something for the bears, from 'retired broker':
PERSPECTIVE ON "FORCE-FED" YEAR-END RALLIES
Several posts on this board have described the nature of that weird, yet
predictable, year-end phenomenon known as an "Institutional Buying Panic".
These things are not new despite the feeling by today's "new era" players,
that such events are all part of a perpetual bull market.
There are two outstanding examples of year-end panics, driven solely by
performance pressure, in the face of clear technical warnings that
"something-was-out-of-whack". In both cases, the stocks being pursued were
extremely overvalued, "everyone" knew it, but they simply didn't care and
bought them anyway. The power of the herd drove them into a lemming-like rush
- right into that terrifying "year-end, career-threatening deadline. In both
cases,
these year-end rallies collapsed into secular bear markets, right out of the
box as the new year began. These declines were especially confusing because
bulls had "learned" that markets ALWAYS go up in January.
The first example occurred in 1968. The general market had "topped out" back
in late 1965, followed by a collapse in the advance/decline line, and the
popular averages. The rebound in 1967-68 saw a narrowed focus on mobile home
stocks, and especially on "Tech" with a capital "T", in much the same way as
today's "Tech" mania. Today's "players" think THEY ALONE have invented or
discovered the glorious world of "Tech" and their lack of memory has
persuaded them that the sky is the limit. However, they might want to
consider the big "Tech" rally of 1968.
Advance
-Decline Line 1966-1968
As the chart shows, the 1968 market saw an extended "divergence" between
"most of the market" (A/D line) and the big cap, tech-driven averages. The
great buzzwords on Wall Street during this mania were "digital", "optical",
"system", "on-line", "computer", "laser", "semi-conductor", etc. If any of
these words were dropped into a "research" report, it guaranteed a buying
frenzy, short-squeezing event. Two of the biggest "stars" were Recognition
Equipment and Optical Scanning Corp. - two sure-fire, fringe of knowledge,
can't miss, long-term bets on an unlimited future. Recognition Equipment ran
from 32 to 400 (shades of QCOM anyone?), then announced a 4 for 1 stock
split. The company stated in it's annual report that the split was designed
to "REDUCE THE LOSS PER SHARE". They really said that! Meanwhile, the company
never made any money, just lost it hand over fist. Book value was negative,
but "concept" was so spectacularly open-ended, that the fantasy crowd
couldn't get enough. By 1971, REC had dropped from a post split high of 98,
all the way down to 2. They never did earn any money. Great concept, though.
Optical Scanning did a similar loop. From a low of 17, it ran to a late 1968
high of 146. By 1971, it had dropped down to 6. Never earned a dime. But,
Damn! What a concept. Such brilliant "sponsorship" behind the stock (all the
"right" research outfits pushed the stock to its final peak). Anyway, the
year-end 1968 rally ran out of gas about a month early, and started down in
December. By mid-1970, the whole market had lost more than 35% on the big
averages, and the "techs" and other stars of the '68 bubble had lost up to
95% of their value. An interesting side note: Warren Buffet closed out his
investment pool in 1968, and "went fishing". He viewed the market as having
reached a long-term inflection point. He was right. The "Dow" and S&P 500
were LOWER in mid-1982, than their 1965 peaks!
The second example concerned the infamous "nifty-fifty" mania in 1972. Coming
into November, institutions felt compelled to chase that handful of extremely
overvalued "quality growth" (translated "large cap") stocks that dominated
the averages (performance bogies). Everyone knew these things were grossly
over priced but, again, they simply didn't care. They just bought 'em anyway,
despite clear "technical" warning that something was "out-of-whack"
(Huge "divergence" in the cumulative A/D line, for instance)
Advance
-Decline Line 1970-1972
As the chart shows, the 1972 market had a huge divergence that was amplified
by the performance-driven, year-end buying panic. A close examination of the
chart shows that the A/D line at least made a decent attempt to join the
year-end party. So far, in 1999, the A/D line has barely budged in the
year-end rally. Hmmmm…
Back to the subject at hand. The big star of the 1972 "nifty-fifty" bubble
was Polaroid. The "year-enders" pushed it to 149, a P/E multiple of 108X.
Oppenheimer & Co.'s All Star Analyst (voted as such by Institutional Investor
Magazine) Ralph Kaplan, published a 50-page bound "research" report,
extolling the "technological magic" of PRD. He projected sales and earnings
growth out for ten years, thus "justifying" the 108 P/E. On January 3, 1973 a
bear
market started that once again confounding the "January Rally" certainties.
Two years later, the big averages were down almost 50% and Polaroid traded
down to 13 and change. Not bad for an "All Star Analyst" ? How 'bout those
year-end rallies?
This post is not meant to PREDICT a similar outcome for 1999 -2000, although
the "New Paradigm" crowd would tend to label it "gloom and doom". However,
there are certain eerie similarities in the EMOTIONAL and PSYCHOLOGICAL
aspects of the herd's behavior. And, if you believe that human nature NEVER
changes, then you might now have a better idea why those tiny hairs are
rising on the back of your neck. And remember, Warren Buffet has just exited
the
"equity game" in much the same way as he did more than 30 years ago - for
many of the same reasons. (See current issue of Fortune Magazine) |
