Gold News

Calling the Bottom

Everyone calling the bottom in US stocks so far has got their bottom handed straight back to them...

FORGET BASEBALL, writes Eric Fry for The Rude Awakening. The No.1 American pastime is now a cute little game known as "Calling the Bottom".

   Ever since the credit crisis splashed onto the front pages last autumn, swarms of overly-eager investors have tried to call the bottom of this crisis, while also trying to call the bottom of the housing collapse and the finance sector sell-off, too.

   No one has yet won the game, however. In fact, every participant who has dared to call the bottom has had his bottom handed straight back to him by Mr. Market.

   Since hitting record highs last October, the major US stock averages have all slumped by about 20%. The indices that track financial stocks have tumbled at least twice as much. In six of the last eight months, the Amex Securities Broker/Dealer Index (XBD) has lost value.

   But throughout this miserable eight-month slide, wave after wave of investors have tried to call the bottom.

   Some of the earliest bottom-callers were deep-pocketed institutional folks and Sovereign Wealth Funds based in Asia and financed with Asian trade surpluses. These misguided investors provided billions of dollars of financing to beleaguered financial institutions.

   Remember when Bank of America spent $2 billion last August to buy part of Countrywide Financial? Or when the Abu Dhabi Investment Authority spent $7.5 billion last November to prop up Citigroup? Or when Warburg Pincus spent $1 billion last December to breathe new life into MBIA...or when TPG provided a $7 billion bailout last April for Washington Mutual?

   Each of these "sweetheart deals" has turned very, very sour. And yet the bottom-callers keep trying to call the bottom, while continuing to toss their billions into a bottomless abyss.

   Bill Miller, the legendary manager of the Legg Mason Value Trust, tossed billions of dollars into the finance-sector abyss during the first three months of the year, for instance, causing his long-suffering shareholders to suffer a bit longer. And while Bill was busy loading up on the fallen angels of the finance sector, his mutual fund delivered absolutely hellish returns.

   Maybe Miller suffers from an excess of confidence and conviction. In the first quarter, Miller added to only eleven of his top 35 holdings. Eight of the eleven were finance companies like Freddie Mac, AIG, Wachovia and Countrywide Financial (now part of Bank of America). No wonder that Miller's famous fund has tumbled 28% year-to-date and 36% since last October.

   Eventually, of course, one lucky bottom-caller will actually call the bottom – not because he is brilliant, but just because he is lucky. Meantime, witness the lucky bottom-calling attempted on CNBC late on Tuesday, 1 July.

   That's when the Dow Jones Industrial Average kissed its lows of the day – and of the last two years – before reversing course and charging 200 points higher. A procession of bottom-callers promptly appeared to cheer the stock market's sparkling intraday recovery as proof that "the bottom is in", especially for the beaten-down financial sector.

   Perhaps the bottom-callers were right this time. The stock market certainly deserved a bounce. But it didn't get one the following day, when the Dow in fact fell towards the fresh two-year low it then hit Thursday morning.

   In short, the bounce is long overdue. But we would not be tempted to place a big bet on an enduring recovery.

Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

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