FWIW
Shepler Capital Management: January 24-28,2000
Greenspan's Bubble
We remain bearish on the prospects for the stockmarket in
both the short-term and the long-term. Important tops tend
to occur within 1-2 days of options expiration, so we are
on alert for an important high in this timeframe. Now that
the majority of hyped-up 4th quarter earnings are behind
us, we feel that the market must again turn it's focus to
the interest rate front.
This change in focus should result
in some major heartburn for bulls.
The valuations built into the market (mainly the tech tulip bulbs stocks) are
completely indefensible by any rational basis. And even
most bulls will admit that the NASDAQ moonshot is a bubble
solely fueled by a Federal Reserve money printing binge.
So, at this critical time we feel that the odds are high
and ever increasing that the end of this secular bull
market is imminent.
We are aggressively short and looking at
all rallies as opportunities to add to short positions.
To be sure, it is not a popular stance. Many friends and
associates who were formerly cautious have now become
unadulterated bulls. They have not only capitulated, but
preach their new found bullish mantra with an almost
religious fervor. Thus, my own skeptical bearish rhetoric
is now being greeted with hostility and anger on their
part.
It seems that nobody wants to even think about any
bearish possibilities in this "new era", and certainly
nobody wants to talk about valuations. When the subject of
valuations comes up it is quickly dismissed as a non-issue.
Because to discuss such things might lead one to the
logical conclusion that they should not be 100% invested in
the NASDAQ right now, which is tantamount to heresy in this
"brave new world". The only fear I hear expressed lately is
the fear of missing out on another year of triple and
quadruple digit gains in the Internet highfliers.
Well, unpopular as it may be we are going to continue to
observe Greenspan's Bubble from the outside rather than the
inside. We call it Greenspan's Bubble because that is the
name that historians will likely give it years from today.
You see we contend that it is not the "new era" of
technological gains that is responsible for such ludicrous
stockmarket gains, but it is simply the result of THE most
irresponsible Federal Reserve policy in history.
"Bubble Boy" Greenspan's money binge began with the S&L
bailout in the early 90's, continued with the Mexico
bailout of 1994, then the fat-cat LCTM bailout in 1998, and
finally the ill-conceived pre-Y2K money binge in the face
of any already overheated economy. Every time there is the
slightest chance that stock speculators will have to absorb
a loss, the Fed responds with another fresh round of funny
money!
But when the market goes parabolic on the upside all
the Fed does is jawbone about "irrational exuberance".
So let's do the math on this one... When stocks are bid up
to dangerously insane levels, Greenspan verbally scolds
speculators. But when the bubble tries to deflate a little
he turns on the printing presses to rescue the speculators.
Hmmm, what would you do if you were a speculator in this
scenario? Answer: Send the market into the stratosphere
with reckless abandon!
So what is going to stop this insanity? Certainly not our
Dr. Frankenstein at the Fed.
No. It will have to be bond traders who are presently responding
to this irresponsible Fed policy by sending rates on the 30-year treasury
bond ever higher. These bond traders realize that this reckless
money binge WILL lead to inflation if not held in check.
The only question is how high T-bond rates will have to
rise to pop the bubble. Our guess is that the 7-8% range
would be a definite death blow to the bull, but it may not
take that much. Of course if the Fed finally begins to act
responsibly, a big jump in the Fed funds rate would negate
the need for higher T-bond rates to deflate the bubble.
Either way the bubble will pop, and it will be quite a
spectacular view for those of us with the common sense not
to participate in it.
(c) 1999. Bill Shepler - You can write to Bill at wshepler@yahoo.com |
