Summary of Don Coxe transmission for Friday October 5, 2001
We are in a primary bear market according to John Templeton (predicts 6600 on DJ30 and could last 2-3 years) and others. The S&P average hasn't signaled a primary bear market but DJ30 and DJT has. Does classic Dow Theory apply? It has worked in the past, it works for solid reasons (manufacturers make the stuff but the shippers send it to the user) and nothing better has ever come along to supplant it. This primary bear market began on March 24,2000 running for 550 days. Not many bear markets last longer than that. 1973 bear was 700 days, 81-82 was something under 500 days. So you can make the case that we have endured much of the pain.
What do you hold in a primary bear market? Assuming we don't go through the closing levels of September 10th, the S&P should bottom out in 825-875 range, another 15-20% on the down side. The event that absolutely defined the DJ bear market was the response to the Terrorist attack. What is being done is absolutely amazing and impressive, 9 cuts by Fed, tax cut in record time, another tax cut, rate cuts all over the world, money stock growth is incredible. We have come to the end of end of cold war, end of history (Francis Fukiyama). We are maybe at the end of structural bull market of 1982 but a new one will begin in some period of 6 months to 2 years. We may be at the end of structural disinflation deflation. Commodities are still signaling a primary bear for inflation but with amount of money being created and Federal fiscal policies is changing the dynamics and ended the period when the share of the economy by government declines. The share of GDP by government is increasing and will increase. The military share of GDP will rise, we will rebuild New York City, bullet train proposal, all spending proposals are being introduced in name of national security. We can no longer use the P/E ratios of the nineties because government no longer has to shrink. Corporate profits have not grown but executive compensation has increased at an obscene rate. The only ones who made money in the last decade were the insiders and there will be a backlash against big business, stock options and compensation packages. The private sectors by screwing up so badly have set up for a different kind of market.
The story on Canadian Gas stocks, between now and 2007 and 2009 when gas will be brought to the lower 48 by MacKenzie pipeline, LNG was going to supply 5-7% to make up the shortfall. Exxon Mobil has announced that the aftermath of terrorist attack has shut down their LNG plant in Indonesia. There are severe security risks for having convoys of LNG tankers coming into the U.S. It is probable that the economy will be revived next year due to stimulation of economy. US E&P companies are not producing a lot of gas except at higher prices. You have to assume that there will be more take out bids of Canadian companies.
Bad policy decision in the 30's and in the 70's prolonged the recessions/depression.
In 28-29 after years of commodity deflation they were concerned about inflation. They also had a commitment to a balanced budget. Roosevelt even ran on a platform to raise taxes and balance the budget. It will come some time when inflation will kick in. There is a troubling jump between the 10 and 30 y Treasuries. At what point will you cut off the stimulus. Worry about inflation next year will be an easier task than what we are dealing with now. |
