George, I did not respond to you on Don Hays' prediction of a Naz at 1400 before the end of this year. I believe that Don contradicts himself, in one place he is forecasting a huge bear market, but in essence assumes the bottom will be reached quite rapidly, that is not how bear markets and changes in psychology traditionally evolve. Psychology takes a long time to change (as Don himself notes), and psychology by itself needs a nudge from either the economic or the monetary environment, but preferably, both. Now, we have had the nudge from the monetary environment for quite some time, but I do not think that so far it has affected liquidity much. Yes, some measures of money supply have contracted (or actually, I should say the growth rate has contracted and in some cases, become negative, but the actual aggregates are still above the levels of a year ago). The problem is that we are a much more open world economy than in the past, and until the bulge in liquidity injected by the liberalization of the Japanese Postal system is absorbed (and that may take a good additional six months), the efforts of the FED's will only be partially successful, IMTO.
I can summarize my "thesis" of a continuation of the bull market, past the next nadir (probably late May for a new low on the NAZ?) till about November or year end and a bear market next year based on few basic principles:
Political:
a. Election year, the current government has a lot of freedom of injecting liquidity into the market so as to create the "good feelings" required for them to stay in power ("it is the economy, stupid" still works). That will be in effect over the next few months once the campaign resumes in earnest. That effect will be absent after the election.
b. Recognition by any new administration (R or D), that market excesses must be wrung out of the system, and it is best to take the bad tasting medicine early in the four years cycle.
Economic: (just two, there are many more, including housing slow down, car market saturation etc.)
a. This year's earnings will still look pretty good as compared to last year due to the extremely high growth rate of the economy in the past few quarters. Next year's comparison to this year will be difficult, as the growth rate slow down induced by the Fed, finally takes its toll on earnings.
b. The BTB ratio of the Semi equip sector often peaks few months before the whole chip sector peaks (first the equip makers than the chip makers themselves), it has reached 1.44, which i believe is a record high, it cannot go much higher than that. Thus I get a peak in the equipment sector sometime in the second or third quarter this year, followed by a peak in the chips and the rest of technology late this year or early next year.
Liquidity:
The FED's efforts to soak liquidity are currently balanced domestically by the budget surplus (I know many believe it is a phantom surplus, but the fact remains that the treasury is in the market buying long term treasuries), as the economy slows, these excursions by the treasury will wane. This current excess liquidity coupled with excess liquidity discussed above, will fuel the "last gasp" in this Bull for a good two to three quarters, and after that, will dissipate.
Valuation: there is no question in my mind that current valuations by any historical standard are high, but I do not know how much higher they could go (the Nikkei at its top sported a PE of 80, and many claims that due to Japanese accounting principles, these PE were understated and were actually much higher, so a PE of "75" as Hays claim, may not be the peak of the mania.
Once the three forces cited above combine to break the bullish psychology of the market, then we could be ready for a bear market, and not a three months severe correction. These are some of the major reasons my long term outlook is a market locked in a trading range of 6000 to 13,500 on the Dow and possibly a range of 1900 to 5200 on the Naz. It will take a good many years (five to ten, maybe 16 like in the 1966 to 1982 period?) before the growth in earning finally catches up with current valuations.
Zeev
PS, having said all this, I still will be looking at the technical underpinnings for actual timing and corrections to this broad range view of the markets (VBG). You got to remember, those turnips reserve the right to be wrong, change their mind, and change their mind often. |
