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Dan Dorfman

Dan Dorfman

Posted: October 1, 2009 06:43 PM

Yikes, Not Another Market Crash

What's Your Reaction?

Here's one of those pre-Halloween horror stories that deals with your net worth. I don't know whether veteran online stock tracker Michael Markowsi will go to any Halloween parties this year. But if he does and you happen to run into him, a word of caution: don't ask him about the stock market because it's a certainty he'll scare the living daylights out of you. He'll be easy enough to spot because his costume, befitting his investment mood, will likely depict a combination of frightening Halloween characters all wrapped up into one -- Frankenstein, Dracula and one of those flesh-eating zombies from the horror film Night of the Living Dead.

What makes his thinking especially noteworthy at this juncture is that this month is notorious for crashing stock markets, the most devastating one being the vicious one-day drop on October 19, 1987, known as Black Monday. Triggered by the simultaneous issuance of sell signals by insurance and computer programs, that 1987 crash produced a one-day loss in the Dow of 22.6% or more than $500 billion in stock values, the market's single biggest one-day dollar decline ever.

Likewise, there have been five instances in October where the S&P 500 fell 10% or more. Further, since the end of World War 11, five of the 11 bear markets (as measured by declines of 20% or more) ended in October.

It's no wonder, then, that crash jitters abound among the nation's more than 80 million stock investors. Judging what I hear from Markowski, the skipper of Stock Diagnostis, com., an online research service headquartered in Ft. Lauderdale, Fla., those jitters are well justified. Why so? Because he sees a high probability that another crash -- a scare-you-to-death plunge of 50% or more in the S&P 500 (now at 1049) to the 400 to 500 level -- could kick off this month and run through mid-2010.

His dour outlook -- clearly a contrarian view -- is largely based on a study he undertook of the vigor of second-quarter revenue growth (or the lack of it) of 228 industries. Consistent revenue growth is especially important because without it a company can not increase its dividends or grow its base. In this year's second quarter, such growth was conspicuously absent, and many companies only managed to avoid red ink by slashing costs, especially through personnel reduction.

In his study -- which focused on second-quarter revenue growth, versus year-earlier numbers -- Markowski found that just 70 of the 228 industries, less than a third, managed to grow their revenue base in the quarter. Moreover, in the past two quarters, he points out, the number of industries able to grow revenues has fallen to new lows. Noting that revenue declines show no sign of bottoming, Markowski sees this dilemma growing progressively worse. In fact, the trend is so grim, he says, that by the end of next year, you could see the number of revenue-growing industries slide to 40 or maybe even below 20.

Regarded as noteworthy on the revenue side of the ledger is that three leading technology names -- Microsoft, Intel and Dell -- all reported second-quarter revenue declines of more than 10% from the same 2008 perioed.

Markowski, who in September of 2007 accurately predicted impending problems for the brokerage arena -- which was about six months before such bigwigwigs as Bear Stears, Lehman Brothers and Goldman Sachs began to run afoul of severe financial strains -- figures by year-end 2010 only about 10% of the industries will be growing revenues.

It means, he says, "companies will continue to cut overhead to protect their profit, which will put even more people out of work." The inference, as far as the stock market goes, he observes, is that "price-earnings multiples will continue to contract, and we're going to see a significant correction."

His recommended strategy for investors: Preservation of assets! In this context, he would devote 80% of a portfolio to government securities with a maturity of two years or less. His suggestion for the remaining 20%: a combination of dividend-paying stocks (notably Abbott Laboratories, Philip Morris and Automatic Data Processing) and shares of companies that participate in the online financial sector of the economy (Ameritrade, Morningstar and E*Trade).

Write to Dan Dorfman at Dandordan@aol.com.