Don:
Here is an interview with Don Hays from last year. the 3 phases are denial, concern and capitulation. Hays feels we ended the concern phase in January and we should have 3 good trading rallies (this can change based on market conditions and we ended the 1st in late january) which can be traded based upon overbought / oversold conditions and the capitulation phase will start in the April to June time frame.
In his own words: Interview with Don Hays
Staff
Don Hays was an engineer by trade, having graduated from Tennessee Tech with a mechanical engineering degree. He began working in 1960 for NASA in Tullahoma in their High Altitude Testing Chamber for the legendary Von Braun rocket development team, the group responsible for the Saturn rocket that landed Americans on the moon. While there, Hays began dabbling in stocks, buying securities through Tennessee Securities. One stock that he purchased was Scottish Inns of America. His $1,000 investment became worth $50,000 in a few years, and Hays “discovered the fountain of youth. But it also meant I fell in love with the market,” he said.
Hays made a career change in June 1969 and became a financial consultant in Chattanooga with J.C. Bradford & Co. During some tough years in the market, Hays began writing a market letter that the partners at Bradford began to notice more closely. Hays’ acumen and clarity impressed them so much that they brought Hays to Nashville in 1978, and he began working as a coeditor and comarket strategist with Ned Davis.
Hays moved to Richmond in 1984 and joined the firm of Wheat First Butcher Singer as their market strategist. After a successful run there, First Union branched into the brokerage business, and the established Virginia firm became part of First Union Securities, along with Everen Securities in Chicago.
Hays decided it was time to be closer to his family and grandchildren in Nashville. He now heads The Hays Advisory Group, a team that includes his two sons. Jeff and Keith Hays handle the servicing of the accounts; Don Hays controls the money management. He is also a consultant with Morgan Keegan and he has a successful market letter with 1,200 subscribers.
The following is the first excerpt from Business Editor Jim Brown’s recent conversation with Hays. Hays discusses the ghosts of markets past, present and future in an enlightening encounter in our Burton Hills office.
JB: What is your assessment of the unbelievable market we’ve experienced since 1991 when we last had a recession?
DH: In 1982, I wrote a report that said inflation was being defeated. In all times that happened in history, we’ve had a major bull market. In August 1982, I noticed a technical signal that had happened five other times in history, and I wrote a report called “The Bells Are Ringing.” From 1982 until 1998, I became known as a “super bull.” But I wasn’t. There were many times I became cautious in the short term. But a lot of people thought I couldn’t become bearish.
At the end of 1997, I started seeing the opposite. The market was so overvalued, and we saw monetary conditions changing. We believed in April 1998 that you were going to see a top in the market. In September 1998, we turned bullish again, which we did not expect to do. But it was with a different banner: we were no longer saying it was a super-cycle bull market. We were saying it was going to be a short-term condition and that the market was going to be rallying – a peak in April and again in August.
But we saw something happen in the fall of 1997 – the Asian crisis. The Federal Reserve absolutely flooded the system with more money. They realized the U.S. consumer was the saving grace for the world, so they wanted to encourage the consumer to buy, buy, buy, buy. And they accomplished that by making easy credit. The same thing happened in 1998 when you had the Long-term Capital Management hedge fund crash and [that] almost took the world down with it. The Russians defaulted on their bonds, and the Federal Reserve flooded the system with even more money. When the banks have all that money they have to use, how do they do it? They create very easy credit standards. Anybody could borrow money.
JB: Did Y2K contribute to that easing?
DH: Y2K contributed to the technology part of it because at the end of 1999 – when the Federal Reserve saw this big crisis that might occur with a run on banks – they came in and temporarily flooded the system with money. And here, the public and the banks think the same thing. We have a Federal Reserve and banks that are not going to allow the economy to die, and so they created this huge bubble in the system.
JB: Are you a fan of Alan Greenspan or a detractor? Does he get enough or too much praise from the media?
DH: He gets absolutely too much (Hays smiles). Greenspan’s not dumb. He’s an extremely detailed kind of person. He likes to have his hands on all the strings. He’s overmanipulated the power. He should have let the natural forces take effect.
JB: Does any one man have that kind of power?
DH: They have the power temporarily, but market forces will always come back and level the playing field. With his power, he has created more money than any Federal Reserve chairman before him.
JB: How much blame do you believe should be shared by the politicians for this market downturn?
DH: Almost none. What the press will do, with all due respect, is to talk about what they are hearing about. And market strategists do exactly the same thing. If you look at most strategists, when the market’s down that day and a reporter calls them, they look to see what’s happened that day and explain it to them. And if it’s up, they do the same thing. The markets are not based on the headlines of today; the markets are looking six to twelve months ahead. So really, what the markets are doing is voting every day on the trends that are producing tomorrow’s headlines.
JB: Do you believe we are in a recession or headed for a recession?
DH: We’ll be in a recession in about nine months, and I think you’ll see the economy slow down much quicker than people anticipate. The market is a culprit in that. It was a culprit on the upside, and now it’s going to be a culprit on the downside. It’s like a pyramid scheme almost. All these people on the sidelines saw the Federal Reserve flooding the system with money, and they saw the markets start moving up. They started thinking, ‘Oh, this is easy.’ So you saw television programs on how to be a millionaire – or whatever the name of that program is – and you could see the effect of what’s happening to people’s minds. Everybody started piling into the market.
Now on the other side, the more the market went up, the richer they felt. They thought they could go and leverage themselves. They could buy a bigger car, a bigger house – whatever it happened to be. So you could see how that pyramid scheme works until the straw comes that breaks the camel’s back.
On the other side, when the market comes down, they don’t feel as rich. Now they have all this debt, and then they have to slow down even more to pay back their debt. So it will exaggerate the downside exactly like the upside.
JB: That’s happening to the NASDAQ currently. Do you think that will happen to the broad market like the S&P 500 or the Russell 2000?
DH: It has already happened to the NASDAQ the worst. The next worst is the Russell 2000 vs. the S&P 500 and the next worst is the Dow Jones [Industrials]. You now have all this money in mutual funds that was previously in technology stocks. All of a sudden, this money is trying to find a less risky home. So they’re not really taking money out in a big groundswell. They’re just shifting their focus from technology into something they think is safer and cheaper. Right now, the Dow is more of a beneficiary, but that will change. What you have in a bear market is three phases.
The first phase is the denial phase. Nobody will admit the economy is weak or that earnings are down. But stocks will still start acting badly. That’s what happened from March 10 until the end of April and the middle of May. Then we had a little interlude rally. You always have an interlude rally. Then we’re in the second phase.
The second phase is the concern phase, and you can see that already starting. People are concerned about these earnings not meeting expectations for the first time. Now we are going to have a bottom of the concern phase, I think, probably in the next three to six weeks. It’s risky. You can’t really project how low a market will go, but I think the NASDAQ can go to 1800 or 1900.
JB: In what time period?
DH: The next three to six weeks. It will be a very sharp decline if I’m correct, and you’re seeing that happen already. We’ll have some pauses, but there is a lot of risk. The NASDAQ was selling at a price-to-earnings (PE) ratio March 10 of 264. Right now, you can’t tell exactly where it is. But if you just project earnings to grow at 25 percent and the market has come down as much as it has, it still is selling at a PE ratio of 125. The NASDAQ had never sold over a PE ratio over 45 to 50. So I think at 1800, the NASDAQ would still have a PE ratio of 75.
JB: And still have lower to go?
DH: Yes, I think, before phase three is over with. Phase three is the capitulation phase. That’s where people aren’t just rotating money from one sector to another and keeping money in there, showing concern, but [they are] really capitulating. They are taking money out of stocks and they’re putting it in their bomb shelters. When that happens, they’re putting them in Treasury bills and bonds and things of that nature. At that point, things can still go lower. We think that happens next year, not this year. |
