Some random thoughts.

Today, the S&P 500 was down 4.6%.  Since the peak on October 11, 2007, the S&P 500 is down 56%.  It is also down

• 26% since the high on January 5 (39 trading days ago)
• 20% since the high on February 9 (15 trading days ago)
  
• 10% since the high on February 26 (3 trading days ago)

We are deeply oversold.

But who cares?  The market can do nothing but go down.

Why?  From the rumor department

Markets can and will do anything.  They can and will go further than you or I could ever imagine. 

Of course, at extremes, the predictions get more and more wild.

I remember being in a meeting in March of 2000 when a well-known money manager said to me that technology was going to get to 67% of the S&P 500 within the next few years.  Tech was 35% at the time.  I just shook my head.

Likewise, we are getting more and more extreme as the market goes lower.  Today, one bulge-bracket (are there any left? - ed.) technician speculated the S&P 500 could get to 280, which would retrace the 1929-1932 decline.  (More on that in a minute)

Remember, the uber-bears will overplay their hand!

Rare was the uber-bull during the tech boom who got you out at the top.  I imagine (most of) the uber-bears will fail to get you in, or cover your shorts, at the bottom. 

Now, could the market fall 87%?  Of course it could!  Markets can and will do anything. 

Is it likely?

No.  Not impossible, but unlikely.

I do not invest nor trade based on extreme events.  I believe that it is prudent to scale into and out of positions as the market approaches extremes on both the upside and the downside.  Thus, I usually take a hit when I am buying and leave money on the table when I am selling.

And I certainly have been taking a hit the past few months.  I have some cash left, but not much.

I cannot help myself.  Stocks are becoming mouth-wateringly attractive!

Ignore those arguing that stocks are expensive because GAAP earnings on the S&P 500 are going to be $25 in 2008 and expected to be $32 in 2009.  That is foolish.  Roughly $30 in the decline in earnings is due to the massive write-offs in the financial sector.  To say that this is an accurate reflection of the underlying profitability of corporate America is to believe that we are going to have $1 trillion in financial asset write-offs each year for the next 10 years.  Even the uber-bears are not arguing that.

Instead, the market is trading at 10x normalized earnings.

Don't believe me?  Fine.  But get this - the median stock in the S&P 500 is trading at 9.2x 2008 earnings and 9.9x 2009 estimates.  It is even lower in the ValueLine universe.

Over a 10 year period, I cannot think of a time when investors have lost money when the median stock was valued at less than 10x earnings, even during the Depression.

Now, back to the Depression.  The technician mentioned above speculated that stocks would fall to 280 if the market fell as much as it did to the 1932 bottom.   Absolute return is the wrong metric, in my opinion.  Most likely, the bottom will be a Tobin's Q of 0.3, which marked the great bottoms of 1921, 1932, 1949 and 1982, as detailed in the excellent book, Anatomy of the Bear, which I will review in a few days.

According to Russell Napier, author of Anatomy of the Bear, a Tobin's Q of 0.3 would take us to around 400 on the S&P 500.  And what happened after the market bottomed in 1932?  Equities rose 180% in a year, and 240% within four years.  Such moves off 400 would put the S&P at 1120 and 1360 respectively.

Which is why I feel comfortable buying stocks here.  In fact, the further markets fall, the more comfortable I become.

Of course, markets may not behave the same as they did in the 1930s.  However, there is a tremendous amount of cash on the sidelines.  On Larry Kudlow this evening, Blackrock's Bob Doll stated that cash was 50% of retail investors' portfolios, an all-time high, which is consistent with what I have seen.  Thus, there is a lot of firepower on the sidelines which could probably will slingshot the market higher once it bottoms.

In fact, even though stocks fell 87% during the Great Depression, the real decline was less, somewhere around 70%.  (I do not have the inflation data in front of me at the moment, but I will hunt it down and post the inflation-adjusted returns of stocks during the Depression at another time.) 

To date, the inflation-adjusted return of the market from the peak in 2000 is 62%, almost equaling the real decline in stocks during the Great Depression!

Deflation during the Great Depression was about 20%.  (Again, I'm doing this by memory on the fly.  I will get the actual numbers later.)  During the Depression, the government did little to fight deflation, a very different response from the government today, however ham-handed they may be.  In fact, the government actively created deflation during the Depression by raising the discount rate from 1.5% to 3.5% to stem an outflow of gold in 1931.  I do not believe deflation will be anywhere near what occurred during the Depression, given the actions of the government, and that the monetary creation over the past decade primarily effected asset markets, not consumer prices.  And now, deflation is manifesting primarily in the asset markets, not in consumer prices, as one would expect.

Thus, a 70% inflation-adjusted bear market would get us to 560, another 20% decline from here.  Heck, at the current rate, we will be there by the middle of next week!

If we are going there, get it over with, I say.  The sooner the better.  Let's fall 20% tomorrow!

On a closing note, I want to give full props to one of Running of the Bulls' regular readers, Dave.  (Dave goes by the handle psychodave, but his comments are anything but psycho.)  A while back, Dave said the S&P 500 was going to 600.  Well, it has not yet gotten to 600, and it may not, but the SP traded with a 6-handle on it today, and that is close enough for me. 

Good call Dave!