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'The end of the bull market'

Leonard Zehr, July 27, 2007 at 9:04 AM EDT

So warns investment newsletter writer Dennis Gartman on Friday, saying the massive plunge in equities in the past 24 hours “dwarfs anything seen previously,” and is far more severe than the crash of 1987 or the emerging markets-Russian collapse of several summers ago.
He is rejecting any talk on the Street that this weakness a mere correction in the context of a global bull market. “It is not merely a correction. It is the signal of the end of the global bull market that began several years ago, and before this near bear market is done, we are likely to see share prices materially ... indeed very materially ... lower.”
Don’t be surprised, he predicts, to see bellwether stocks that led the market higher trade down 50 to 60 per cent from their highs “before this has run its course, for that is the nature of bear market.”
In retrospect, he figures the recent IPO by Blackstone Group LP was the “very top of the bull market. They will be seen from the perspective of history as one of the strong hands who sold their holdings to the weak.”
While some market pundits have criticized Blackstone for going public only to see the stock price fall relentlessly since then, Mr. Gartman writes that “Blackstone’s management did not err; the public erred in buying it. The strong hands sold to the weak, and the weak have bungled the job.”

  1. Wet Back In Canada from Canada writes: The Law of gravity. The surprising thing is that every ten years or so investors seem to forget the law of gravtiy.
  2. Patrick Delaney from Niagara Falls, Canada writes: I agree! I substantially lightened my equity exposure July 16/07. Only time will tell if it was a good decision - but the party can't go on forever. I'm not greedy, so I'll take what I've made over the years, rather than see it dwindle away.
  3. Trevor Ouellette from Edmonton, Canada writes: And where are investors going to put their money? Housing? Treasuries? Bonds? No, as far as I can tell, nothing substatial has changed in the past month. Panicking in/out of the market never made me money in the past and I don't really see anything to change my mind. Sure, some sectors are doing worse than others but overall I see the market trending higher by early fall.

    So, I'd be a careful buyer over the next couple weeks as prices dip. Remember May, 2006? It's just come late this year.

    But most people won't be able to take the short-term pain of this correction. Are US consumers stopping their spending? Are corporate profits down? Remember, these are the things that matter in the end.
  4. C Paugh from NH, United States writes: Oh please - in percentage terms, the sell off is not even significant at all. Either earnings have to compress, or bond yields have to far exceed earnings yields so that risk margin and appetite go way down. Then valuation rations will follow. What is going to spike bond yields - inflation is not out of control, any weakness in the US housing market will be deflationary and put more pressure to lower interest rates. Any earnings compression is two years away in the US when the boomers start to retire, and much farther out in Asia ex-Japan. This is just the summer seasonal adjustment, and things will trend down until the end of the quarter.
  5. stuvian von gruvian from Canada writes: Don't worry. The plunge protection team is printing the necessary money to keep the prosperity illusion alive as we speak. Stop worrying and learn to love inflation. $8 loaves of bread are yummy.
  6. jarrod baker from Toronto, Canada writes: Stay the course. Over the long term, the trend of the market is upward. This is not a time to sell. Although I would recommend caution, stocks will become cheaper. By the beginning of next week, the major sell off will end and although you may not see large gains for the next 6 months ( a year tops), you should think about buying.
  7. jose quail from Guelph, Canada writes: i like cake
  8. gordon mcpherson from Ottawa, Canada writes: I don't get the big caffuffle about sub-prime mortgages...most European banks exposed don't regard the issue as explosive and to be quite candid, don't mortgages carry an interest rate which is the charge for risk... In addition, banks usually have mortgage insurance to cover their loss otherwise they wouldn't lend the money out at such a low interest rate...and then the property is sold off at market prices. The only one left out is the borrower...and the band played on!
  9. Sivaram Velauthapillai from Toronto, Canada writes: GORDON MCPHERSON: """I don't get the big caffuffle about sub-prime mortgages...... """

    The risk is that the whole debt market, ranging from sub-prime to emerging market to corporate bonds, has been pricing in low risk. In other words, the yield demanded by investors on these risky assets has been low in the last few years. So the fear gripping the market is that debt financing will get more expensive. So the market isn't worried about sub-prime per se (that's only a small portion of the whole market anyway) but that it will spread to other areas. Already there is some reports that junk bonds (generally used by private equity and hedge funds) are getting more expensive and some private equity funds are having problems raising money (the Chrysler deal is an example of one that is running into problems).

    """In addition, banks usually have mortgage insurance to cover their loss otherwise they wouldn't lend the money out at such a low interest rate..."""

    Only if that were true... first of all, banks have almost always loaned money to people that they shouldn't have, and at extremely low rates. If what you were saying were true, the Savings & Loans crisis in the 80s wouldn't have happened; the financial problems in Japan wouldn't have happened; and the current situation wouldn't happen.

    """...then the property is sold off at market prices. The only one left out is the borrower...and the band played on!"""

    The borrow will lose but so do the investors/creditors. Usually the property (or whatever the asset) cannot be sold at market prices. Often these credit crunches happen AFTER asset prices (such as commodities, real estate, etc) start collapsing. Furthermore, one generally never gets a good price when liquidating assets (it wouldn't surprise me if assets have to marked down 30% or more). If you have to sell the collatoral at a deep discount then you probably don't make any money even with the interest on the original debt.
  10. vernon cooney from Calgary, Canada writes: I had a 1997 Saturn in excellent shape (Economy). It had 228,000 km and was very well maintained. I knew because of the age of the vehicle that if I had a large repair (Economic correction) I would have to get a new car. I drove my car very carfully. One night my daughter was hit buy a drunk driver (China, inflation, asset bubble, higher interest rates etc). I had to take a loss (Bear market). I am now into new car payments (Economic cycle).

    The moral of the story is there is a drunk (End of a Bull Market) out there and when he finally gets into his car there is going to be a big accident (Correction). I predict the drunk has a couple more drinks to go. CHEERS
  11. Mark O from Toronto, Canada writes: I read people's comments and see a lot of overconfidence and unsubstantiated predictions.

    People need to separate fact, fiction and what sales agents in the financial industry have told us. Markets don't go up because they went up in the past. Buying and holding doesn't always work. Not every correction is a buying opportunity.

    Take everything you hear (good and bad) with a grain of salt.
  12. Paige Turner from United States writes: Nobody jump out of building yet please! It's not over yet. Notice how the world now moves in synch with regard tostock markets...we're all in it together and while there maybe a correction, historically speaking stocks are where our $$$ Cdn or US should be.
  13. lynn H from Canada writes: All I have noticed is that when the media says that the market is good and getting better then it is time to sell. When they print that the bull market is over then its time to buy.
  14. Fog Hat from Toronto, Canada writes: >>“Blackstone’s management did not err; the public erred in buying it. The strong hands sold to the weak, and the weak have bungled the job.”<<

    So if KKR IPO fails you think Dennis would describe Kravis as 'weak'? In fact the strong hands in this market are not only those who sold at the peak but those who take a short position from this time forward. BX has been a great short and so would be KKR if they manage to go public...in fact, the entire global market has been a great short since BX went public! Be strong, like the Matador, and slay this Bull (BS) market. Peace
  15. stephen white from Canada writes: About subprime: Thanks to reckless lending in the U.S., risk was not priced into the mortgage rates. With the decline in lending standards, anyone would could fog a mirror could get a loan, regardless of income, credit history, etc. The lenders didn't care, because they were packaging the loans up into mortgage-backed securities and selling them on to investment banks, and passing on the risk.

    The investment banks, in turn, sliced and diced these dubious MBS's into CDO tranches, concentrating the default risk by pushing it all into the highest-risk "equity tranches" (read: toxic waste). With the risk of default supposedly contained in those flimsy barrels, they convinced the rating agencies to buff up the lowest-risk tranches into AAA credits! Quite a feat of financial alchemy, that.

    Once they became investment grade, pension funds could buy them, and hedge funds were able to leverage themselves up, buying $20B of these things for $1B down, not unlike the no-down-payment dubious loans that started this whole mess in the first place!

    Of course, then it turned out that, no matter how you slice them up, these loans are still garbage, and even the investment-grade credits are being sold at pennies on the dollar. So a 20% haircut on the CDO's translates to a 400% loss for the hedge fund (I'm looking at you, Bear Stearns).

    I tell you, if the world really knew the true state of the economy and the financial markets, they would run screaming out of the room to put all their money under the mattress.
  16. John Tomari from Canada writes: With oil at $77, Chinese growth at 11%, base metals prices close to record highs, Canadian companies are going to be raking in the profits, and the underlying commodity prices will encourage more M A activity: we have yet to see it really take off in oil and gas. Recent earnings reports from Encana and PetroCan were fabulous. Asian economies, including Japan, are hot, and they are providing much of the recent support to world economic growth. Recent IMF report predicts growth of over 5% next year. All of this means continued good times for the Canadian economy, particularly in the resources sector, but it will be reflected in overall strength, which means industrials and financials should also do well. Back up the truck to pick up Canadian stocks on sale.
  17. TIM TURENNE from Canada writes: Rather than predict be prepared. Better to follow the trend than forecast.

    There are plenty who forecast markets but like the weatherman they seldom get it right.

    Take a look outside. Nice day? Great, maybe have some outdoor activity.

    Take a look at the market - any market. Nice trend? Hop aboard. Stay a while.

    Put a stop-loss under your worries. If and when the trend ends you're out.
  18. John Tan from Mississauga, Canada writes: This market reversal is seemingly quite different from the previous bears of the eighties, and then some. The macro dynamics of the capital market today are more involved because monetary flows have increased exponentially in tandem with a widening number of international players spun from a broad spectrum of investors from many countries. To draw conclusions that this week's reversal in Wall Street is harbinger of a crash that will precipitate into a 50 to 60 % drop would suggest that all these international players have decided to call it quits and let the collapse happen. I do not think so. Globalization today has increased the connectivity of the capital markets to such an extent that necessitates multiple and mutual support. The system will not allow itself to self-destruct. What will happen is that such spring-cleaning when they happen serves to flush out the inefficient companies while allowing the efficient ones to continue to flourish. In the midst of all this, private equity players like Blackstone are only conduits of free capital seeking for efficient employment of investors' capital. To suggest that they are only passing off bad plays into the hands of the weak seems preposterous, not unless there is a conspiracy (or a collusion that would have to involve multiple players like hedge funds and other fund managers) in play. In which case, then we are talking about massive exploitation of the investing public. Heaven forbid ! Surely the SEC would be the first to take action if this were the case. Maybe those in the know can tell us what is happening ?
  19. Nathanael Tookan from Vancouver, writes: A market top takes weeks to months to form. I agree with Mr. Gartment that the fall in the last few days marks the beginning of this formation. Regardless of the fundamental reasons behind the market's fall, the psychology will turn and once it takes hold, it will take a long time before it is ready to reverse. The fundamental reason may spark the first change and it may well be the liquidity crunch, the US consumer's (accounting for 70% of US GDP) confidence plunge due to the real estate mess, the USD mess, etc. etc. etc., but the spark is only effective because the market is ready to move the other way.

    As a trader, it is not advisable to panic, but when the flag is up, it is most advisable to move into a cautious mode. The market told me to get out and by Monday, I as in cash. I will stay there until the market says otherwise. Once the indices have broken the major moving averages and aren't able to break above it, watch out.

    The trend speaks!
  20. Nathanael Tookan from Vancouver, writes: There is a scapegoat at every top of the market. There will be an inquiry, new government legislation, some poor soul that was caught will be prosecuted and jailed, and before the finger pointing is over, the new uptrend will begin...it never fails. And the business cycle goes on ... just as real as taxes and death!

    Good luck to the surfers and wealth to the prudent!
  21. Nathanael Tookan from Vancouver, writes: Interestingly, of all the lessons I learned from a fundamentalist point of view is this ... my finance professor explains that it is often (not always) a negative factor for a company to sell it's equities as a form of financing.

    If your company is doing so well, why would you sell? Why would you raise money through one of the more expensive means namely equity financing?

    Beware those big exotic IPOs, there is a reason why the existing owners are selling ... some reasons are good, and most are bad.
  22. R. M. from Regina, Canada writes: Just remember...99.9% of market guru talk is hindsight!
  23. Phil S from Toronto, Canada writes: To John Tomari. You have forgotten one important point - the carry trade is unwinding. People who borrowed money in Japan at 1% interest to buy investments here in Canada, for example, were unwinding their investments this week precisely because everything is so hot in Japan and the BoJ is likely to start raising interest rates. The only question is how much money is in this carry trade? As they all stampede for the exits, it will drag down the TSX, NYSE, NASDAQ and wherever else that money is invested. That also explains why the Japanese Yen has been on a tear at the same time as this latest stock market plunge. I don't have the answers, but I'm just saying that I don't think we've hit bottom until all of the carry traders pay back all of the money they've borrowed to buy all of our stocks.
  24. John McCaffery from Warragul, Australia writes: My concern for the future markets has always been; are we investing in wealth creation? For example, if a couple have three children and they spend all their time striving to earn money and invest their substantial disposable income into paper promises, but ignore the investment required in their children - are we positioning opportunities for wealth creation in the future? I have yet to read of a top CEO raised by a day care; on the contrary, almost 100% of successful CEO's attributes their success to one or both of their dedicated parents.
  25. joe h from Oakville, Canada writes: ya and just the day before gartmen was saying this market was going much higher. beware of sweeping pronouncements from bulls or bears and do your own homework
  26. Aloha Eric from Toronto, Canada writes: If you read his newsletter it's all about the Eur-Yen exchange rate and the rapid descent of it signifying an unravelling of the carry-trade and the flight to safety. His prediction needs to be read in the context of his analysis. I wouldn't discount his prediction as his newsletter may have a self-fulfilling element to it as it's also read by all the major investment banks from Goldman Sachs to RBC and CIBC in Canada.
  27. gordon mcpherson from Ottawa, Canada writes: Thanks to Sivaram and other folks above for a great blog...lots of interesting stuff to consider in these hedy times... Seems caution, information and more caution are the plays of the day.
  28. John Tan from mississauga, Canada writes: Fellow readers of this blog may be interested in this new information. Go to www.kitcometal.com to check article by Steve Saville on his view of the "Commodity Super Cycle". Using the same methodology to calculate the CPI-adjusted prices from the 1960s through to the present day, Saville's findings are of great interest : (1)the DOW's rally in CPI-adjusted terms since its 2003-bottom has been weak - being about 40% below its all time high in 2000 and also lower than when it was in mid-2003. (2)Gold has only made some small real gains since 2001 (3) Copper's seeming substantial gains since 2003 have not been out of the ordinary. His conclusion is that these charts tell us that the global boom is attributed to INFLATION, not as popularly believed, the growth from countries like China and India or the manipulation of base metal prices. He posits that governments and central banks have done a stellar job managing inflation expectations by holding them down to a 2 - 3 % level regardless of what is actually happening in the real world. This is possible because the present method of calculating the CPI has shifted from that used in the eras of the sixties. This "managing of inflation" expectations has resulted in the poor performance of monetary gold relative to industrial metals as well as generational lows in bond yields. What we have is a combination of persistently high inflation and yet a persistently low inflation fears among investors. The anomaly has diverted most of us to believe that the rise in prices are real, caused by an Asian-growth fueling the commodity super cycle. Saville mentioned Bernake's July 10th speech where he underlined the importance of managing the public's inflation expectations. If Saville's analysis means anything, we do well to stay invested in the commodities (and any other investment) that is our best hedge against true inflation not what central banks are telling the people.
  29. David Simon from Canada writes: Anyone who thinks that a 5% fall means anything needs to buy a nice safe GIC from the big 5. That's it-be a good little Canadian. Just leave the stock market to people who can handle some volatility.
  30. Patrick Delaney from Niagara Falls, Canada writes: Remember: the stock market is not wealth creation, but wealth re-distribution.
  31. Libertarian Raider from Ottawa, Canada writes: Patrick Delaney from Niagara Falls, Canada writes: Remember: the stock market is not wealth creation, but wealth re-distribution.

    What you say is strictly correct, but financial markets have greatly facilitated wealth creation around the world during the past 250 years.
  32. j smith from Canada writes: there's always a bull market in something. ask the guy from PIMCO who called for a collapse last week and started buying.
  33. j smith from Canada writes: Pimco's Gross, Bear on Company Debt, Buys Corporate Fund Shares By Mark Pittman July 30 (Bloomberg) -- Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co., invested $1.5 million in a Pimco corporate debt fund after the shares fell to the lowest since its inception five years ago. Gross bought 4,900 shares in the Pimco Corporate Opportunity Fund at $13.80, 50,000 shares at $13.85 and another 50,000 at $13.90 on July 25, according to a filing with the Securities and Exchange Commission. As manager of the Pimco Total Return Fund, Gross has been predicting corporate borrowing costs will rise as buyers balk at financing leveraged buyouts. Gross said July 24 that cheap borrowing rates for LBOs had come to an end. The same week, he snapped up shares in the corporate bond fund at record low prices. ``The tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market,'' Gross wrote last week in his monthly commentary on Pimco's Web site. The shift ``promises to have severe ramifications for those caught in its wake.'' Gross, who is also chief investment officer at Newport Beach, California-based Pimco, owns 3 percent of the fund, valued at $29 million. Pimco is a division of Allianz SE of Munich. Neither Gross, nor Pimco spokesman Mark Porterfield, responded to e-mails or telephone messages seeking comment.
  34. j smith from Canada writes: the above example is honest unbiased advise from a respected invesment manager and who regularly has his comments widely distributed on shows like cnbc.

    everyone goes into panic mode so he can buy cheaper after he makes remarks that the markets are headed for a free fall.

    not bad.
  35. Patrick Delaney from Niagara Falls, Canada writes: In uncertain times, if in doubt, buy both Sentry Select Diversified fund of income trusts [SDT.un] or Enervest Diversifed [EIT.un] for monthly income.

    SDT at $5.15 [current price on TSX] pays 4.5 cents/month/unit or 10.5% annually where EIT at $6.70 pays 7 cents/month/unit or 12.5% annual return. And SDT also has paid out special capital gain distributions twice a year.

    Both are tax efficient too, with a blend of capital gains from portfolio turnover, dividends, return of capital [ROC] and ordinary interest income. This means for non-registered accounts, only about 55 - 60 cents of every dollar received, needs to be added to your taxable income. After the 30.5% income tax kicks in in 2011, only the dividend and interest portion of the distributions will be hit!

    Money machines for troubled times.
  36. Chris Thiessen from Winnipeg, Canada writes: If investors are scared of the bear market then perhaps value investing will come back and perform quite well. Only indexers should be worried as stock selection is always key.
  37. Bill Siragusa from Toronto, Canada writes: When investment newsletter writer Dennis Gartman says the sky is falling it's time to buy. The latest 5 % correction is not nearly as bad in relative terms to the Oct 19, 1987 crash (which was over 20% in just a few days). The world has been awash in sea of paper since we went off the gold standard in 70's, so paper wealth is relative to market perceptions only. Excluding any bizarre and unforseen acts like a war or epidemic, the predominent market feeling is optimism with intermittent bouts of pessimism (that manifest itself as unpredictable and temporary downturns). So when is it the best time to invest ? Answer: When you have the money.
  38. david jones from Comox, writes: BNN reported yesterday that the US markets have not been this cheap since 1991 at a P/E of just 15. The earnings of these global companies have been phenomenal & will continue especially if the $US remains weak. Look at the numbers not the gurus.
  39. Marv M from Edmonton, Canada writes: Let me sum it up for you, the American consumer is wallowing in debt, the US economy is 70% consumer driven so in order to keep the US economy growing consumers NEED to spend, in order for them to spend, the fed needs to lower rates to increase even more borrowing and debt, in order to finance this the Fed cranks up the printing presses which increase inflation which pushes the American consumer who is already barely keeping their head above water even further into debt, the Fed continues to come out with their Phony inflation numbers and rosy forecasts trying desperately to keep consumer confidence high and with that hopefully their spending high, this all digs the consumer even deeper and deeper in debt until the entire system comes crashing down!!!!!!!!!!!! The question isn't "IF", the question is "When". This is what happens when an economy shifts from being a producer and exporter to a consumer and importer.
  40. jeff klassen from Halifax, Canada writes: There will be another move upward from here, as it will take some time for the markets to form thier tops. This will provide an opportunity for investors to sell some equities and to hedge thier long positions with some bear ETF's (SDS - USD, HXD - CAD). No bull market lasts forever and we are "long in the tooth" in this bull. Sell banks, buy energy and gold stocks on dips. Lighten up energy and gold as the markets rise and add to your positions in bear ETF's to protect yourself. This is not the last shock down for this bull. If you're not convinced, pull up a long term chart on the S&P 500 and note the steep move upward in the past 24 months. This little move down is only a taste of what will come.
  41. Chris Ng from writes: Warren Buffet's recent filing shows that he bought 11 billion worth of equities in the last 6 months. We know he tends to buy only when he considers stocks undervalued.

    He has stated before: The secret to getting rich.
    "Be greedy when others are fearful and fearful when others are greedy"

    The market seems to have lots of fear these days. Valuations are coming down - looks like a good time to get a little greedy.

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