When the elevator cable breaks, it's always nice to have some idea of how many more floors to the basement.
Steve Leuthold says he has no trepidation over the machinery supporting the lift in his Minneapolis, Minnesota, office building. He does fret, though, about how many points to the bottom of what he is calling a bear market.
With that in mind, he recently laboured to divine just how low stocks might go, based on 41 years of assorted market statistics.
If you're long on the market, move along to the horoscopes, because there's no good news for you here.
Leuthold, who runs a securities research and money management firm called the Leuthold Group, ran statistics to see where the Dow Jones industrial average, the Standard & Poor's (S&P) 500 index and the S&P industrial index would land if the market were to return to what he calls "normalised" values.
He figured out what's cheap or expensive by calculating historical levels for such things as price-to-earnings (p-e) ratios, dividend yields, price-to-book-value ratios and a ratio of market value to gross domestic product.
Then he mapped out the ugly results under two scenarios.
In the first, he showed where the market would be if stocks fell to median valuation levels. (For example, calculating the mid-point of all quarterly p-e levels in the 41 years, averaged with all quarterly dividend yields, etc).
In the second scenario, he showed where the market would be in a bear market such as the 1973-1974 period, by illustrating market levels at the bottom quartile of valuation for the 41-year period.
Ready for a Dow Jones average of 4937? That's where the Dow would be if investors were to value stocks at their median historical levels.
Or, if you can stand it, how about a Dow based on values in the lowest 25th percentile? That would take the widely watched measure of stock values down to 3949.
It gets worse if you take the numbers back to 1926, which includes the ugly crash of 1929. The medians of valuation dating back that far would take the Dow to 4328, according to Leuthold.
And, based on the bottom quartile numbers, the Dow would sink to 3479.
Leuthold says he's certain we're in a bear market. The only question, he says, is whether it's what Wall Street calls a relatively benign "cyclical" bear market or a nasty, scarier "secular" bear market that lasts as long as three years and takes stocks below the uncomfortable 20 percent decline that seems to be the agreed-upon drop that officially signals a bear market.
He is unfazed by recent rallies. Bear markets move through three rounds of selling, he says.
There's an initial sharp sell-off (followed by a rally, akin to the one of late August); a second to lower lows (followed by a rally, akin to the one that began in early October) and a third wave "where people really give up and throw stocks away".
We're probably in the happy rally before the third rout, the analyst says.
Leuthold Group has put its money where its mouth is, having reduced its clients' exposure to stocks to zero in July by hedging its stock positions with stock index puts.
"Thirty percent is our normal minimum level," explains Andy Engel, a research analyst at Leuthold.
Engel concedes that the firm's pessimism in the past preceded market rallies. "In spring of 1997, we were negative with an equity exposure of 13 percent," he says.
"We were out of sync with the market - not giving the mutual fund investors enough credit, because they were really driving the market."
Today, the Minneapolis advisers are telling clients to put their money in a mixture of stocks (100 percent hedged with puts on the S&P 500), emerging country funds, Australian and New Zealand bonds, cash and real estate investment trusts (Reit).
Leuthold says he loves the Reits because they're yielding 7,5 percent. "That's better than you can get in bonds these days unless you're in the real junky stuff."
In most regions of the US, the supply of new commercial real estate has not kept up with the rate of economic growth, says Leuthold. "So rents and occupancy are stable and going up" because of a shortage of supply. He says an additional reason to like the group is that it constitutes a good inflation play.
Why worry about inflation when deflation is on so many minds? "If you get into a significant recession, one of the first tools countries use is to issue more currency, which is inflationary," he says. Both a secular bear market and a nasty recession are in the realm of possibilities, Leuthold says.
"This could be the correcting force for the whole 'secular' bull market" that began, in Leuthold's view, in 1974 with the Dow at 577.
While delivering this terrible news to clients in his monthly newsletters, Leuthold softens the blows with some perks: joke contests, dubious achievement lists and confessions by Leuthold about his own investment gaffes.
This month, Leuthold reveals his own egregious errors running an over-leveraged mutual fund in the 1960s.
Before the mea culpa, though, is this: "How many Nobel Laureates does it take to unwind a disastrous derivative trade?" The answer is "None - the banks do it for them."
If all goes as Leuthold fears, the clients will need a laugh.