Morning Market Comments
by
Don Hays
December 27, 1999
It was a wonderful day in the Hays household, and I hope it was for each of you. And this was not even our year. With married children, we have to trade the number one priority with the other set of parents, so this was their year, but on Christmas night we really chowed down, ranging from my mother of 91, Brenda?s mother of 77 down to Jackson Hays of 2 weeks of age.
Old Santa Claus was good to us, and the Santa Claus rally in the stock market did itself proud. On the last day before Christmas it really wanted to show its stuff, as it is prone to do, with the Dow, the S&P500 and the NASDAQ composite all surging to new all-time record highs. For the week of the Santa Claus rally, the shining star, the NASDAQ composite was up by 5.7%. This brought the yearly total gains up to 81%. For the NASDAQ 100, the year to date gain has been a fabulous 96%. Who says the sky is the limit? Of course, this number is not really meaningful because of the input of stocks with no earnings, but the estimated price/earnings ratio for the NASDAQ is now 175. I say it is not meaningful, but maybe it is, because it is those stocks without earnings that seemingly are the brightest of all the stars. A Merrill Lynch statistical survey found that on the New York Stock Exchange the stocks with no earnings are up 52% for the year, but stocks with those dreaded earnings have actually declined by 2% for the year. So you figure out the best strategy for buying stocks--the ones with the biggest losses, right?
To add to that story, if you look at a graph of stocks 52-week performances over the last decade, you will find that since July 1998, there has not been one time when more than 50% of the stocks had year over year price appreciation. The other two times this has occurred for an extended time was in the spring of 1990 and 1994. Both periods, of course led to extreme market weakness as a whole. But so far the camouflage has continued for so long, and we end this 1000 years (I know that the official end is not until next year, but nobody is using that date and I?m not going to either) with the indices still in a partying all-time record high.
It is not just coincidence that we also end the millennium with the margin debt at the highest percentage compared with disposable personal income. My records don?t go back 1000 years, but certainly the highest in the last 50 years. As of the end of November 1999, the margin debt had risen to 3.0% of disposable personal income. The highest previous level had been about 1.3% in 1987 before the crash. The pessimism after that event brought the ratio down to about 0.6%, but the euphoria since then has really turned the debt spigots on. The risk, of course, is the effect this would have when/if the unimaginable of a market decline ever occurs. Margin calls are what really exacerbates the steep sell-offs, and drives stocks to extreme under valuations.
As we outlined in last week?s comments, maybe the Fed thinks the stock market bubble is too big to allow to bust. Certainly they stepped in during the 1997 attempt, and the 1998 one as well. They either promoted, or allowed the massive amount of new money supply. Each time when they tried to take the patient off the breathing machine, by slowing down money supply and credit growth, the market started to squeal, and the Fed couldn?t stay the course. Each time they opened the spigot again. And that doesn?t tell all the story, according to the interview that Kate Welling just conducted with Doug Noland on her outstanding web site. (Sign on to this at www.weedenco.com/welling/signin.asp) He cites the huge growth of money put into the system through the government-sponsored enterprises like Fannie and Freddie Mae.
And in recent days I have seen some disputing the Fed?s latest failure to hang tough. This spring they had indeed once again tried to contain the runaway growth of money supply, but something happened to scare them into submission again about three months ago. The put/call ratio gave us a clue that something was amiss. The bond quality spread also widened sharply. The dollar against the yen was plummeting, and the long bond yield was rising sharply. Now 13 weeks later, we see that money supply has jumped sharply in the meantime. In this time the broad aggregate has increased by $196 billion, which is about the same as in the first five years of the decade, when Greenspan was only playing the first act of Atlas Shrugged. For those of you that haven?t read Ayn Rand?s best selling book, it details how the fictitious all-wise savior of the world John Gault, first had to totally destroy the human spirit before he then rebuilt a perfect world. Young Alan Greenspan was a prot‚g‚e of Ayn Rand as she was writing that book, and I often wonder if he hasn?t intuitively tried to cast himself as John Gault. He certainly did all he could to kill the human spirit from 1987 until 1996. But from that dearth of optimism in 1992-94, he has really changed his stripes. But maybe real life is a little tougher than fiction. And now he seems to be having a tough time as he attempts to control the purse strings, and worry about whatever it was that panicked him into another liquidity binge 13 weeks ago.
As we end this year, we still find the dollar weak against the yen, at 102 yen to the dollar versus the 148 prior to the Asian Pacific crisis. The euro is in a much steeper decline against the yen. The trade deficit is ballooning, with real exports showing significant declines. With 40% of the treasury debt held overseas, the risk of their selling is weighing heavily on the bond market. It is no coincidence that we also find the long bond yield making new highs. Industrial commodity prices have started to rise. Greenspan?s weak knees have surprised me before, but once the Y2K kicks in for real, and whether or not calamities and disturbances occur, it will be time for Alan Greenspan to admit that he ain?t no John Gault. It is time to get back to the real world.
The Fed?s announcement last week gave all kinds of hints that they are headed in the direction of trying to reel in money supply and credit growth. In their statement they cited the growing worries about the balance of supply and demand, the conditions of the financial markets, and the need to contain inflationary pressures. So after the turning of the calendar to the 2000 page in 5 more days, it will be very difficult to continue to allow the excesses of recent years. It will be time to face the music, and see if the patient can breath on its own.
Japan is a good example. This morning it was noted that their industrial production increased by 3.8%, despite continuing weak domestic consumer demand. Obviously John Gault has been feeding the Japanese along with the rest of the world.
The Hays Advisory Group does not guarantee the accuracy or completeness of this report, nor does the Hays 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 Advisory Group, 5205 Close Circle, Nashville, TN 37205.
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