What Now After World Rates Cut?

World markets had its World CuT ( I actually would prefer calling it World Cup 2008!) last night and of course the main question that a lot of folks want to ask is exactly what Chris Puplava had written in his market wrap, Are We There Yet?

Before we focus on what Chris had written, let's look at some short notes from CNBC's Bob Pisani.

• What an interesting trading day. Four observations:
  
  1) Markets rallied midday on comments from Mr. Trichet in Europe-he said they would "take appropriate decisions at any time." Traders interpret this to mean that Mr. Trichet is now clearly in the rate cut camp, and to providing "unlimited" liquidity. This is a big turnaround: Trichet turns dovish.
  
  2) Stock traders are fixed on the bond market, as traders want to believe that today's huge selloff in bonds means that the flight to quality trade is ending.
  
  This would be a big psychological boost, because stock traders want to believe this is a sign the credit markets might be in the process of unfreezing.
  
  3) We are so oversold, and there has been so much money lost, that a small but significant minority of professional traders are now LONG the market--they are standing in the bleachers cheering like crazy, because for them it is ALL IN time.
  
  There is a larger group--half of all traders--sitting on the sidelines waiting for some sign of a tradeable bottom. They do not have it yet, but that minority that is long is trying desperately to get the uncommitted group in.
  
  4) The most important development is the coordinated global action. First U.S. federal agencies began coordinating activities, then other countries began active intervention, now there is GLOBAL COORDINATION. Consider that we have had, in less than a week:
  
  --a UK bailout,
  --Fed buying commercial paper,
  --a Spanish TARP,
  --coordinated rate cuts,
  --deposit guarantees in Europe,
  --a banking sector support plan in Russia.
  
  Merrill Lynch's economist, Alex Patelis, summed it up best: "Unless we are assuming that global policy makers are incompetent, they will sooner or later get it right."
  
  Source: http://www.cnbc.com/id/27088304

Now let's look at what Chris had written.

• I still maintain that the markets will not bottom until next year and that the current recession we are in will likely not end until the second half of 2009. A brief explanation of these views from last week’s article is given below:
  
  Market & Economic Snapshot
  So there you have it. Credit markets remain frozen, the Federal Reserve is dropping B-52 dollar bombs (devaluing our currency), household net worth is declining, incomes are falling, and jobs are being lost to the tune of over a half million year-to-date. The economic tanker is clearly in recessionary waters that will not be calming until at least next year. What the Federal Reserve and government do from here will decide the depth and duration of the current recession but make no mistake, an economic recovery will not take place until next year as the economy will not turn on a dime.
  
  As such, any market bounce produced from reaction to the bailout legislation passing or some other government action will fade as quarterly earnings misses (losses), job losses, rising unemployment, and falling consumption reports come in. SELL STRENGTH!
  
  I have had a very pessimistic tone over the last few months and have likely depressed many readers. The chief reason was to help protect reader’s capital by staying out of the markets and using rallies to exit if one was still invested. Today’s WrapUp will be a bit more balanced as I will show that we are still not at “THE” bottom but rather at or near “A” bottom, as well as show the light at the end of the tunnel. Central banks are now acting in a coordinated fashion by lowering interest rates globally, and the markets crashing over the past two weeks means that we are likely at or near an intermediate-term bottom in the markets. Nothing goes down or up indefinitely as the 2000-2003 bear market showed us with several double-digit counter trend rallies, and we are due for one now as the current sell off is long in the tooth.
  
  While we are overdue for a corrective bounce we still have not seen the end to the current bear market. Valuations are still not near lows seen in previous bear markets, and historical intermarket timelines and relationships show that a bottom in the markets in the here and now is far too early relative to the state of the economy to be signaling “THE” bottom. Market participants would be looking past a very long and dark valley indeed if this is to be the bottom.

And yes Chri reckons that the current valuations are way too high!

• Valuations Still Too High
  In a late August WrapUp (The Worst is Yet to Come) I showed how analyst estimates for the S&P 500 were far too high and likely to fall significantly as corporate profit margins still remain near historical highs and with analyst accuracy near 16 year lows (Analysts’ Accuracy on U.S. Profits Worst in 16 Years). As such, I have looked at previous bear market bottoms (using 15%+ to define a bear market) and used the trailing price-to-earnings ratio (PE) using the previous twelve months of earnings rather than the leading PE ratio that uses suspect forward analyst earnings estimates......

And yes Chris also believes that US could be in for a 'deeper recession'..

• Historical Cycles
  Not only do valuations point to a final bottom months out, so too does the historical precedent of the stock market’s bottom in relation to economic variables. I believe the economy is entering deeper into a recession that is not likely to end until next year as multiple economic variables show below. For instance, the year-over-year (YOY) rate of change in nonfarm employment typically peaks 15 months prior to the onset of a recession and bottoms two months AFTER a recession has ended. With the employment YOY rate of change still plunging it is not likely that the recession is to end any time soon.

Chris then continues..

• If the recession is not likely to end until next year, looking at the relationship between stock market bottoms and recession conclusions will show that it is too soon for a current bottom in the stock market. It is common knowledge that the markets serve as discounting mechanisms and so stock markets typically peak prior to the onset of a recession and bottom prior to a recession’s end. Over the last forty years, the S&P 500 has peaked six months prior to the onset of a recession and bottoms five months prior to a recession’s end. The market has followed the historical average by peaking six months prior to the current unofficial recession that is likely to have started in January of this year.
  
  

Ah.. watch for the bear market rallies!!

• If I am correct that we are near an intermediate bottom in the stock market, and that the stock market is not likely to bottom until the first half of next year, then all is not lost. Bear market counter-trend rallies typically lead to double-digit advances that can allow investors to sell into to regain some of their capital that has been lost over the prior months. Raising cash and sitting tight until next year should allow one to enter into the market at much discounted prices and experience a rally off the conclusion to a bear market, which are typically explosive.

And his advice..

• Selling into an intermediate corrective bounce should help investors regain some of the capital that has been lost recently. I believe sitting tight until reinvesting in an eventual market bottom next year will go a long way in returning an investor’s capital back to pre 2008 levels, more so if one invests in tomorrow’s best bargains. Going forward, the above mentioned economic indicators that typically herald an end to recessions will be monitored closely. New developments over the course of the remainder of the year will help fine tune my forward estimates for the likely outcome in 2009. Stay tuned.

I've only highlighted some passages written by Chris. Do read the rest of his article in full here

And yes, I very much agree with what's said about Larry Kudlow. Out of all the folks at CNBC, I find him even more repulsive than Cramer! But hey, this is my personal opinion.