<font color=red>Paradise lost
John Milton is on extended leave of absence.
luminarium.org
luminarium.org
Alan Abelson wrote the column this week for him,
TA
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October 16, 2000
Up and Down Wall Street
Paradigm Lost
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By ALAN ABELSON
It's not the end of the world. Yet.
They're burning daylight in the Middle East. But ugly as it is, it's not Bosnia or Kosovo, and it's not likely to turn into Bosnia or Kosovo.
Goldilocks has got her hair mussed up something awful. But if the economy has lost a step, the stronger-than-expected numbers on September's retail sales suggest the consumer still has an itch to spend and, more importantly, can still find the scratch to satisfy it.
And though the deadly dust-up between the Israelis and the Palestinians and the vile act of terrorism in Yemen roiled the oil markets and sent the price of crude spurting back up, we suspect the eruption is a blowoff rather than the start of another sharp rise.
For one thing, we don't believe the Middle East is about to go up in flames. For another, the latest weekly report from the Department of Energy shows a million-barrel increase in crude oil inventories and higher gasoline stocks. That tends to confirm our impression that while supplies are drum tight, they haven't evaporated, and, what's more, they're not going to, contrary to the wailing of the experts (the same ones, of course, who insisted not so long ago that we were drowning in oil).
And even in Wall Street, when spirits have sagged apace with each falling stock (and there have been heaps of falling stocks, and each and every one has fallen a heap), if you squint a bit, you can spot silver linings among the massive formations of dark clouds.
Yes, we've had an October Massacre. But it can't compare with earlier October Massacres in 1978, 1979, 1987 or 1929. To be sure, the month is barely half over, but that's a mere technicality.
And let's not forget, either, that October historically is not only the massacre month but also the month big bull moves are born. Which is logical since bull markets are born when there's nothing left standing to massacre.
Okay, then, feel better? But, hey, hold the thanks. Isn't making folks feel better what a journalist is for?
It grieves us to confess, though, we'd feel a whole lot better if it weren't for a few scattered concerns. Pesky little rascals that they are, they simply won't let us savor the notion that when this spasm of distress passes, the good times will roll again.
For example, the heartening news on September sales is tempered for us by the notion that September has been here and gone, and it's not written in stone that it will prove prelude to the "holiday season," to use that quaint euphemism for the shopping season.
The stock market has a long nose, and for months now it obviously has been sniffing the scent (too faint for mere mortals to detect) of trouble brewing in the economy. And, sure enough, trouble has begun to make itself rudely and ubiquitously visible in the form of disappointing corporate earnings.
No mystery why the stock market has it all over those high-tech models economists rely on to divine the future course of the economy: The stock market has the huge advantage of being a self-fulfilling forecaster. If the market foresees things not going well, it gets to worrying so much that it proceeds to act poorly, which then helps make sure things won't go well.
So it bothers us that the poor action of the market for the past seven months or so hasn't yet exerted even a tiny fraction of its potential impact on consuming or corporate America. When it does, both will take the pledge and start to cut down on their binge spending, a cruel change in behavior that can only visit grave damage on the economy. A hurting economy, in turn, means a less robust stock market. And that, sigh!, is how virtuous circles turn into the vicious kind.
The process is rarely an instant one. And the transformation of this venerable lovely boom into non-boom won't happen overnight, either. But we're convinced the drop of as much as 40% in the Nasdaq from its March high makes such a transformation inevitable.
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Gaze if you will at that stark but eloquent chart of the Nasdaq Composite that graces this page. It's the handiwork of George Gilman, who puts out The Business Picture, an extraordinarily useful quarterly compilation of graphs on business, the economy and markets. In depicting the dazzling ascent and more recent decline of Nasdaq, the chart also effectively describes the powerful and extended recovery-expansion that has made so many rich and the rest of us, if not rich, at least happy (short-sellers are an entirely different species, so they don't count). That Nasdaq's chart traces with eerie exactitude the dazzling decade of economic expansion is no coincidence.
And why it isn't is laid out in his usual trenchant fashion by our old buddy, Barton Biggs, in his latest Morgan Stanley blurb. "Nasdaq," exclaims Barton, "is the driver of the American mood, the world's stock markets, U.S. consumer spending and the Information Technology expenditures that have been the muscle of the global economic boom. It is not too far fetched to say that Nasdaq drives the world economy. This hyper index is the leading indicator of economic activity, not the reverse."
In other words, take away Nasdaq and the planet wouldn't be half the jazzy place it is these days. Far be it from us to quarrel with that assessment, especially since Barton is the quintessentially global guy. But even from our rather parochial perch, we second the proposal that Nasdaq has been the sparkplug of the great U.S. expansion. And, to paraphrase Barton, not just by filling the pockets of those lucky souls who bet on Cisco and Sun and Microsoft and scores of other companies of a more speculative hue. For Nasdaq has also energized an outpouring of capital spending on technology, the likes of which this proud nation, indeed the world, has never seen. And that explosion of business investment, more than anything else, has kept the expansion bounding merrily onward and upward.
The question naturally arises, in light of his admiration for the role Nasdaq has played in our glittering economic progress, what's his beef? Well, simply this: The index's orbital trajectory has been accompanied by all manner of investment excess. Which also explains why he believes Nasdaq's fierce plunge this year has not run its course. (For the record, he nicely anticipated Friday's rally.)
Up and Down Wall Street, Part 21
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Part II
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Those wild and pervasive excesses that marked the index's fantastic advance (86% last year alone, as we recall), Barton explains with a touch of regret, have not been completely purged, not by a long shot. In the fiercely damaged Internet section, for example, there remain, he notes, loads of companies whose stocks, bloody but unbowed, still sport market caps of well over a billion dollars "with nothing but dreams, mounting losses and fancy business plans." In the monster bear market of the early 'Seventies, he reminds the greybeards among us, the speculative junk, no matter how inflated it got, "all ended up selling for three bucks." Which seems a reasonable target for the vast majority of 'Net stocks.
Barton frets about the consequences of the Internet collapse on real people and actual places. "Before this shakeout is over, a lot of jobs will be lost, a lot of space will be empty, and a lot of Internet infrastructure will be repossessed or auctioned. Morgan Stanley may even go back to suits and ties."
We can only pray it never gets that bad.
The only thing surprising about the bounce on Friday was that it took so long in coming. The most prominent thing about the bounce on Friday was how skinny it was. Predictably, the stocks that had been hammered the most were bid up the most. But the averages were deceptive. They certainly didn't portray accurately the mass of the market, since only 1,630 issues advanced, while 1,255 declined, a rather feeble plurality of ups on an ostensibly big day. It looks more like the old knee-jerk response to a market that's gone down too much, too quickly than anything with wings.
Nothing, moreover, has changed. Fundamentals are still fading, and valuations are still overblown. In other words, the poisonous combo that sent the market into its tailspin is still very much in play. The bears may have felt the need to take a break, if only to spend some of their ill-gotten gains, but they'll be back, mean as ever.
Sentiment, psychology, mindset -- whatever you want to call it --also argues that the rebound, even if it persists for a spell, is merely an interruption to a downswing that has a way to go. For despite the whacking stocks have taken, there's an astounding complacency among investors, especially of the institutional persuasion.
On this score, savvy Ed Hyman, chief cook and bottle washer at ISI Group, dutifully surveys his institutional clients every week to see how they feel about life, pro football and the market. Ed tells us that in sharp contrast to October '99 and '98 after severe poundings, the portfolio managers this time are extremely bullish, darn near fully invested and sitting with pretty much the same stocks they had before the lights began to dim.
Bottoms just don't happen when so-called professionals are so repulsively blissfull.
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The chart on this page we find notably unnerving on a couple of counts. It shows the relentless swelling of margin debt from the dawn of the bull market through August (September numbers will be out this week). Although down a notch from the peak, the total amount of debt remains staggering. That also reeks of complacency, since equities have been on the skids for most of the year.
But far more scary, the hundreds of billions of margin in a seriously failing market is an accident waiting to happen. And since a very substantial chunk of those borrowings is secured by the most vulnerable stocks -- high-techs and Internets -- that's not just any accident waiting to happen. That has all the makings of a fatal one. |
