December 1, 1999
Market Comments
by
Don Hays
T minus 1. One more month to the advent of the new millennium or in a
more powerful phrase to Y2K. That brings all kinds of thoughts, probably
most prominent the former-fear of the computers of the world crashing. I
say former fear because it seems that Mr. Greenspan and much of the world
now are declaring that 1/1/2000 will be a non-event. Even Ed Yardeni, who
raised the consciousness of many in this country and world about the
urgency of this possible catastrophe, has now changed from a self-described
alarmist to just a skeptic. But he has not changed to a believer. He is
still displaying one of the most contrary opinions of any economist I have
ever seen by projecting a recession next year. And as I noted in Monday's
comment, in this crazy business when everyone is following the same theme,
you better take cover. So I guess I'll stay where I've been. I was in the
skeptical camp before, and I'm still skeptical.
But my biggest skepticism is not about the consequences of Y2K. My
biggest skepticism is about the wonderful new era when everyone is about to
become a millionaire. Isn't the popularity of that new show amazing? Have
you watched that thing? Music, television and movie preferences, length of
skirts, etc. have always echoed the mood of the times, and almost always
the root of those trends can be traced to a strong bull market in either
stocks or home prices. The most flagrant examples come with rampaging bull
markets in stocks.
And here we are. Three years ago I wrote my expectations that a period
was approaching when the stock market heroes of yesterday, i.e. Warren
Buffett and John Templeton, would be replaced in the upcoming years by the
relative strength momentum investors. Even as clairvoyant as that past
statement seems to be, I have to admit I didn't expect the dramatic
absolute sea change of personalities in the bull market. Last week, with
the NASDAQ composite hitting the +57% year to date performance line, and
with bullish advisory service from Investors Intelligence moving to 52.1%,
with the CBOE put/call ratio falling to its lowest level since 1990, the
unbelievable divergence in the stock market has been flaunting itself in
the face of all those former heroes (and some of the rest of us.)
In the same week that the NASDAQ composite reached that milestone, the New
York Stock Exchange cumulative advance/decline line dropped to a 4-year
low. Merrill Lynch statisticians have found that 37% of all NYSE common
stocks and 51% of NASDAQ stocks are still down 40% or more from their
1998-99 highs. And of course, the huge preponderance of stocks making new
52-week lows last Wednesday at 301 soaring over the 40 making new highs is
blaring out the extreme bear market that most stocks have found themselves
in.
But the root cause of the psuedo-bull market is still very much alive and
well. Is it corporate earnings? You've got to be kidding. Earnings have
nothing to do with this bull market. That was revealed for even the
skeptics last week in the GDP report, and the government release of
corporate profits excluding the new exciting accounting gimmicks. We
discussed that last week, but it showed a clear slowing trend. But the
bull market is anchored in the crazy jump in money supply that seems to be
out of control. We cited this several weeks ago how money supply that had
seemed to be coming under control four months ago, had turned back up.
That trend certainly continues, with the growth of M3, the broad measure
turning up sharply. Annualized, it has moved right back up to the 11.9%
rate, which is 7% above the Fed's published target range. If you chart it,
you will see that retail sales and consumer sentiment typically move up
with about a 3-month lag, so here we go again. Shop 'til you drop. But
those shoppers have been running on empty for a long time now, so bank
credit is coming right along with the shoppers-rising 9 «% annualized over
those last 13 weeks.
Greenspan cannot ignore this. It is too flagrant for even him. He has
been blowing this bubble up for a long time, but sometime his lungs are
simply going to be deflated. He does have a lot of hot air, I admit, but
even Greenspan has some limit where he has to understand that his legacy
will be as the initiator of the biggest bubble since the great depression.
Now even with all this, I am aching to be bullish. I'm getting tired of
this garbage. I see many stocks that look so tempting that it pains me
dearly to keep this cloud over my moods. But in all my experience, when
you fight a Fed that is obviously tip-toeing into a tightening mode, and
falling further and further behind stifling the debt-ridden economic
resurge, you get burned no matter what you buy. The Fed WILL play catch
up. Today, one of the Fed governors seems to be opening the door to the
next mood.
Already, despite the rise in consumer sentiment, the public is sending a
few hints that they are running out of chips, or sources for new IOU's.
For instance, despite the consumer confidence report that moved up strongly
to 135.8 from 130.5 last month, the "plans to buy" component of that
release, which often has been more timely to pick up emerging trends,
showed a remarkable decline in plans to buy big ticket items. For
instance, those intents for motor vehicle purchases dropped to the lowest
level since June 1998. Home purchase plans dropped to the lowest level
since November 1997, and appliances the lowest since October 1997. Another
confirming report came from the existing home sales dropping for the fourth
month in a row. This obviously spills over to a lot of peripheral
industries.
I have never believed in those "yearly" trends as a primary tool to use
for investing, but since I am looking for all the muck I can to put flesh
on my negative asset allocation model's skeleton, I am going to repeat
another observation that comes from Merrill Lynch. They cite the strong
performance that historically has come from the 4th year of the
Presidential election cycle--the actual election year. This is being used
by some of the bulls to support their expectations of another strong year
next year--in 2000. Their study, which was made famous by Yale Hirsch
finds that it is true that since the turn of this century the election year
has produced average gains of 9.8%. But wait a minute, in those years when
the election year falls on a "00" year in the calendar, that +9.8% has been
totally reversed to an average loss of 6.6%. So there!!!!
I can't leave this report without continuing to believe that the fall in
the Euro is a much bigger deal than the European Wall Street Journal's
report this morning believes it is. With the already fragile German
economies, a currency meltdown, ala Asian Pacific, is not out of the cards.
That is the most visible "fly in the ointment" out there today, in my
opinion. It makes it even more ominous that the herd is dismissing it as a
non-event. Another factor that is being totally dismissed is the remaining
tension between China and Taiwan. Last week, Taiwan's stock market took it
on the chin because of growing signs of China raising their military
preparedness. That is not something to be dismissed by all of those in our
nice warm houses, cuddled up watching Regis.
Stock Market; is that your final answer????
The Hays Market Focus Advisory Group does not guarantee the accuracy or
completeness of the report, nor does the Hays Market Focus Advisory Group
assume any liability for any loss that may result from reliance by any
person upon any such information or opinions. Such information and
opinions are subject to change without notice and are for general
information only. Hays Market Focus Advisory Group, 2828 Old Hickory
Blvd., Apt. 1808, Nashville, Tennessee 37221. |
