Interesting:
Know When to Fold 'Em: A Market Redistribution Is Taking Place
By Jim Griffin
Special to TheStreet.com
10/1/00 11:00 AM ET
You can see it in the prices and in the money flow data if not yet in the sentiment surveys: The facile Panglossian perceptions of a glorious trouble-free Goldilocks future that have driven the market in recent years have begun to come in for reconsideration. This is a good thing. Let's hope that it is not taken to excess.
September was an ugly month. It bloodied all of the widely followed market averages, including the Dow, Nasdaq and S&P 500. Even the recently hot mid-cap sector took some bruises. Most of the broad market indices broke through their 200-day moving averages in September, and those moving averages, especially in the cases of the Dow and S&P 500, are so flat as to be at risk of turning down.
One reasonably useful definition of a bear market requires the index to lie below a falling 200-day moving average. But what's in a name? The moving average for the Nasdaq Composite is still tilted upward, but that's likely to change dramatically in the next few months as the January-February afterburner of last year's spectacular fourth quarter liftoff drops out of the calculation.
So what's in a name? When the 200-day moving average is declining, it indicates that you haven't made any money in almost a year; indeed, you may well be underwater if you haven't been a holder since way back when. That's a bad thing that quite commonly has happened to good people in the history of markets, and it's a lot less fun than what has been the market experience of the late 1990s.
But fear, or even mere fright, is nowhere to be seen in the Volatility Index. The VIX measure rather reliably reveals panic when it is in evidence, and discouragement and depression are absent in the investor sentiment surveys. The money flow numbers, however, suggest that a re-evaluation is taking place among portfolio managers, both amateur and professional.
Money flowed out, in size, in September from the glamorous leaders in the wealth creation of the late '90s, including Intel (INTC:Nasdaq - news - boards), Microsoft (MSFT:Nasdaq - news - boards), WorldCom (WCOM:Nasdaq - news - boards), Oracle (ORCL:Nasdaq - news - boards), Dell (DELL:Nasdaq - news - boards), Cisco (CSCO:Nasdaq - news - boards), Sun Microsystems (SUNW:Nasdaq - news - boards), Applied Materials (AMAT:Nasdaq - news - boards), Ericsson (ERICY:Nasdaq ADR - news - boards), JDS Uniphase (JDSU:Nasdaq - news - boards), Sycamore Networks (SCMR:Nasdaq - news - boards), Yahoo! (YHOO:Nasdaq - news - boards) -- you see a pattern here? Each of these stalwarts of the great tech bull market took a drubbing last month.
Where did the proceeds go? Some, almost surely, went to the sidelines. There are widespread suspicions of a buildup of institutional cash holdings; until recently the only portfolio managers who could be found with cash could be found on the unemployment lines. Some of the money raised may have gone into bonds; bonds managed to add a modest increment of price return to the coupon during the third quarter, although they gave some back in September.
Some, according to the money flow numbers, was rotated into such names as Boeing (BA:NYSE - news - boards), J.P.Morgan (JPM:NYSE - news - boards), Fannie Mae (FNM:NYSE - news - boards), Exxon Mobil (XOM:NYSE - news - boards), EMC (EMC:NYSE - news - boards), IBM (IBM:NYSE - news - boards), Schlumberger (SLB:NYSE - news - boards) and Bristol-Myers Squibb (BMY:NYSE - news - boards).
Energy, utilities, pharmaceuticals, financials, capital goods and, yes, technology. My point is not that everything that is technology-related got sold to the bare walls; my point is that perhaps now we are seeing a careful judiciousness creeping in, a much more risk-averse willingness to draw distinctions between great companies and great stocks. A lot of great companies got sold down hard in September.
As Kenny Rogers explained musically, you got to know when to fold 'em, know when to walk away, know when to run. The investment community seems to be in the process of walking away. This is a good thing, presuming it does not get taken to excess, i.e. that a stampede does not break out. A more realistic valuation of Old Economy businesses against New will be a stress- and risk-reducing development. The great growth companies, disproportionately to be found in the tech sector, deserve a premium market multiple to the more staid established industries; on that there is little dispute. But a reeling in of the ridiculous by the market, a return to the merely sublime, will be a stabilizing outcome. And, of course, a better buying opportunity.
The market created huge volumes of wealth in the late '90s. That wealth blossomed in anticipation of the extraordinary future that lies ahead, barring apocalypse and meteor strikes. But it is sloppy practice to pay twice for the same thing. There is, logically, a point at which the glorious future is fully priced in the market, given any particular market context. The history of the market for the year 2000 will be written as having been an exercise in trying to find the right relative values for the futures of flashy and more mundane industries. A less unbalanced result will be a more stable result. Right now, that process looks well advanced.
On the subject of market context, Hamlet's indecisive Dane got upstaged by the contemporary version last week. In the first national referendum on participation in the European Monetary Union and the euro experiment, the Danish electorate responded in the negative. That result must have been in the market, because the euro managed to hold its level against the dollar. This may have been an expression of respect for the line drawn by the European Central Bank and its G7 colleagues through their coordinated intervention Sept. 22.
Or it may have had something to do with the omens of a topping out in the price of crude oil. The Clinton administration's decision to release crude into the market from the Strategic Petroleum Reserve was a market intervention in the nature of the ECB's exercise in defense of the euro. Both suggest to the market that the consequences of current price levels are troublesome. Both require the market prudently to take that official perspective under advisement and decide what to make of it.
As it happened, both the ECB and the Clinton administration got backed up in a potentially meaningful way when Crown Prince Abdullah of Saudi Arabia broke ranks with the Organization of the Petroleum Exporting Countries and pledged to pump whatever it takes to drive the price of crude back below $28 per barrel. With oil priced in dollars and most of Europe completely dependent on imported oil, Prince Abdullah, in one gesture, reinforced the lines on both euro and crude.
The money-flow data, as well as the less-quantifiable background atmospherics of the market, indicate that a great redistribution is in process. Triple-digit multiples are being re-evaluated against the prospects of solid, if homely, businesses. Huge capital gains, or at least a portion thereof, are being removed from the table -- know when to fold 'em -- in order to be placed in less-exposed pockets. If the ECB-Clinton-Abdullah lines hold, that will improve the current market environment and increase the probability that the ongoing redistribution of the enormous gains of recent years can be brought about without a bear market.
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Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to send comments on his column to Jim Griffin. |
