UPDATE
Okay, let's update what has happened, and where I think we're headed.
As "predicted" in my prior post, the DJIA has indeed stumbled, finishing down over 800 points on the week, and setting a new loss record in the process. Certain components of the Dow remain overvalued relative to weakened revenues/earnings prospects. Wall Street analysts are apparently in no hurry to revise projections "across-the-board". Estimated growth projections still remain at levels first guestimated in 1999 and 2000. Wall Street has been pulling out its big guns. In the past week, Abby Joseph Cohen reiterated her view that the market is at or near a bottom, and she has recommended that investors hold no cash, instead putting the money into equities. (My opinion is "Balderdash!!!" with a capital "B".) Mark Mobius made an appearance on CNBC yesterday to "tell" the world how stable the Asian countries are, and how they are currently recovering from their own bear market of years past. (My opinion? "Cow-puckey!!!") My view is that brokerages are dying from lack of commissions on equity transactions, and they're doing everything they can possibly do to hustle buyers into the markets. Take everything you hear from the so-called Street pros with a huge grain of salt. They're hurting really bad right now. The big bucks of the past few years (investment banking, IPOs, etc.) are all but gone right now. Under current market conditions, there's absolutely no chance of any return to the lucrative transactions of the past few years. So they'll concentrate all efforts on convincing Joe Q. Public that now is the time to buy.
What's up next? The big news this coming week will be the FOMC meeting on Tuesday, and more specifically, how many basis points will they reduce the interest rate. Wall Street is demanding 75 BPs or better. Just yesterday, there was a renewed clamor for 150 BPs. I think they'll get 50 and no more for now. What will the market reaction be? If it's 75 BPs or better, undoubtedly there will be a bear market rally of fairly significant proportions, but the rally will be short-lived, and many of those investors risking capital on the speculative rally will get burned by being unable to get out quick enough when the worm turns yet again. The market has already priced 50 BPs into equities, so "only" 50 BPs will be somewhat of a disappointment, and I think stocks will continue to plummet. Remember that rate cuts have the effect of increasing the overall money supply, and an increasing money supply is often a prelude to inflation. Since the Fed's main focus is on economic policy, not market conditions, I think that they won't risk anything in excess of 50 BPs.
Keep an eye on the government's planned tax cuts. The overall plan was conceived during a period of time when prevailing attitudes in the country were tainted with the rose-colored glasses of the aptly named "wealth effect". Well, that's history now. Consumer confidence is extremely weak, and it is reflected in weakening consumer demand. Consumers seem to be concentrating on debt reduction. (As a side note, watch out for some fallout with the new bankruptcy laws coming into play shortly. Debtors will very likely file early in an effort to avoid the more stringent rules. This may have some effect on banks with excessive unrecoverable credit card debt.) With reduced income levels for businesses in general, and reduced personal spending, tax proceeds should be grossly under government predictions. The financial underpinnings of the proposed tax reductions have all but disappeared, and should the government proceed as planned, budget shortfalls and increased levels of debt become increasingly likely. Look for the Bush administration to back away from the proposed magnitude of tax cuts shortly, although they may try to save face by allowing Congress to appear to be the "bad guys".
Oil consumption is dramatically decreasing worldwide now. In the US, decreases in manufacturing and business travel means less energy needs. Personal energy consumption is also decreasing as high prices at the gas pumps has forced personal conservation. OPEC nations met yesterday to discuss a supply reduction of anywhere between 500,000 and 1,000,000 barrels a day in an admitted effort to prop up crude oil prices which have been drifting lower with reduced demand. (I haven't yet seen the results of that meeting.) Lower production will have the net effect of keeping energy prices high, and runs a strong risk of reigniting inflation fears, more so in foreign economies than in the USA, but the USA is not immune (witness California's energy woes). Oil prices will continue to weigh heavily on the markets, and should serve to further dampen earnings for companies with heavy energy usage.
For the coming week, I think that we may see a short-lived, bear market rally on Tuesday which may last through Wednesday and early Thursday. I expect that by Friday though, the bear will return as no one (and I mean absolutely no one) will want to be holding significant equity positions over the weekend. By the following Monday, the bear should be back in control. My view is to continue to short overvalued "story" stocks, which are stocks with little to no earnings and nothing more than a persuasive story to entice investors. NASDAQ stocks should continue to plummet, but the big names (Cisco, Intel, Microsoft, Oracle) might hold their current levels. Most of the NASDAQ decline should be in second tier stocks, mid-caps and small caps. Look for further declines in the DJIA, though I think next weeks decline may be more on the order of say 200 to 400 points rather than the 800 points we saw this week. NYSE stocks (and even AMEX stocks) have not really participated in the bear market yet. Their turn is coming, though possibly not this week. Watch for revenues/earnings warnings this week. It won't take but one or two "gorillas" to kill the market again. The market has absolutely no chance for significant recovery until we see what has been called "capitulation". Speculators continue to hold onto overvalued stocks, especially certain NASDAQ issues. Biotechs have yet to be impacted to any great degree, and I think that this sector may be the next one to severely tumble.
All for now. I'll repost again on Tuesday/Wednesday after we see the market reaction to the FOMC meeting.
KJC |
