NAZ led the Dow and S&P into this rally. Should be the first one to run out of gas...At least temporarily. Still looks like there is more gas over the next couple weeks.
The weekly INDU looks to be clearly in the A wave of 4 of 3... as does the S&P. We may be close to B if not already in...
Of course there is this:
A Longtime Bear Turns Bull
By Doug Kass
Special to TheStreet.com
3/26/01 7:57 AM ET
With this column, we reintroduce Doug Kass, the manager of two hedge funds, Seabreeze Partners and Kass Partners. Doug is renowned as a manager with an emphasis on short-selling. Previously, he was a portfolio manager at hedge fund Omega Advisors, and head of institutional equities at First Albany and J.W. Charles. As always, let us know what you think.
Roy Neuberger, a great trader and the patriarch of Neuberger Berman, once told me to buy cyclical stocks when the factory doors of industrials are padlocked. The economy and the stock market's doors are now padlocked.
After weeks and weeks of pounding, it has become almost unthinkable that the market might rally. For new equity and low-grade debt financings, the capital markets are closed. Investment bankers are being fired by the large underwriters.
A year ago it was almost unimaginable that the equity market would fall. A year ago, IPOs routinely rose by 100% on their first day of trading. Mutual funds were created just to buy new issues, and to participate in the aftermarket trading of those new issues. The Great Bull Market of the 1990s did its best to obviate the need for an historical perspective. In essence, experience and knowledge of the past was a liability.
No longer -- the tide has changed. Growth-oriented mutual funds have faltered badly, and investors are withdrawing their investments. Value-oriented mutual funds are performing better, and are becoming more popular with individual investors.
I have been bearish throughout the past two years. But over the course of the past two months I've grown progressively less cautious. And now, I'm of the view that the equity market might currently be putting in an important bottom.
Investors have finally recognized that they made a mistake in thinking that the technology capital spending boom of 1998-2000 was a secular phenomenon. And that recognition is at last being reflected in today's low stock prices.
The technology spending spree was not enduring -- it was nothing more than a temporary ramp-up. It was abetted by a halcyon IPO market, which provided issuers with zero-cost capital, and by the compliant manufacturers of tech products who offered customers financing which, based on poor business models, was undeserved. In turn, this produced an unsustainable level of demand for technology products.
The resulting demand became so heavy that it fooled even the tech companies (and investors in tech stocks, who bid the sector to ludicrous price levels) into believing in a secular expansion in demand for optical fiber, routers, servers and other tech products. In response, the largest companies dramatically expanded the capacity of what their plants could produce.
Along the way, alas, the fuel for the euphoria in the form of plentiful debt and equity financing to lower-tier participants, combined with aggressive vendor funding to unworthy creditors -- all the things that encouraged the hysteria -- began to disappear. That was 12 months ago, to be precise.
As well, it began to be acknowledged throughout the past year that certain areas of technology, like personal computers and wireless phones, had reached a level of maturity that was suggestive of cyclical, slower growth.
A year ago, with Qualcomm (QCOM:Nasdaq - news - boards), Dell (DELL:Nasdaq - news - boards), Micron Technology (MU:NYSE - news - boards) and Nokia (NOK:NYSE ADR - news - boards) at the top of the investment world, this was unthinkable.
And earnings growth hit a wall. One by one, technology companies issued profit warnings. Then, all of a sudden, valuations began to matter, and the bifurcated market of the past decade reversed, big time.
Investors, analysts and market strategists were in denial during most of the market reversal. And why not? It had paid to buy every previous decline.
Of course, the greatest myth -- that commerce had entered a Web-centric world -- was squelched. The suggestion that, in order to compete, a rapid deployment of an Internet strategy was the key to future profits, was replaced with the more traditional and prosaic notion that capital spending programs needed to be justified by quick paybacks.
Unfortunately, like the road to riches of prior investment bubbles -- railroads, radio and automobiles -- investors learned for the umpteenth time that the laws of valuation and of gravity have not changed. Even that forward-thinking (just kidding!) newspaper, The New York Post, has a new column entitled The Dot-Com Dead of the Day, which appears in its business section every day!
That said, the speculative excesses of yesteryear have, in my estimation, been eradicated. Besides the changing investment landscape, in both sentiment and price, described above, I want to share additional reasons for my more constructive view:
Fear is palpable. Tout TV (read CNBC) has begun to take an adversarial approach to their money manager and analyst interviewees who have performed poorly. Lame-O Awards are handed out to analysts who have recommended stocks that are down 75% or more, and Penguin Awards are given to brokerages that downgrade stocks after the companies have issued earnings warnings or traded down to less than $2 a share. While these awards might be justified, I find the manner in which they are given offensive and it provides me with yet another contrarian indicator -- as they were shameless cheerleaders just one year ago.
For some time I have been of the view that layoffs at the two major television networks dedicated to market coverage (CNNfn and CNBC), as well as layoffs at the major brokerages, would presage a market bottom, and indicate that the worst might be over. After all, it has been a great indicator in the past. And those layoffs are occurring now.
Since March 12, the broader S&P 500 and the Dow Jones Industrial Average have underperformed the tech-laden Nasdaq, as investors sell anything that is liquid, or not down that much. This is a big and positive tell to me.
The redemption issue, or what I fondly call the nightmare scenario, appears to be an overblown concern. Dominant mutual fund family Janus has relatively large cash positions (in certain funds as much as 20%) -- a rather large buffer in anticipation of withdrawals in relation to the concerns du jour. The tax issue, being that realized investment gains in early 2000 must result in the sales of stocks in order to meet April 15 tax payments, also seems to be an overblown concern. The market decline, beginning last spring through the year's end, in large measure erased a lot of the gains. Regardless, tax selling will be over in a matter of weeks.
The dividend discount models -- you remember those! -- I use suggest that technology, currently making up about 17% of the S&P 500 (and down from more than 30% a year ago), represents real value. First time since 1997!
All now agree that the Goldilocks economy is dead. As a consequence of the broad acceptance of the New Economy, all valuation benchmarks were broken by huge margins. But, like the children's story, the concept of an economy not too hot and not too cold was nothing but fiction. And price-earnings ratios fell back to Earth.
Most of the juicy short themes I have employed over the past two years (Internet, optical fiber, wireless phones, personal computers, semiconductors, hand-held devices, etc.) are now incorporated in lower stock prices.
There are few signs of a turn upward in inflation. The specter of higher oil prices is no longer a threat. And no cost-push or demand-pull inflation is in sight.
A tax cut is on the way. With elections out of the way, we might even see the parties agree on additional ways to extricate the economy from the downturn.
Institutional cash positions have risen from a low of 4% a year ago to 6% today. This rise might sound trivial, but it is not. On the $4.3 trillion of fund assets, that is a rise of $86 billion in cash reserves. As well, money market funds are at an all-time record, ready to be committed to stocks once an up trend is established.
A year ago, daytrading manuals populated The New York Times Top-10 Book List. Today, some daytraders are on the feds' Most Wanted list because of murderous sprees after losing all their money!
Two years ago, new language appeared, as Wired magazine introduced the phrase B2C (Business to Consumer) to our language. Now B2C is euphemistically referred to as "Back to College."
I am being inundated by interest in my partnership, as investors want short representation. But where were they when the short pickings were abundant, as when priceline.com (PCLN:Nasdaq - news - boards) traded at $100, or when Yahoo! (YHOO:Nasdaq - news - boards) traded at $125, 12 months ago? Probably invested in the Janus funds!
Finally, I am getting a strong positive read from my point guard, partner and trader -- The Trading God. He has been bearish all the way down, and at 3:27 p.m. on March 22, he turned major-league bullish.
A decade ago, Warren Buffet advised investors to "Be fearful when others are greedy, and greedy when others are fearful." It may now be time to be greedy |
