Year 2000 is almost coming to a close. There are only a
few more weeks left. A year ago Y2K acted as the great
bogeyman and everyone watched in amazement as the
Nasdaq doubled. The party came to a crashing end in
March, but too many bubbleheads sat in denial. The wild
analyst projections of stock market gains continued and
people were tricked into believing that the “new economy”
had suspended the basic laws of economics by crackpot
economists, naive political leaders, and just plain greed.
These “new economy” fantasies are now meeting reality and
anxiety is in the air. The American Psychiatric Insatiate
carries out a fascinating survey twice a month that examines
the number of mental patients admitted to hospitals and the
number of new patients signing up for psychiatric therapy.
This number jumped so high the past few weeks that it
almost looks like a statistical anomaly.
According to the psychiatrists these new patients feel that
they have lost control of their lives. Some have projected
these fears on to their feelings about the Presidential
election. Walter Spear, a New York psychologist, has had
patients who stayed up through election night and did not
get the proper sleep. In the aftermath they’ve had
disturbing dreams of victory for the candidates they voted
against. Others have felt that they no longer have any say
and that a few people in Florida or some judge is deciding
who they voted for.
They have connected worries about the stock market and
their finances to the election mess. In word association
games patients associate Bush with the burning bush in the
Biblical story of Exodus and Gore with goring, violence,
blood and death. The truth is these people never had
control over their lives. No one is in control for that matter
anymore. As Hunter Thompson likes to say, “no one is
flying the airplane.”
Not even the grand bubblehead himself, Alan Greenspan, is
in control. The whole world economy almost collapsed in
1998 and he tried to patch over its problems by putting the
band aid of lower interest rates on it. All he did was
postpone the pain by creating wild economic imbalances and
a stock market bubble in this country. He made a wild
gamble and we are now about to reap the whirlwind as the
chickens come home to roost. Greenspan will soon become
the most hated man in America, along tweedle dumb and
tweedle dee.
The slowdown is only beginning. Analysts have had to
revise Fourth quarter earnings DOWN so that companies
can beat estimates. Analysts are now expecting 10%
average earnings growth for 2001 when they had a forecast
of 13.8% at the end of September. And these estimates will
probably have to be lowered even further.
This is why stocks are dropping. And to top off the
earnings deceleration most stocks are still overvalued by
historical standards. Why will people be willing to pay
overbloated valuations for companies whose earnings
growth has allude flattened out?
The markets are factoring in a recession. Corporate bond
yields have skyrocketed, bank lending has dried up, and
venture capital firms have pulled back their spending. The
spread on treasury bills is pointing towards recession and
there is no need to mention the major market averages.
Despite these facts almost all economists say there is no
recession in the future and everything is rosy. Either the
markets are wrong or the economists are wrong. You can
take your pick. The truth is that our economy has horrible
financial imbalances and no one knows exactly how they
will end or how long it will take. But one thing is for sure it
isn’t going to be pretty.
Not many people saw this coming. I warned before the
market crashed in April that the bottom was about to open
up and I warned several weeks ago that a horrible economic
slowdown, with the odds in favor of a recession, is looming.
What happened? Companies earnings slowed down, stock
prices plummeted, and now there is talk by an occasional
rational expert on TV that the country is in for tough times
next year.
You can see why I have little respect for most stock market
and economic experts. They have been consistently dead
wrong while I have been right. The Mary Meekers, Joe B’s,
and Abby Cohen’s have cost people millions. But there are
a few people worth listening to besides me. These are the
heroes who have stood up and yelled fire in the burning
theater while the Wall Street gurus told everyone to stay in
so their buddies could get out the door first. They’ve called
a Spade a Spade and have occasionally took hell for it.
People don’t like contrarians.
The first of these is William Fleckenstein. He runs a hedge
fund and runs the “Market Rap” column on Silicon Investor.
The second is Michael Parness who, like me, runs a website
called trendfund.com. He started with about $30,000
two years ago and has made several million dollars since
then. He does more short term type trading then I do, but
has been right on calling this market. Like me he called the
market crash and the current meltdown. His site is worth
checking out. Tell him TraderMike of SwingTradingOnline
sent you.
So what do we do? Short the rallies and play breakouts on
the bear market rallies. Repeat until the market bottoms out
and we start talking about economic recovery. Then put a
large percentage of money into long term positions and
enjoy the next bull market. Life will go, even after Stuart
and the Ameritraders of the world go bankrupt. The market
has a tendency to go through periods where it weeds out the
wild and reckless. Discipline yourself and you’ll come out
on top. You’ll have some stories to tell your grandchildren
and you can prevent them from holding on the next time
there is a stock market bubble and crash. |
