Comstock:
Bubble: The Sequel, Part 2
On May 21st, near the end of the March-to-May stock market rally, the market staged an exuberant advance similar to the one that took place today for many of the same reasons. At that time we wrote a comment titled, “Bubble: The Sequel”. We stated that, while it was entirely possible that the rally could carry further, we believed that it was based on false premises, and would therefore fail. The rally peaked the next day, and was down 18% to new cyclical lows on the day before the terrorist attack.
We believe that the market is now at a juncture similar to the May top for the reasons we have been writing about in prior comments. The following is a brief summary of our recent thoughts. 1) The consumer is extended, with outstanding debt at record at a time of decreasing employment. 2) Early indications of non-auto retail spending points to a potentially weak holiday season. 3) The recession is synchronized across the globe, so help is not available from outside the US. 4) We are coming off an historic economic and financial bubble unlikely to be corrected by an unusually mild recession. 5) Stock market valuations are still exceedingly high, even more so after this rally. 6) Operating earnings are highly overstated, as discussed in past comments. 7) With worldwide overcapacity, global deflation is a risk. 8) The economies of Japan and Argentina could lead to a financial crisis. 9) Investor complacency or outright optimism is high compared to past market bottoms that were typified by gloom and despair. 10) IT overcapacity and surveys indicating reduced 2002 spending on technology means more weakness in this area. 11) Layoffs in the past few months have been running far over anything seen in the last decade. 12) The bounce in most economic numbers reflects a comeback from the unusually low post-attack results rather than a new recovery, and, in this sense, is highly deceptive.
In the market, perception sometimes becomes reality, and the rally could continue for longer than we expect. However, we believe that the negative fundamental and technical picture argues against a significant extension of the advance at this point. Bear market rallies tend to suck everyone in before they falter, and, in our view, this one will be no exception.
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