Sonny ---Another take on the market :
To OTC Journal Members:
Our weekend edition entitled "Where's The Bottom" sparked a prolific number of comments, most arguing that they knew where the market was going, and wondering how we could suggest there could ever be a bottom to this market.
Our point was simple- we have no idea where the bottom is, and we believe the lower the market goes the better we set up for the inevitable rebound.
There were some very interesting comments on our suggestion that the NASDAQ would see 5,000 again in the next few years. Several people sent us emails suggesting we wouldn't see 5,000 again in our lifetimes. Others congratulated us on pointing out this market is beginning to create interesting value opportunities, with Apple Computer (NASDAQ: AAPL) being our example.
Short term it would seem the market is headed lower as the Bears continue to have all the momentum. Corporate America is supporting their cause by issuing daily dark forecasts of future corporate performance and layoffs.
Greenspan vs Wall Street
Wall Street was screaming for a 75 point basis rate cut from the FED yesterday and didn't get it. Many believe the FED won't allow itself to be seen as Wall Street's "PUT" on the market.
In reality the FED is moving too slowly for Wall Street and Corporate America because the FED acts on trailing data, and the markets look forward. The trailing data suggests the main fuel for economic growth, consumer spending, is not slowing as rapidly as business in the technology sector. Many believe as the market continues to drop consumer spending will eventually follow, and trailing data will provide evidence of the recession Wall Street believes we are already in.
The FED's statement associated with the rate reduction should give hope to Bulls with a longer term time horizon. Several key points reflect a changing sentiment at the Federal Reserve towards a more aggressive rate cutting bias in the near future.
Consider the first paragraph:
Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well underway.
The phrase "Equity Wealth" represents the first time the FED has even acknowledged the stock market in one of its statements. Furthermore, it is clear the FED realizes the obliteration of equity wealth will lead to a spending slow down.
Here's the next paragraph:
Although current developments do not appear to have materially diminished the prospects for long-term growth in productivity, excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft. In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely.
This statement suggest the FED is on watch for slowing global growth, and is prepared to act to help the US economy remain healthy. This last paragraph is basically an admission of a coming recession, and clearly sets the stage for further interest rate cuts:
The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.
One more important point- this is the first FED statement where inflation was not even mentioned. The FED has set the table for further action as required without seeming like Wall Street's servant.
Blue Skies Are Ahead (But We Don't Know How Far)
Clearly we are in the middle of a very difficult time for both stocks and companies. Growth is slowing dramatically both domestically and globally. Most believe the FED is behind the curve in lowering interest rates, just as they were behind the curve through the nine interest increases we had in the last up cycle.
The Bears have complete control of the stock market, and we have read predictions of a 900 NASDAQ and 6,000 DOW this year.
However, cooler heads recognize this economic slow down was inevitable after 10 straight years of expansion. No one knows how long it will last or how much further we will fall. However, the other end of this recession there could be the most prolific 12 to 15 year economic expansion in our history. Several key factors support this view:
The expansion of the 90's began at a time when we were facing rising a Federal debt and budget deficits. We will enter the next economic expansion with our Federal debt reduced, and the budget deficits have become surpluses.
By the time this cycle of interest rate cuts are over, we could be at a 3.5% or 4% discount rate. This excess liquidity will provide much needed fuel for the next expansion cycle.
It is widely known that there is a huge bubble of wealth which will changes hands over the next thirty years, as the Post WWII bubble of population passes its wealth onto the next generation. The recipients of that wealth we will much more aggressive in their investing habits.
We're now a year into the Bear Market, and six months into the economic slow down. The worst is probably behind us as far as stocks are concerned, but corporate performance could continue to slow for some months.
Many are looking for a capitulation in the DOW as viscous as the NASDAQ drop to signal the final capitulation.
We don't know where the bottom is, but we do know that today's stock is trading based on perceptions of where the company will be in six months. Any sign that business has stabilized and the next expansion could be around the corner should put the Bulls back in charge of the markets.
In the meantime, we will continue bringing you news on our favorite small and microcaps which we believe should be accumulated at these levels, and the occasional Trading Alert.
BEST WISHES
BILL |
