings have been selectively lean.

So unworthy companies that were simply sucking up market cap have fallen into the elephant's graveyard. The strong that remain have heeded the reality of overcapacity and have made the painful staffing decisions and factory closures. Shares outstanding, once weighed down by in-the-money stock option compensation, have lightened up after aggressive share buyback programs. And, yes, in real dollars, the composite stocks are fetching less than a quarter on the March 2000 dollar.

Earnings have gone through feast and famine in recent years, and both extremes have been facades. The bubble days were marked by unrealistic levels of capital spending, as tech and dot-com IPOs floored the market, flush with cash to be spent on building out their ice cream castles. However, now we are at the other unnatural end of things, where operating results reflect an overabundance of restraint in terms of corporate spending. I'm not sure which end of the rubber band snaps the hardest. However, I think I know where all this pent-up demand will lead us. Can you say sandbag on a slingshot? I thought you could.

But it's not just the companies, I know. You're a problem. I'm a problem. With personal bankruptcies on the rise, it's easy to believe the worrywarts who draw pictures of blob-like credit bubbles threatening to consume us whole.

Earlier this week, the Federal Reserve reported that outstanding consumer credit shot up to $1.7 trillion for the month of May. Before you stock up on canned beef and jugs of drinking water and finish reading your "How to Build a Falling Sky Shelter" manual, do the math. While consumer debt is up by an annualized rate of 6.8%, consider that borrowing costs are substantially lower now. And while the country may have lopped on another $9.5 billion in consumer credit back in May, this wasn't a bunch of deluded shoppers maxing out their plastic at Denial Mall. The lion's share of that growth -- $7.1 billion -- was locking into the low rates in non-revolving credit lines for everything from homes to cars.

Call me hokey, but I give Joe Consumer a little bit of credit when it comes to credit. You're seeing the trends emerge where discount retailers are thriving at the expense of full-price merchants. The public is also loading up on hard assets at a time when low rates take the borrowed dollar further than it has since the 1950s. Pundits like to paint in broad strokes. We're all naive dolts, puffing into a bubble wand that's weaving some huge credit bubble. Don't buy in. Don't breathe out.

What else are the bears brandishing? Right, the weak dollar. It's true. If the stateside economic scandals haven't been enough to shake off the foreign investor, the notion that unhedged investments risk currency losses is not something to dismiss lightly. However, what else does that weak dollar mean? Doesn't it improve our position as an exporter? Doesn't it make the country a much more attractive holiday destination? While I'm not suggesting that the silver linings are enough to wipe the clouds clean of gray, it's an upbeat side that you really haven't been fed.

And, please, once and for all, can we stop hearing that the market is still overvalued just because the 1982 bull market began with single-digit P/E ratios? For starters, it did so holding hands with double-digit interest rates. Nowadays, money market yields are not providing the same kind of attractive distraction. With lending rates so low that they are buzzing the control tower, bonds are hardly the place to be once the Fed pushes the uptick button.

Goldman Sachs is backing off earlier projections that the Fed would start raising benchmark interest rates later this year. It is now banking on the moves coming during the second half of next year. Either way, fears that rising rates will hurt the market are overblown. When it happens, will the real estate bubble burst? Sure. Will the value of existing bonds fall? Definitely. Will it take a long series of moves before money market funds appear appetizing? You bet.

So where will all this money go? You know the answer, you're just too afraid to say it out loud. The market is a self-cleaning oven right now. It's a grimy process as it rids itself of inept companies and corrupt officers. The end result will be worth it.

If I propose that the Nasdaq Composite would double over the next five years, only to find itself at just half the level where it stood seven years earlier, would that make me greedy? I don't think so. If I ignore traditional gauges that are stacking valuations models on the foundation of depressed financial results, does that toss me into the naivete batter mix? I hope not. Every bull and bear market is different, except for the fact that they each tend to start when the masses are looking the other way. You know, like now.

That's why I don't mind the empty beach. It gives me a chance to lay out on a huge towel as wide as the month of July. You say you only see clouds? I say pass the tanning lotion.

Rick Aristotle Munarriz is proud to be an investor. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.