From the April 01, 2008 issue of Futures Magazine • Subscribe!

Anatomy of the Bear: Lessons From Wall Street’s Four Great Bottoms

Anatomy of the Bear: Lessons From Wall Street’s Four Great Bottoms

By Russell Napier

CLSA

324 pages, $34.95

“Anatomy of the Bear” profiles the four most significant market bottoms of the twentieth century. They include: 1921, 1932, 1949 and 1982. Author Russell Napier gives comprehensive insight into the economic, political and cultural climates framing each era.

Napier’s portrait touches everything from literature to the evolution of our consumer society. Sections of the book convey information via Wall Street Journal excerpts. Their inclusion corrects one popular misconception about market bottoms, that they occur when sentiment is at its most negative. Entry after entry demonstrates that in all four timeframes, speculators were receiving straightforward confirmation that market strength was building.

Another challenged axiom is that bottoms are accompanied by high volume as longs capitulate. Actually, turnarounds are ushered in with low volume and malaise.

Several bottoming signals, some of which may surprise you, are presented. Probably the most telling is the extreme undervaluation of stocks as measured by the Tobin Q ratio, which is the market value of a company’s assets divided by their replacement value. At these key buy-friendly times, stocks dip to about 30% of the startup value of the respective companies. Meanwhile, previously softening commodity prices begin to firm.

The book emerges as the kind of pragmatic how-to text sought by serious market players. How do we proceed from here? Armed with numerous tools for recognizing a bottoming environment, the reader can now anticipate timing based on historic cycles. Market tops are characterized by extreme stock overvaluation, which last reached its crescendo in 2000. The subsequent drive to an undervalued timeframe generally takes nine to 14 years.

It’s a testimony to how serious the book is that Napier admits we’re still early in the cycle. Most books about bear markets would be trumpeting the impending financial debacle rather than the buying opportunities of the aftermath. If you’re patient and serious though, this may be an ultimately rewarding read.

Art Collins is the author of Beating the Financial Futures Market: Combining Small Biases Into Powerful Money Making Strategies. E-mail him at artcollins@ameritech.net .

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