David Merkel (The Aleph Blog)‘s continuation of the previous "The Fundamentals of Market Bottoms, Part I, on the subject of market bottoms. It seems to me many of these criteria are being fulfilled now, though it also seems that the "bottom" when talking about the entire market is more of a unfolding process than a precise moment in time. – Ilene
The Fundamentals of Market Bottoms, Part 2
Excerpt:
…"Bubbles pop when cash flow is insufficient to finance them. But what of market bottoms? What is financing like at market bottoms?
The Investor Base Becomes Fundamentally-Driven
1) Now, by fundamentally-driven, I don’t mean that you are just going to read lots of articles telling how cheap certain companies are. There will be a lot of articles telling you to stay away from all stocks because of the negative macroeconomic environment, and, they will be shrill.
2) Fundamental investors are quiet, and valuation-oriented. They start quietly buying shares when prices fall beneath their threshold levels, coming up to full positions at prices that they think are bargains for any environment.
3) But at the bottom, even long-term fundamental investors are questioning their sanity. Investors with short time horizons have long since left the scene, and investors with intermediate time horizons are selling. In one sense investors with short time horizons tend to predominate at tops, and investors with long time horizons dominate at bottoms.
4) The market pays a lot of attention to shorts, attributing to them powers far beyond the capital that they control.
5) Managers that ignored credit quality have gotten killed, or at least, their asset under management are much reduced.
6) At bottoms, you can take a lot of well financed companies private, and make a lot of money in the process, but no one will offer financing then. M&A volumes are small.
7) Long-term fundamental investors who have the freedom to go to cash begin deploying cash into equities, at least, those few that haven’t morphed into permabears.
8 ) Value managers tend to outperform growth managers at bottoms, though in today’s context, where financials are doing so badly, I would expect growth managers to do better than value managers.
9) On CNBC, and other media outlets, you tend to hear from the “adults” more often. By adults, I mean those who say “You should have seen this coming. Our nation has been irresponsible, yada, yada, yada.” When you get used to seeing the faces of David Tice and James Grant, we are likely near a bottom. The “chrome dome count” shows more older investors on the tube is another sign of a bottom…."
Full article here.
