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BELKIN REPORT belkin@attglobal.net 2012 Belkin Limited All Rights Reserved Oct 10,

Bear Markets and the Business Cycle - a 110 Year View

tock prices go down in recessions. Although that is an obvious pattern in market history -- business school textbooks andtalking heads seem oblivious of it. The assumption that Fed-engineered rate cuts and credit expansions make stock prices g

deeply ingrained in market psychology. But the historical pattern is: Corporate earnings slumps in recessions make stock prices plum

In the period around the last two business cycle contractions (2001 and 2008-09), S&P500 reported earnings (annual sum) decline(2001, five quarters) and 92% (2009, seven quarters). The S&P500 index declined -49% from its March 2000 peak to its October 20and it declined -57% from its October 2007 peak to its March 2009 low. The peak and trough dates for business cycles, corporate eand the S&P500 index do not perfectly coincide.

For the purposes of this report and table we use the Dow Jones Industrial Index (DJIA), because it has the best historical data goin110 years (to 1902 in our table). The National Bureau of Economic Research (NBER) defines US business cycle expansion and returning points. Their data extends back 160 years www.nber.org/cycles.html.Well focus on the past 110 years (22 cycles).

This is the stock market/recession pattern: The DJIA typically peaks several months before the official start of a businescontraction - while the economy still looks OK (average -2.6 months before recession). Then the DJIA slumps (an average -3bottoming out in the deep, dark depths of the recession - before any economic recovery is evident. Then a new, extended rally staaverage 3.9 months before the next economic expansion begins). That has been the pattern in virtually every business cycle contsince 1902 (see table). Percentage DJIA declines have ranged from -6% (ending 1945) to -89% (ending 1933). Please note that th(and trough) in the DJIA and economic cycle do not exactly coincide. That is probably why the pattern is not more widely understood

The Belkin model forecast suggests that the US economy will soon tip over into an official recession.That is based on theforecast for S&P500 earnings, industrial production, durable goods orders, retail sales and employment. Europe is already in a reand Chinese growth is slowing abruptly. Global economic weakness should infect the US through the international exposurecorporations (the tech sector has the highest international revenue exposure of about 55%).

Business cycle dates are not officially announced until many months after economic turning points. So real-time economic forecaaccurately anticipate NBER cycle dates are critical. The NBER should eventually proclaim the start of a recession (months or yearshas already started, way too late for investment decisions). The current business cycle expansion is now 40 months old, vs. the aexpansion of 45 months (1902-now). That average is skewed by the last three artificially prolonged business cycles of 73, 120 months. Pre-1990, the average expansion lasted 37 months.

Many global stock indexes hit a tentative peak on Sep 14th, 2012. The DJIA went a little higher to 13610.15 last Friday (Oct 5,Assuming that the DJIA is at (or near) a market top - and applying that -30.6% average bear market decline during a recession - yballpark downside DJIA bear market target of 9,445. Higher-beta tech-heavy indexes (Nasdaq) probably have greater downside risk

We recommend that investors study the following table carefully and apply the lessons it reveals to the unfolding global economic doand stock index peak. The oldest lesson in the book is: Sell all your stocks when the news is good right before a recession, go shorthose short positions in the deepest depths of a recession and buy stocks again when no one wants to touch them and the news is te

RECESSION RECESSION LENGTH LENGTH DJIA PEAK DATE OF DJIA PEAK DJIA LOW DATE OF % BEAR DJIA LOWSTART END RECESSION PREVIOUS BEFORE PEAK IN MONTHS DURING LOW MARKET IN MONTH

(MONTHS) EXPANSION(MONTHS)

RECESSION BEFORERECESSION

RECESSION DECLINE BEFORE NEXEXPANSIO

OCT 1902 AUG 1904 23 21 67.77 09-Sep-02 -1 42.15 09-Nov-03 -37.8%

JUN 1907 JUN 1908 13 33 96.37 07-Jan-07 -5 53 15-Nov-07 -45.0%

FEB 1910 JAN 1912 24 19 100.53 19-Nov-09 -2 72.94 25-Sep-11 -27.4%

FEB 1913 DEC 1914 23 12 94.15 30-Sep-12 -4 53.17 24-Dec-14 -43.5%

SEP 1918 MAR 1919 7 44 89.07 18-Oct-18 1 79.15 08-Feb-19 -11.1%

FEB 1920 JUL 1921 18 10 119.62 03-Nov-19 -3 63.9 24-Aug-21 -46.6%

JUN 1923 JUL 1924 14 22 105.38 20-Mar-23 -2 85.76 27-Oct-23 -18.6%

NOV 1926 NOV 1927 13 27 166.64 14-Aug-26 -3 145.66 19-Oct-26 -12.6% -1

SEP 1929 MAR 1933 43 21 381.17 03-Sep-29 0 41.22 08-Jul-32 -89.2%

JUN 1937 JUN 1938 13 50 194.4 10-Mar-37 -3 98.95 31-Mar-38 -49.1% -MAR 1945 OCT 1945 8 80 161.5 06-Mar-45 0 152.27 26-Mar-45 -5.7%

DEC 1948 OCT 1949 11 37 190.19 23-Oct-48 -1 161.6 13-Jun-49 -15.0%

AUG 1953 MAY 1954 10 45 293.78 05-Jan-53 -7 255.48 14-Sep-54 -13.0%

SEP 1957 APR 1958 8 39 520.76 12-Jul-57 -2 419.78 22-Oct-57 -19.4%

MAY 1960 FEB 1961 10 24 685.47 05-Jan-60 -4 566.05 25-Oct-60 -17.4%

JAN 1970 NOV 1970 11 106 968.85 14-May-69 -8 631.16 26-May-70 -34.9% -

DEC 1973 MAR 1975 16 36 987.06 26-Oct-73 -1 577.6 06-Dec-74 -41.5% -

FEB 1980 JUL 1980 6 58 903.84 13-Feb-80 -5 759.13 21-Apr-80 -16.0%

AUG 1981 NOV 1982 16 12 1024.05 27-Apr-81 -3 776.92 12-Aug-82 -24.1%

AUG 1990 MAR 1991 8 92 2999.75 16-Jul-90 0 2365.09 11-Oct-90 -21.2%

APR 2001 NOV 2001 8 120 11722.98 14-Jan-2000 -3 8235.81 21-Sep-2001 -29.7% -

DEC 2007 JUN 2009 18 73 14164.53 09-Oct-2007 -2 6547.05 09-Mar-2009 -53.8% -

AVERAGE 15 45 -2.6 -30.6% -3

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