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By Neil Behrmann Update May 2009 The sentiment cycle never changes. At the top, delusion and irrational exuberance are followed by disbelief, anxiety, panic and irrational gloom. Jeremiahs become celebrities during this phase and make pots of money from selling fear to the anxious. They appear on television and newspapers quote them regularly as latter day prophets. Interviewers forget to ask them whether they were right about the bear market for the right reasons. A renowned Cassandra, for example, had predicted that a dollar collapse would lead to a crash. Instead the greenback proved to be strong. The true bottom of the market was the panic after the Lehman crash during the early Northern hemisphere winter. The number of new lows continued to fall when a further slide in financial stocks caused the S&P 500 to briefly touch the low of around 680 points, early March. Most other stocks were above their October/ November 2008 lows. Bear market for prophets of doom The surge in global markets indicates that pessimism has peaked and gloomsters are encountering their own bear market. One by one, they are becoming less arrogant and certain and are attempting to retreat from their original stance. Some are saying that the surge is a bear market rally. This is a falacious notion as it can only be proved from an historic standpoint i.e. a chart going back in time. In other words there is no way of knowing whether an upward move in a market is a bear market rally or the first phase in a bull market. All you know is that the market is going up, period. If it rises by 20% to 30%, investors have the opportunity to take profits. One thing is certain. People who followed the pessimists in the latter stages of the bear market have lost opportunities. They are caught in cash at rates of 1% or less and are now fretting and are beginning to jump in at higher levels. Therein lies the danger. Beware dial a quote pundits who talk their book Once again there is disbelief in recovery, but market participants, as opposed to stressed business people in the real economy, are becoming confident, even over confident again. Markets have become increasingly confusing for investors. Overwhelmed with good, bad and indifferent information from newspapers, continuous financial TV programs, the Internet, newsletters and tip sheets, many previously conservative investors have become virtual day traders. One pundit or Charlatan says the market is going up; the other down. They are generally talking their book and only original ideas are useful. The rest is blah, blah, blah! Pollyanna perma bulls say the bull market has begun and perma bears warn that we're experiencing a bear market rally that will be followed by the next downturn. Both say that they are "realists". The truth, to be sure, is no-one really knows. A seriously successful wealthy multi millionaire investor and speculator says that he doesn't bother with the information glut and bear and bull markets. He merely seeks opportunities. A guess which could be wrong or right Here's a guess based on longtime experience (see Update December 2008).. The equity markets have just completed the last stage of the chart below . They have rallied from the "Despair" irrational gloom phase to the "mean". During the crisis shrewd investors picked up cheap stocks. Indices are now in the stealth phase while some stocks have prematurely moved into the "takeoff, awareness phase". The market psyche has changed from depression and fear of losing money to the fear of being left out. This is the main reason why markets have hardly corrected following an exceptional surge, as several players and pundits have predicted.

The danger for latecomer jittery money managers and investors is that they could rush in and be whipsawed by an unexpected swift correction. According to James Montier of Societe Generale, stocks with the worst fundamentals with unsurprisingly the largest short positions, have experienced rallies of 70% or more. This spells danger as the analysis tallies with anecdotal reports of extensive bear covering that caused bombed out stocks to over shoot upwards. Stocks of hedge fund businesses, for example, are reporting awful results and continual investor withdrawals. Despite that, they have soared from nadirs by 200% to 700% in some cases. The same applies to several basket case banks and indebted mining companies that are reporting losses and production cutbacks. They are surging because they are riding on the back of another dangerously speculative run into base metals. Stocks of numerous loss incurring companies have thus outperformed shares of good solid profitable and growing businesses. This indeed is an amber light. In the event of a downward adjustment following such a steep and swift rally, the big question is what Wall Street, London and other markets will do next. Will they shift into the next stage of an upturn on expectations of strong economic revival? On the other hand will markets languish in a flat, sideways trend? Will they mark time as over borrowed and highly taxed nations continue to throw money and mismanage failed institutions? The key is to be like George Christidis i.e be patient and seek opportunities by carrying out intensive research on sound companies. He refrained from trying to forecast cycles and avoided problematic companies. Update December 2008 For those who haven't read the original text, please go to the piece below dated February 2008. See also, the chart below. As a veteran financial journalist, I have experienced several booms and busts. What struck me in all the bear markets was the speed of wealth destruction and treachery of the bear. Time and time again investors would be sucked in on hopes that the market had bottomed, only to depart with severe wounds. I've thought of a possible antidote. Most people look at prices compared to the peak of the bull market and then believe that they are buying bargains. Perhaps a better idea is to compare current prices with the bottom of the previous bull market. Take an example. So called experts were saying that oil was "cheap" at $80 a barrel because it had fallen from $147 a barrel. From that standpoint it looks an even better better buy around $43. But between 2002 and 2004 oil was trading between $18 to $30 a barrel. I can't recall anyone then who was forecasting $40 let alone, $50. My experience started with the Nixon late sixties bull market (fuelled by the Vietnam War and Keynesian economics) that led to the 1969/70 bear market. Following the 1973 Yom Kippur war, there was an extraordinary oil and metals boom and then collapse. A strong equity market ending in a nasty slide in 1974. There were also commercial and residential property booms in the early seventies followed by a crash with several bank failures and rescues. A precious metals boom ended in tears in 1980 and a strong equity market in the late seventies was followed by punishing lows culminating in 1982. To be sure there were considerable trading opportunities in the seventies but from the top in 1969 until well into the eighties, stockmarkets went nowhere and declined in real inflation adjusted values. The year 1982--a time of considerable pessimism illustrated by an exceedingly bearish article in the New York Times--was the beginning of an 18 year bull market that ended with the Internet bubble of 2000. During

that period there was a brief but fearsome 1987 crash and a setback during the recession of the early nineties. The bear market that started in 2000 had several events that aggravated the downturn, notably September 11 and the Iraq war. Wall Street bottomed late 2002 and Europe and Asia followed early 2003, weeks prior the bombing of Baghdad. The boom that followed has been exceptional, as it was fuelled by an extraordinary explosion of credit and derivatives trading. As we all know now, the subsequent real estate slump has been the biggest deflationary force followed by the equity slide. Bottom picking has begun in that market with variable results. The commodity price collapse is a bullish development for importing economies as it will lesson the strain on businesses and the consumer. This can be described as a good deflationary force. On the other hand, Russia, Africa and other emerging nations dependent on raw materials exports, will suffer, although they had a windfall during the boom. Private equity is the final bubble that has begun to burst. To be sure, this is such an opaque business, that the cracks probably appeared some while back. February 2008 :- The picture tells all:-

The bubble chart of Hofstra University's Jean-Paul Rodrigue, illustrates the behaviour and emotions of market participants during boom and bust cycles. Equity investors are currently worried, but are still bargain hunting ahead of a bull trap. Commodity markets are in the delusion phase. UK and European real estate markets are in denial, but fear reigns in the US. Mortgage and other credit derivatives are already in "capitulation phase; junk bonds have reached fear range. Investors in high grade corporate bonds are also nervous. This is a systemic debt deflation crisis that hasn't been seen for many decades following extraordinary borrowing, leverage and derivatives expansion in the past few years. The credit crunch could well be the same as the early seventies and early eighties, but so far the consensus neither believes it, nor wants to accept it.

The warning signs were there in the summer of 2007 when two Bear Stearns hedge funds collapsed and the ball began rolling down the hill. See sovereign bonds . Delusion of Commodity Bulls Pension funds and other investors suckered into this bubble can draw their own conclusions from the following chart. CRB Commodity index reaches North Pole, while Baltic freight rates head south. If there were a boom in global commodities demand, shipments and thus freight rates would rise. This is a red light, showing that prices are soaring on speculative hot air.

Source:- InvestmentTools.com