George,
i think we're in for another bear leg soon...the market currently discounts an economic recovery that i believe won't happen. on the contrary, i think the recession is going to take a turn for the worse, similar to its deflationary supercycle predecessor of the early 30's. imo the two sectors that have held up so far, housing and cars, have already begun to enter the bust phase. private sector (household as well as corporate) balance sheets remain at their most stretched levels ever, with the savings rate plunging back to a new all time low in October, and household liabilities as a percentage of assets hitting a fresh all time high according to the latest Fed flow of funds report.
since the market is a discounting mechanism, the vapor induced by policy maker intervention post 9/11 can only hold it up for a limited period of time.
the bullish consensus is at the same time at incredible, in fact insane, levels. Wall Street strategist equity allocations are now at a new all time high of 76%, and AAII reported the second highest percentage of bulls in that particular poll EVER last week, only surpassed by the reading taken in the week during which the Dow hit its all time high in January of 2000.
my take on this is that it portends dismal returns for the broad market next year. unique combinations of collapsing economic fundamentals, record high private sector indebtedness and widespread complacency tend to deliver downside surprises.
the slight uptick in activity manufacturing experiences currently is a short term seasonal and inventory cycle related effect imo.
however, the mainstream consensus is that both a recovery in 2002 is a 'certainty' and that by extension, the stock bear market 'has seen the lows'. over 80% of institutional investors according to ISI are now declaring themselves bullish on the market, and a recent Barron's institutional poll found also a record percentage (67%) of money managers bullish.
the only appropriate conclusion is imo that the bear market will continue and possibly become a lot more brutal, as we have not yet seen any material trend toward mutual fund redemptions. consequently, mutual funds hold extremely low levels of cash (a combination of the 'fear of missing the rally' and complacency regarding the probability of future redemptions).
also, i believe the collapses of Enron and Argentina are merely tip of the iceberg stuff. i believe 'structured finance' with its myriad complex debt instruments that rely on wrongheaded assumptions of liquidity always being available, dynamic hedging of the huge derivatives pile (the latest figures show that the notional value of derivatives held by US banks now amounts to $51.5 trillion, or roughly 5 times GDP) and a continuing surge in delinquencies and bankruptcies, especially in the overextended mortgage/real estate superstructure all point to a financial crisis becoming more likely with every passing day.
as an outwardly detectable sign i point to the recent volatility in the debt markets - a direct result of dynamic hedging, which has replaced the '80's "portfolio insurance" as the new holy grail.
so i remain a medium to long term bear on the market for now. it will take a long time to balance the excesses of the 90's bubbles, and the Fed's total rate cutting panic underscores how enormously serious the situation is. this is NOT, most emphatically not, your garden variety post WW2 recession. |
