The drop in the stock market might have investors feeling sick, but they have yet to reach the "puke point," according to A. Gary Shilling, attributing the queasy phrase to Dennis Gartman, a Suffolk, Va., investment analyst.
That's the point, according to Mr. Shilling in his monthly report to clients, "when investors want to regurgitate their last stock and never own another."
"It may be that individual investors simply haven't yet given up on stocks as their financial salvation, despite the punishment to date," he noted.
Mr. Shilling is skeptical of the optimism of "virtually all of the 12 Federal Reserve Bank district presidents and all of the board members (who) are publicly forecasting a second half pickup" in the economy.
"The only way we can see an economic pickup is through another consumer spending spree," Mr. Shilling wrote. "And that probably requires revival of real wealth through capital gain," meaning a big rebound in stocks, especially Nasdaq technology stocks.
So, will Washington come to the rescue? Mr. Shilling again is skeptical. He sees little immediate boost from a tax cut, noting people initially save most of the proceeds. Another problem is that the federal budget surplus will disappear with the bear market, because it "was spawned by the stock boom and the resulting taxes on capital gains."
Because of declining interest rates, he recommends buying Treasury securities, especially 30-year bonds, which are shrinking in supply, and related futures. Among areas he recommends selling are consumer stocks, such as Kohl's Corp., Whirlpool Corp. and Harrah's Entertainment Inc. But he is upbeat about stocks that could be involved in banking consolidations, such SunTrust Banks Inc.; and about utilities, such as Xcel Energy Inc. and Southern Co.