At a market top what do you see?

Everyone is an expert; they arrive at their broker with shopping bags full of cash to put into stocks because “the market is going up” and they don’t want to miss out. Or they heard a tip on a company. Or they heard about a new IPO. Forget valuations… “it’s different this time”.

They abandon their regular occupations and interests,  and become full-time traders or investors. Whether it is 1927 or 2007, no difference.

Silly behavior permeates up as well. Trading desks, “hedge” funds, seek out new angles and products that extend the momentum, or offer a quick hit on riches. Some do make out like bandits but the higher you are, the harder the fall. THESE ARE PEOPLE IN HIGH-RISK AND HIGH-TRUST POSITIONS. Some will usually go to jail when the party ends.

The 2008 collapse has been brutal and frightening and costly. Usually bear markets are quick and painful, but this is more. Too many failed banks, brokerages and insurance companies. Not just earnings hits, but failures. Also have you noticed that people who were infallible don’t know what to do? George Bush doesn’t know, Alan Greenspan or Ben Bernanke don’t know, Henry Paulson doesn’t know, Congress doesn’t know. Not exactly a confidence builder.

We are looking at a structural reset, and that takes longer. The capital markets environment needs time to shake out every last ounce of irrational exuberance, over-confidence and amateur participant. But beyond that, time is needed to remove uncertainty and allow planning and confidence in predictable business performance; specifically predictable earnings. Market participants need to reform and rebuild.

Time is needed to look around the rooms at banks or brokerages or insurance companies and know whether the men or women will protect your company or put it at risk.

so, Are we at a market bottom?

I doubt it. Here’s why?

(1) You can try and gauge when the moment is, that investors can buy a share with confidence in future earnings.  Look for new measures of earnings predictability to be talked about. The markets need confidence in earnings projections. – not there yet.

(2) You you can also look at the folks with the shopping bags. They are not the smart money. Until they curse the words “stocks” and mutual funds and are determined to only buy a bank deposit in the future.  Look for online trading companies to shut down – not there yet.

(3) Until the terminology and marketing of equities takes on a new form we won’t be there because nobody believes the “feel good”, “we’re smart”, “trust us”  blather in advertising. Look for personality-based companies and promotions. Would I trust Jim Cramer more than an actor in good wardrobe? – hell yes. Would I trust CEOs of companies that emerge from this mess unscathed? – oh ya.  – not there yet.

(4) Finally banks, brokers and insurance companies, in fact every co. in the financial services business needs to clean house, and describe how they are doing it, and make a policy of it. They need to assess and test every person in a HIGH-RISK AND HIGH-TRUST role, and make sure they are occupationally and psychologically suited to their job.