Editor's Note

02/14/2008 12:00 am EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

So, where do we stand-bull market or bear market? Slowdown or recession? How will we know? And does it even matter?

That's what I took away from last week's World Money Show in Orlando-more questions than answers.

Sure there were a handful of bulls like Steve Forbes and John Dessauer, as Gordon Pape reported here

You can add Louis Navellier and Bernie Schaeffer (though he's hanging on to his bullishness by a thread) to that short list.

But Mark Skousen wrote this week that "the pessimism was thick" at the Show, which he thought might be "a sign that the markets are finally coming back to life."

So, is the glass half full or half empty?

After doing a dozen video interviews, holding a couple of workshops, and moderating a panel on global investing, I would say that right now the bears have the edge.

More pundits seem ready to declare we're in a bear market than a recession-which might seem like splitting hairs to the average investor whose portfolio has taken a beating in recent weeks.

But performance numbers are clearer than the economic data: as of late January, nearly half of the 80 largest markets tracked by Bloomberg  had fallen 20% or more from their recent peaks-the textbook definition of a bear.

Those included Australia, Hong Kong, India, Japan, Mexico, Singapore, Spain, and Switzerland. Once-sizzling Shanghai lost 28% of its value from its mid-October high. Brazil and the UK barely avoided the dreaded threshold (using closing prices), while Germany briefly dipped below it.

Here in the US, the NASDAQ Composite index and the Russell 2000 small-cap index both hit the magic 20% number. The Dow Jones Industrial Average and the Standard & Poor's 500 (both off around 16%), on the other hand, have thus far dodged the bear's bullet.

Many world markets have bounced back from their lows around the Martin Luther King Jr. holiday, when the Federal Reserve suddenly cut short-term interest rates by 0.75% and added another half-point rate cut the following week.

Still, technicians are pretty bearish. The ones I'm reading warn that we may need to retest the recent closing lows near Dow 12,000 or 1,310 in the S&P (or even the intraday lows of Dow 11,500 and S&P 1,270). Or, we'd have to break above the 12,800 "resistance" level on the Dow or 1,410 on the S&P before they'd be putting out new buy signals.

Technicals aside, a lot will depend, of course, on what happens in the economy. Except for some scattered data, we've had a crescendo of bad news since January, as US consumers seem to have gone into hibernation for the winter.

Fed Chairman Ben Bernanke, who may have saved world stock markets from a major crash with his emergency rate cuts three weeks ago, warned Thursday that the economic outlook had deteriorated.

"The outlook for the economy has worsened in recent months, and downside risks to growth have increased," he said in Congressional testimony.

Neither he nor Secretary of the Treasury Henry Paulson would use the "r" word (both are calling for slower, not negative, gross domestic product growth), but he said the Fed would "act as needed to provide adequate insurance against downside risks." Translation: more rate cuts ahead.

Every little bit helps, of course (including the $168-billion stimulus package that President Bush signed into law). But the economy could probably use some of those steroids pitcher Roger Clemens testified he never took.

Some smart people think we won't have a recession, others think we're in one already, and others still, like forecaster A. Gary Shilling (who has been correctly bearish on housing for some time), think we'll have one of the deepest recessions since World War II.

Who's right? Beats me, though I'm on the record saying we can avoid a full-fledged recession and bear market.

The big risks, of course, are, first, that all the talk about recession encourages consumers to tighten their belts even further and thus makes negative growth a self-fulfilling prophecy.

And second, the credit crunch, which has gone on for seven months, could freeze out even qualified borrowers. We've seen signs of increasing consumer distress in auto loans, credit cards, student loans, and other markets. Financial institutions are boosting capital and starting to take reserves for possible loan losses. That typically happens when the economy slows.

But this time it may be different, as the subprime-lending crisis, which has spilled over into many other forms of leveraged lending and asset-backed securities, continues to unfold.

This week the Group of Seven (G7) warned that losses from subprime-mortgage-related securities could reach $400 billion.

Thus far, major banks have taken a hit of $120 billion, suggesting we could be facing months of painful write-downs, write-offs or what-have-you.

That's why I'm not ready to declare we're out of the woods yet, by a long shot-though, like Mark Skousen, I'm tempted by all the horribly negative sentiment even among institutions, as shown by the likes of Consensus Inc and Investors Intelligence.

At any other time, I'd be buying with both fists. Now, as I'll lay out in future columns, I'm taking a more cautious approach.

Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily represent the views of InterShow.

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