Some recent Hayes comments suggest a BS rally, based on nothing but liquidity, and that consumer spending is usually best in the first qtr., I have to agree with it. I'll bet consumer spending is going to take a hit.
These comments also suggest 4-6 more months of the general public believing in Peter Pan.
Morning Market Comments
www.haysmarketfocus.com
May 4, 2001
Did You Enjoy That Week of Optimism?
Time to Get Greenspan Nervous Again
by Don R. Hays
Good healthy bullish moves never let investors get too excited until they are
getting ready to spring the trap. That is why we did a little pruning early this
week. Last week the analysts and strategists were doing back flips of joy,
celebrating that the U.S. economy had indeed escaped a recession.
I just didn’t buy it. As we hope we have been clearly communicating with you, I
believe this bull market will be based upon monetary liquidity, pure and simple,
and not economic revival. I still believe that this economy (and the world’s
economy) has not even come close to curing the excesses that have been built
up for the last four years since Greenspan changed from a Grinch into Santa
Claus. Consumer and corporate debt is still very high by any historical standard,
and you don’t just loan them more to get them back into a healthy condition.
And you also don’t lay them off from their jobs. As I write this paragraph, the
morning unemployment news has not been released. I hate to comment on it
even when it does come out since it is so notoriously wrong—being dramatically
revised each month. But the state unemployment claims is a much more
accurate trend-spotter in my opinion, and they were just reported yesterday
blasting up over 420,000 in the latest week. This is a more dramatic increase
than even during the 1990-91 recession.
If time permits, in later paragraphs I’ll get back to the multiple reasons why I still
believe an economic recession is in the cards for the U.S. economy, and even
worse in Japan. There is a possibility that the worst of this news could be
temporarily postponed until next year, with the huge excess money supply that is
floating around out there, but unless a war is started (God forbid,) it looks to me
as if the economies of the world still have a huge amount of digestion of all that
fat that was stuffed down their throats for the last three years. That means the
consumer has to experience a major retrenching.
But let me quickly talk about the wall of worry that I used as one of the two
excuses to suggest a little pruning of those “too hot,” and “too cool” stocks in your
portfolios on Wednesday. And also the reason that I believe that government
bonds were again an excellent buy (and still are.)
Since our Wednesday morning report, the American Association of Individual
Investors survey revealed that as of this week a huge 63.5% of those surveyed
were bullish, 14.86% neutral, and 21.62% bearish. This bullish sentiment is out
the top, and would scare the bejiggers out of me if they were being supported by
any other extreme readings. But so far they are not. In fact, they shouldn’t reallyMay 4, 2001
www.haysmarketfocus.com Page 2
be considered an out of sight extreme, in my opinion, unless the bearish
sentiment also dropped under the 10% level such as they did in early February of
this year. But the sudden eruption of bullishness did illustrate why it was time for
the market gods to start a little “tree shaking,” to see how tight these new bulls
were willing to hang on.
Several have asked me for support levels on this pull-back, and I think it is
almost impossible to put a target on it. I could flippantly pick a chart target out,
but I believe the more important aspect will be that it will pull back just enough to
rebuild the wall of worry. And when you look across the sectors of stocks, you
see that some of them appear to have very little, if any risk. I guess I would put
the banking sector in that group. But those “new era” stocks that bounced so
dramatically off their panic lows probably do, however, as the optimistic hopes of
the last two weeks take on a dose of reality.
So hopefully, you have a little dry powder now, and hopefully we’ll be able to
watch our psychology indicators and the overbought/oversold indicators such as
the McClellan oscillators plotted each day on our web site, and pin-point an
reentry point. The market will probably stay very fickle for the next couple of
days, but I will be very surprised to see much upside fireworks until we patch
those new signs of cracking in the “wall of worry.”
If I’m right, and believe it or not sometimes I am, the next big lift-off will come
once again on a Federal Reserve dramatic dropping of interest rates because of
weak economic signs. So bad news will probably continue to be good news in
this crazy bull market. Uh oh, the employment news just came out, and
Greenspan’s bath water just shot up to boiling again. Just remember Mr.
Greenspan, you boiled this water so you might as well stew in it. But Mr.
Greenspan, the problem is that so many innocent partakers of your excesses,
and faithful admires of your austere reputation that is so worshipfully touted in the
press, will now have to suffer while you sit in your ivory tower and prepare your
next speech. What a Maestro you are.
The anecdotal evidence is still overwhelming. As I noted above, these
employment numbers this morning are just tagging along behind the
unemployment insurance claims that have been soaring. As the new analyst
reports on Dell Computer are telling you, the tech activity has not even started
yet on getting their sales and capacity balanced out. The latest semi-conductor
book to bill ratio is still plunging, falling from its peak above 1.5 in the last year to
today’s dismal level of .64. That means that there are only 64 new orders for
every 100 computers that are being shipped and billed. That is not a good sign
for the future earnings of the technology companies.
And all those optimistic statements from the European monetary authorities
about the European economies are a lot of fluff, in my opinion. When you look atMay 4, 2001
www.haysmarketfocus.com Page 3
all the leading economic indicators you can see that virtually every country is
tagging along behind the U.S. consumer.
But that raises a question. In the first quarter the U.S. consumer sales were
relatively robust. Baloney!! If you look back for the last six years, you will see
that the first quarter sales increases typically are the best of the year. They
decline in the rate of change, at least in the next two quarters. When you look
behind this year’s consumer numbers you will see that much of the first quarter
consumer strength came in January, with February and March dropping rather
sharply. That January strength came after a very cold December, and many
good economists (yes, there are a few) believe that that January number was
distorted. Consumer sentiment has been plunging. Lay-offs are picking up.
Fuel prices are eating up family cash. State tax revenues are also plunging.
Durable good orders were down sharply ex transportation distortions. And 2 nd
quarter earning estimates are already expecting earnings to be down 11%, and if
previous trends continue will be dropped 6-9% lower by the time the quarter is
over.
So celebrate all you stock owners. Or at least celebrate if you still have a job,
and you do believe as I do that we still have 4-6 more months when the investing
public will continue to believe that Mr. Greenspan’s dropping of interest rates will
solve all their problems.
But for a little while, put your hard hat on and hunker down on that cash we
raised earlier this week. I think we will have a good chance to replant those
seeds in a few weeks.
The Hays Advisory Group does not guarantee the accuracy or completeness of this report, nor does the Hays
Advisory
Group assume any liability for any loss that may result from reliance by any person upon any such information or
opinions. Such information and opinions are subject to change without notice and are for general information only.
Hays
Advisory Group, P.O. Box 50436, Nashville, TN 37205.
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