July 20th, 2008

The Dow at 7,200?

Now that’s a headline that caught me eye and motivated me to click on the link to the site. What I found there was an article written by someone who’s name I haven’t seen or heard in many years, Dan Dorfman. Don’t know how many of you remember Dorfman but he was the 1990’s equivalent of Jim Cramer today … or Jim Cramer is today’s equivalent of Dan Dorfman of the 1990’s but Jim wouldn’t appreciate that comparison.

For those who don’t know or don’t remember Dorfman, here’s a Wikipedia recap. But what’s really interesting is the article that Dorfman wrote for the NY Sun, in which he quotes comments by Martin Weiss, a “Wall Street’s superbear, veteran Florida investment adviser”:

Street bears are a dime a dozen, but none of them is more frightening than Mr. Weiss, whose current outlook — a horror story for investors — calls for another vicious drop in the Dow, to 7,200. That would be equivalent to another 4,446-point loss, or about a 37% decline from current levels.

If you’re about to say that’s insane, don’t. As a crystal-ball gazer, Mr. Weiss’s prowess should not be taken lightly. I last caught up with him in February, when he told me: ‘American stocks are in a new bear market and anyone who believes otherwise is living on another planet.’

Mr. Weiss applauds the selling, asserting that “the dire economic and financial conditions in America are now equivalent to those of 2002, or worse” (a reference to the year of the Internet debacle).

‘We’re losing jobs at the rate of 73,000 a month (438,000 so far this year). In addition, banks and lenders have closed the credit spigot to both companies and individuals, making it difficult to get a loan or a mortgage.’ That, he says, is what recessions and falling stock prices are all about.

‘the nearly $400 billion in losses we’ve seen in financial institutions worldwide is just the tip or only one quarter of the iceberg.’ The International Monetary Fund, he notes, estimates total credit and mortgage losses could ultimately run $945 billion, while some other projections peg the figure as high as $1.5 trillion.

How does he figure a 7,200 Dow? Mr. Weiss reasons that if the index were to simply match the decline that has already occurred in the all-important banking sector, it would sink to the 7,200 level. Noting that the KBW Bank Index, which tracks the country’s largest financial institutions, has plummeted more than 53% from its peak, he points out if the Dow were to do the same thing — which he feels is not an unreasonable assumption — it would put the index back near its mid-October 2002 low of 7,197.

Why did I quote this piece so extensively? Because it resonated with me and hope it will do the same for you. I never thought of myself as a “perma-bear” but since I’ve been writing about a bear market since February, I unfortunately see my worst fears materializing. And now I read from someone with more experience that the bad signals my MTI (Market Timing Indicator) has been sending being confirmed by others.

And the strategy Martin Weiss suggests is the same as you’ve read about here only to a lesser degree than I’ve recommended.

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