Bill F.,
Don Hays made another run thru NYC this week so I thought I would give you those highlights I promised you a month ago from his lunch at the 21 Club. Not much had changed in his presentation from the one a month ago.
I am not big fan of talking heads or strategists but have had numerous chances to hear Don's take on the market over the past few years and it is always time well spent. He is probably the only legitimate rocket scientist I know on Wall St, and I am sure those years he spent working at NASA in the 1960's with the likes of Werner von Braun were almost exciting as this new era market.
Don started out with his theme of Globalization and the five waves of technology he thinks will change the world-technology, telecom, Bio-tech, nanotechnology and alternative energy. These five waves have been his consistent themes over the past few years.
Next he offered up two charts with particular emphasis on the parabolic move on the NASDAQ. Looks like a rocket launch to me. Next up were a couple of charts pointing out the advance/decline on the Nasdaq and then a look at the Value Line Index which consists of 1700 stocks equally weighted. This of course peaked in April '98 and has been stagnant since. He mentioned that it is likely that most investors have made all of their money in only a small part of their portfolios with the rest of it acting poorly. He did mention that he is long HGSI (and has owned it for several years) which is a good example of his bio-tech theme, although he never expected to ramp like it has.
Don then looked at the miserable performance in Health Care over the last year noting that only the utilities and transports turned in more pathetic performances in '99.
After that was a peek at the NYSE composite and below that a look at the number of stocks trading above their 200 day moving average which he then repeated looking at the NYSE composite and the advance decline line. We are currently in the most massive non-confirmation in this measure since 1908 and if past is prelude then of course we are close to having this resolved.
Next up was the CBOE Internet Index which was on the verge of a massive puke-arama last October but was likely saved by the Fed's Y2K flood of cash. He also commented on things like Intel's phantom profits from VC type activites and said it is unlikely to be sustainable.
Following that was perhaps my favorite chart which pointed out the amount of trading volume (in dollars) on US exchanges versus GDP. In normal markets the ratio runs about 20% but we are now off the charts at 200% ($2 worth of stock trading for ever dollar of goods and services produced)-which of course takes us back to 1929 which was the only other year to see this mesure so high.
The "Smart Money Index" was next up and was actually a contribution from somebody who reached Don via email. He then talked a minute about how the internet has changed his life and the way he works which is probably true of most of us. The smart money index measures the first half hour of trading (which of course is driven by Maria), and compares it to the last hour of trading which is not quite as emotional as that first half hour. Although I don't know exactly how it is computed, this measure has been uncanny since 1988 in spotting market wipeouts and we are living on borrowed time according to this unique measure.
Don's Four Legged Stool
Don puts together a four legged stool which easily illustrates his methodology and illustrates the Outlook for the Market. The legs are Investor Psychology, Monetary Conditions, Valuation of the Market and the always intact Long-Term Upward bias of the market. The long-term bias is always a supporting leg despite the corrections that occur. I guess the idea is you need three of the four legs working or you are in trouble. The stool topples with only two supports.
Investor Psychology
A quick perusal of CBOE put/call ratios and a look at margin debt followed. Apparently margin borrowing exploded in October of '99 and now stands at the twice the level it did in the fall of 1987 (margin debt as percentage of total equity assets). Hmmm.....
Next up was Investor Sentiment as measured by the Association of Individual Investors. We are at all-time highs with a reading of 75% bullish. 'Nuff said.
Kick away this leg
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Valuation of the market
I don't have to tell people on this board what this looked like. Don used a 10-20x P/E as representing undervalued and overvalued at each end. We are north of 20x. Next up was the Nasdaq PE ratio since '85 and we are off the charts with a parabolic move up since late '98.
A quick look at historical PE's and estimated PE's from Value Line rounded out this exercise. This is also scary.
Kick away another leg
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Monetary Conditions
A chart featuring M3 growth since the early 80's and the yearly change in M3 courtesy along with a chart comparing the yearly percentage change in M3 and GDP led Don to draw comparisons between the last few years and 1971-72-73. He commented on how Nixon coerced Arthur Burns into pouring it on during his relection drive which led to the nifty fifty stocks of the early '70's-he then said that the hammer is now cocked and we are likely to get clocked. Don is about as big a fan of Greenspan as you are Fleck.
A quick peak at the rising NYSE composite versus the 30-year bond (Notgood) was followed by a chart showing the pool of available workers. (there are none)
Next up was a look at import prices noting that the trend has turned against us.
A chart of the yearly percentage change in CPI vs PPI was next and it is the first time since 1990 that these lines have crossed with PPI accelerating faster than CPI. He looked at this a different way by taking CPI and subtracting PPI from it. This indicates that we are at the point where the momentum players always choke. Always!
Third leg down-DOH!
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So Don thinks we are at the point were Van Wagoner, Nick- App and Driehaus (MO-MO) and all the day trading junkies and E-Traders puke big, big time as we go into a 12-24 month period only a value investor with a healthy dollop of cash would like to see. Currently there is about $2 sitting in money market funds for every dollar in equity mutual funds (i think i have this correct-if not then $2 are flowing to MM funds for every $1 going into mutual funds). He thinks eventually this money finds its way into the market and helps form a bottom.
Don does not think bonds will act well until stocks finally cave and notes that we are near the lowest bullish sentiment on bonds since marketvane began tracking these numbers.
After going thru a nuclear winter Don thinks we will come out the other side in a sort of investment nirvana, where big and small caps, growth and value all move lockstep onward and upward. Or something like that.
He does not know what exactly will kick this off although a few people present sure wanted to see Greenie jack margin requirements. Don says he never does see it coming but thinks it could be a currency-related event that kicks off the slide.
It is probably tough to follow this without his power point slides in front of you but wanted to share his thoughts. I might not always agree with him but he is always entertaining and gets you to challenge your assumptions. Not only that but he is certainly one of the biggest stock market junkies I have ever met-he loves analyzing this stuff. Not even those knuckeheads running First Union can quash the enthusiasm he brings to his work and the market.
Sorry but I have to go now as I have only nine hours to get ready for the open. And I need to find out who is on:
cnbc.com
NotarocketscientistNeiderhoffer
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