The Bear Market Is Only Beginning

The Bear Market Is Only Beginning

by Comstock Partners

Long before it became headline news, we were talking about the corrosive effect of excessive debt, the softening U.S. and global economy, the "fiscal cliff", the implausibility of a European solution, the probability of a hard landing in China and the prospect that corporate earnings estimates were far too high.  Now these negative stories are carried in the Wall Street Journal every day.  This week alone carried articles on downward earnings revisions at major corporations, Brazil's sputtering growth, the worsening slowdown in China, new austerity measures in Spain and Italy, the continuing disappointment in U.S. economic indicators and more worries about the fiscal cliff.  As if that were not enough, the news has been full of reports on the fixing of Libor rates, the fraud at Peregrine Financial, and the J.P. Morgan losses.
In the face of the now-obvious negative outlook, the question we get most often is why the market has declined so little, and why it seems so resistant to bad news. In our view, the reluctance of the market to give up much ground is typical of many past market declines and reflects a state of denial by investors as they grasp at reasons to remain bullish.  Currently, the reasons cited most often are that the market is cheap, corporate earnings are strong and the Fed, as well as other central banks, will provide all the liquidity that's needed to avert a serious economic downturn.  We believe that each of those evaluations is flawed.