To:Jay Chen who wrote (847)
From: tradermike_1999 Sunday, Jun 23, 2002 4:01 PM
View Replies (1) | Respond to of 849
Grab your popcorn. Turn on your TV next week and watch the stock market crash as the result of the Bush/Greenspan debt "bailout" game they played last Fall. Who needs enemies like Bin Laden when you have a lunatic like Greenspan ruining the country:
"We are now on the inevitable down phase of the cycle of Creative Destruction that Joseph Schumpeter described half a century ago. As such policy makers must take great care not to interfere with the fundamental need to inject greater caution back into the system. A simple reflation of bubble in financial assets which existed through the first half of this year would only involve greater dangers for the world economy in the period ahead." - Lawrence B. Lindsay at the Imperial Hotel, Tokyo Japan
“I don't know why markets are where they are today. Eventually (stocks) will go back up, perhaps sooner than later. There is an unbelievable movement in the market without what I believe to be substantive information." – Paul O’Neill speaking at a finance meeting of the G-7 last weekend
Always when markets are in trouble the words are the same: “The economic situation is fundamentally sound” or simply “The fundamentals are good.” All who hear these words should know that something is wrong. – John Kenneth Galbraith, The Great Crash of 1929
The big event Friday wasn’t the stock market drop, although it was awful. Nor was it the drop in the dollar, although it was awful too. It was the statement by Japanese finance minister Masajuro Shiokawa which was: "It's impossible to manipulate currencies with our force. It's not good to intervene in the currency market all the time." Japan has tried and failed 3 times in the past 6 weeks to make the yen drop in relation to the dollar. The Japanese bankers have admitted that they cannot do it and will no longer try for the time being. One prop of organized support for the dollar has now disappeared.
CNBC ignored that bit of news. All year the cry from the financial experts is that you needed to buy stocks, because the economy is “in recovery.” When the market failed to go up as predicted then the CNBC analysts and mutual fund managers would blame the drop on events and forces that they could not predict, such as terrorist warnings, conflicts in the Middle East and between Afghanistan and Pakistan, or corporate scandals and lies. They never blamed the market drop on the fact that the economy is not recovering as they claimed it was or the fact that stocks are overvalued and are being liquidated by insiders. If they did that would mean that they were fools to buy or hold the stocks or tricksters to tell you to do so. No. They aren’t responsible for their mistakes. It is always some random event that is to blame. All you had to do was to wait for the bad events to go away and you’d get your money back. Or so they said.
Well, I stand by everything I write and when I am wrong I lose my own money. But unlike everyone else, I have been right: over and over again in fact. I told you earlier this year in my “New Paradigm Series” that the dollar and the stock market would drop and gold would go up as the costs of huge levels of corporate debt, a mushroomed Federal budget deficit, and most importantly a record level current account deficit hit home. The economic situation was not fine. A recovery manufactured by interest rate manipulation and government spending is not the foundation that creates sustainable economic growth. Only time could work off the wild economic imbalances in the economy and stock market and the attempts by Alan Greenspan and the President to speed up time through debt and money creation has only made things worse. You don’t “bail out” a credit card junkie by telling them to use get a home equity loan to go buy an SUV like Robert McTeer, the Greenspan clone who is the head of the Dallas Fed, said last year. Now the current account deficit is on track to hit 5% by the end of this year or the 1st quarter of next year. In economic history every time this has happened to a country – including first world countries – the result has been an economic crisis and calamity to its currency. There has NEVER been an exception.
I don’t know what you did when you read my New Paradigm series( Part I; Part II) in which I warned you that the tech stocks would crash and you should get out and save your skins. Maybe you heeded my warnings. Maybe you chose to ignore them. Maybe you listened and then heard Bush’s Treasury Secretary tell you that the dollar isn’t dropping and never will drop because we have a “new economy” in which technology has created so much productivity that there is no where else in the world for foreigners to invest. Or maybe you just didn’t want to think about things one way or the other. You may have been so emotionally tied to your tech stocks that you couldn’t think of selling them. So you buried your head in the sand like an ostrich and prayed that the people on TV were right this time. They sure can sound convincing. And they are experts. Aren’t they?
Well, the Nasdaq closed at a new low for the year Friday and CNBC talked about the falling dollar at least a dozen times, because on that day it fell a lot. But much of the talk was still one of denial. Maria Bartiromo tried to cast this as a positive light by asking guests what companies will benefit from a falling dollar, as if some stocks are now great buys despite the fact that foreigners are taking their money out of the US stock market. Larry Kudlow, CNBC’s head “economist,” said that the dollar isn’t dropping. It is only in a “correction” from an uptrend that has been going on for over 8 years. Didn’t he say the same thing about the stock market when the first bear market dip hit it in April of 2000? That’s the month I switched from being a bull to being a bear.
The dropping dollar and current account deficit are THE KEY to understanding what is happening to the stock market. If you don’t understand them then you are going to lose money. Everything that happens in the world financial system will be influenced by the falling dollar. It is that simple.
A report from RBC Global Investment Management Inc., a division of Royal Bank of Canada, got leaked last week. It reads:
"The U.S. dollar has been levitating for a long time, but the underlying fundamentals continue to erode. The U.S. current-account deficit exceeds $400 billion annually, and the continuation of this chronic deficit has turned the U.S. into the world's largest debtor as most of these deficits are being recycled into U.S. debt instruments. Gold is already in a bull market in U.S. dollars, and an established bull market in every other currency. If the reserve currency, the U.S. dollar, falters, gold could well be launched on the upside as people recognize its status as the only true currency."
I’m not the only one who has been right. There aren’t many of us. But one of them is sitting in the White House as one of Bush’s economics advisors. That man is Lawrence Lindsay who resigned from the Federal Reserve Board and sold every single US stock he owned after he told Alan Greenspan that he was creating a financial bubble that would end in disaster. Lindsay is a rare man. He’s a patriot who happened to be on the Fed Board. He wasn’t a puppet for international bankers who played “bail out” whenever they cried for one. Another man is Warren Buffet who made several hundred million dollars in June by purchasing puts on the S&P 500. Another is George Soros who warned two years ago that the US would be the next place to have a financial crisis. Another one is John Templeton who told people on CNBC the other week to get out of US stocks all together and buy treasury strips. Another one is Stephen Roach, the head economist at Morgan Stanley who has been warning about the current account deficit for the past year. On Friday he wrote the following:
“Meanwhile, financial markets are seizing up in the industrial world, and crisis is the only word to describe conditions in Brazil that are rapidly spreading to other Latin currencies. All this is starting to seem reminiscent of the dark days of late 1998 and early 1999. Yet there’s one key difference: America is not in any position to save the day by administering the tonic of global healing that worked so well three years ago. That puts the global outlook in an exceedingly difficult light.”
“The news flow on the state of the global economy is simply terrible these days. US consumption growth seems to have sagged through the critical 2% threshold in 2Q02 -- underscoring the distinct possibility that the over-extended American consumer may simply be incapable of carrying the global economy for much longer.”
“French consumer spending plunged in May and Italian business confidence sagged appreciably in June. I am just back from nine days in Europe and I can assure you there’s nothing vibrant in Euroland these days -- work stoppages are mounting by the day and intra-EMU squabbling is on the rise. Nor are there any signs in Japan that that the 1Q02 growth pop is sustainable; a 1.5% plunge in its service economy in April (the so-called tertiary index) is painfully consistent with the caution that our Japan team has long expressed on the state of the real economy.”
“And so, once again, it all hinges on the ability of the once-proud American growth engine to save the world. That could turn out to be the biggest disappointment of all. That’s because the United States now has the "mother of all" current account deficit problems -- an external imbalance that will inhibit America’s ability to fuel global recovery of a still US-centric world. The just-released 1Q02 US current account data underscores this dilemma. The $112.5 billion deficit -- or $1.25 billion per day -- amounted to 4.3% of US GDP. That’s slightly worse than implied by our baseline forecast (4.2%) and well on a path to pierce the all-important (i.e., ominous) 5% threshold by year-end 2002. At the same time, I note with interest a May US budget deficit of $81 billion, literally three times the shortfall of a year ago. Gone are the days when Federal saving would offset the lack of saving in the private economy. America is as saving short as ever --little wonder it needs foreign capital inflows to fund it. If anything, that suggest pressures on an ever-expanding current-account deficit can only intensify in the months and quarters ahead -- that is, unless the US finally starts to rein in the excesses of its own domestic demand. “
“Therein lies the dilemma for the world. Back in the crisis days of late 1998, America’s current-account deficit was "only" 2.7% of GDP. While most of us thought that was high at the time, in retrospect, there was considerable scope for further expansion as the US stepped up and led the world into a glorious recovery that we dubbed "global healing." That’s right, it wasn’t all that long ago, that we were the out-of-consensus bulls on the global economy. But now the tables have turned. The global healing of 1999 saw America’s current account deficit expand by two full percentage points of GDP over the subsequent two years, hitting an all-time record of 4.6% in the year 2000. A two-percentage point widening from today’s level would push the external imbalance up to 6% of GDP -- requiring financing via capital inflows of close the $2 billion per day. “
“I am not saying that can’t and won’t happen. But it is ludicrous, in my view, to ignore the obvious and important consequences of a sharp further widening of America’s gaping current account deficit -- should it occur. The once-high-flying dollar will bear the brunt of such an imbalance, and that realization now seems to have sunk in with a vengeance in foreign exchange markets. But other US asset markets could also be affected -- a possibility that is hardly being lost on the beleaguered US stock market. But the weakness of the dollar puts the world on notice that the old days of US-centric growth are over. The flip side of that outcome is that the euro- and yen-blocs are going to have to learn to live with stronger currencies. And with these still externally-dependent regions lacking in domestic demand, their life is about to get considerably more difficult. That’s a far cry from the magnanimous climate of global healing of three years ago. This time, as the outbreak of global trade tensions also seems to indicate, it’s every country for itself! “
“It’s crunch time for the old recipe of US-centric global growth. What worked so brilliantly for the past seven years seems unlikely to do the trick this time. Global risks are mounting and there may be no easy way out for world financial markets. “
Now the selling in the market is beginning to pick up and if it continues next week it will become a crescendo of falling stocks and panic. If panic comes then I’m going to close out my short positions and go long. I’d expect a sizable rally that should last for 3-6 weeks. Any positions I buy will only be trades though. Not long term holds. I’d expect the rally to top out and another correction to come later this year. And besides I know that the tech stocks I buy for a bounce are total garbage and aren’t worth holding on to as an investment anyway.
I can’t predict where the market will bottom out at or even if a panic bottom will come next week. I just know that I am seeing the signs of panic and if things continue as they are then we’ll get a panic bottom within the next two weeks. If the put/call ratio stays above 1 and I see the volatility index(VIX) surge quickly during the trading day – by at least 3 to 5% - to go above 40 then I’ll be looking to go long the QQQ’s and a basket of tech stocks. The ones I'm looking at now are A, CMOS, BRCM, and QSFT.
Most tech stocks made new lows on Friday or Thursday. When I am looking for tech stocks that I might buy on a bottom I am looking for ones that haven't made new lows recently and are performing better than the Nasdaq. Instead of making new lows in the past few days they have been hovering above a support level. This way when I think that the Nasdaq has bottomed I can buy these stocks and put a stop below their most recent range. I don't have to guess the bottom for these stocks, because one of sorts has already been put in. Take a look at CMOS above as an example. If I were to just buy any tech stock I wouldn't really know where support is or where I should put a stop. I'd just have to guess. However, I am looking to buy some QQQ's but will probably end up buying call options on them to help with this problem.
I don't expect a panic bottom to come Monday and it could take another week or so for it to happen, but I need to start to prepare myself for it.
All of these have held up recently during the decline. Stops will be placed on the low of the past 3 days from where I buy them. If I’m right and the market reverses the day I buy them then I’ll place stops right at what I paid. I’ll hold in the expectation of selling them after the Nasdaq rallies 20-35%. If I'm wrong then I'll get stopped out and take my loss.
If we get a panic bottom will the bottom mark the end of the bear market? I doubt it. But who cares? You shouldn’t be in a position where it is important. I do know this though. The big cap tech stocks that everyone is obsessed with will not lead the next bull market. They should still be sold on bounces and rallies and gotten rid of even- even if they made a bottom Friday. They will under perform because they are priced as growth companies when they aren’t. Nor will the stock market enter a new bull market anytime soon. It will take years of sideways action to prepare the way for one. Regular investors should have most of their money in interest bearing instruments and not risky and dangerous stocks. Those who want to make money in the stock market instead of lose it should look at gold. And if you are retired and have most of your retirement in stocks then you are crazy.
Also even if we do get a real bottom I still expect the current dollar and gold trends to continue. And what if it isn’t the real bottom? Suppose the market rallies through July or August and then drops to make a new low later this year ? It easily could do that. Tech stocks are still grossly overvalued. We’ll handle things as they come and see what the market tells us it is going to do and not guess that it will do what we want it to do like everyone else. We don’t need to predict the future to make money. Just recognize the market trends and when they change. |
