MORNING MARKET COMMENTS
by
Don Hays
December 29, 1999
Not a lot new to report this morning as we count down to one of the most
talked about dates in my lifetime, and maybe ever. Three more days before
we see if the ballyhoo was justified or not. The last momentous occasion
that was so widely anticipated was that deadline that George Bush gave
Saddam Hussein leading up to the Gulf war (if you want to call it a war.)
But on that occasion the sentiment was almost unanimous that the market
would go down. Bearish sentiment was overwhelming. But what a difference
this time. Leading up to that previous time our asset allocation model had
turned very bullish, and we were screaming bullish. We felt lonely as the
herd was preaching gloom and doom. But this time, yesterday's consumer
confidence jumped to 141.4, the highest since October of 1968. Bullish
advisory sentiment from last week soared to 53% according to Investor's
Intelligence. The talk of the town is onward and upward, especially in
those "new era" technology stocks. Three more days. If feels almost like
that previous time, but a mirror image of the expected reaction. So we'll
have to wait and see.
It was reported in the last few days that money supply and inflation levels
were creeping up in the Euro zone. So it is not just in the US that higher
short-term interest rates are on tap. With housing reported up yesterday,
and the almost all-time record high consumer confidence, on top of a
tremendously robust Christmas shopping spree, the question is not whether
the Fed will raise interest rates in February, but by how much and how many
more times. They have already triggered the "three steps and a stumble"
rule, that says three restrictive acts by the Federal Reserve stops bull
markets. Of course that was triggered on November 16, 1999 and the market
has been strong since, so is that rendering this signal wrong? Not hardly.
In the past times when the lemmings were in a mass stampede, it takes a
while before the signal is able to totally stop the onslaught. Probably the
most vivid example was in 1929, when the third step of restricting monetary
policy was activated on July 13, 1928, and as you know the bull market
continued to look good to the casual observer until September, 1929. Of
course the broad market, as exhibited by the advance/decline line, almost
instantly started to look bad, but the few stocks dominating the major
indices continued to feed on the optimistic juices. Since we referenced
above the previous record high in consumer confidence in October 1968, let's
also look at the Fed action during that time frame. The Fed's third
restrictive action occurred on April 19, 1968, but the marauding bulls
momentum (and consumer confidence) carried through until a rambunctious peak
in the market indices in the middle of November 1968. Time and time again,
as you look through history you will see this same story. It may take a few
months, but the die is cast, and it says don't ever fight the Fed.
Of course, this Fed has shown such a tepid personality since Greenspan
exchanged his Grinch uniform for a Santa Claus outfight in 1996. So the
speculative investing public will be hard to convince that he is able to
stay the course. Most people do not believe that he fulfills the "John
Gault" mold that I described last week. They believe that since he and
Andrea made it official, he has mellowed into a sweet old man. We think
conditions will not allow anything but "tough love" in the months ahead. I
expect the combined action of the currencies in the Euro Zone and in the US,
the price of commodities, and the bond market to team up to force the Fed to
reel in the recent growth of money supply and credit. It never has failed
before to stop a bullish stampede, and it won't this time either. With the
margin debt twice as high against disposable personal income as it was
before the crash of 1987, the magnified effect to the market as the bubble
in consumer and investor sentiment comes crashing down would be a
double-whammy.
So one more time, we caution you to go against the herd. Be very cautious
as we tip-toe to the "unofficial" end of the Millennium.
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.
(1999 Hays Advisory Group, LLC. All rights reserved. The information
contained in this report may not be published, broadcast, rewritten or
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