2002 Stock market forecast:
Don't let the title confuse you this is jubilee in the biblical sense - economic justice and liberation - not jubilee in the everyone has a party and gets fat sense:
2002 Stock Market and Economic Forecast: A Year of Jubilee
It has been a year ago that I wrote my famous stock market forecast for 2001, which got copied and tossed around all over the Internet. In it I argued that the economy would enter a recession in 2001 and that the stock market would have one last rally in January and then collapse to new lows. My final conclusion for 2001 was that the average investor would be best to stay out of the market and keep his money in cash. Traders could make money by playing short-term breakouts and fortunes by short selling stocks, but the long-term investor would only end up being a bag holder for the corporate CEO's and insiders who bailed out before their stocks crashed.
Back then I was one of the few voices saying this. Virtually nobody in the mainstream financial press or on television was negative on the market. Everyone was obsessed with guessing the bottom and calling the next recovery. The excitement heated up after Alan Greenspan cut interest rates unexpectedly one day in the first week of January in a panic. That night Hedge Fund manager and TheStreet.Com co-founder James Kramer appeared on CNBC and said that you HAD to be in the stock market or you would lose money. CNBC showed historical statistics over and over again that "proved" that the market always goes up after the Federal Reserve cut interests rates. Alan Greenspan had predicted a "soft landing" for the economy and the stock market. Everyone believed him, except us. The only "soft landing" that came was the sound of Alan Greenspan's head hitting the ground when he realized how badly he had screwed up the economy.
The market fell to new lows and bounced in April. Analyst proclaimed it to be the bottom. Abby Joseph Cohen said stocks were cheap. We said we would get a rally that would top out in the Summer and then drop to new lows again in the Fall. Economists said that the economy would recover by then. It didn't.
During the Summer corporate investment spending continued to drop. Companies laid off more and more people and the unemployment rate grew. We recommended getting out of the market and short selling stocks in August. The Nasdaq then broke down and entered a downtrend.
Then came the September 11th terrorist attacks. The stock market closed for a week and the next thing you new the word recession spread everywhere. Alan Greenspan used the opportunity to cover himself and told Congress that the recession was caused - not by a stock market bubble or the Federal Reserve's interest rate policies - but by terrorists.
Before the market opened back up stories were leaked to the New York Times that said that the SEC and the Federal Reserve were going to do everything they could do to force a rally to happen. The SEC relaxed rules to allow large traders and institutions to get preferential order flow while the Fed cut interest rates several times and injected money into the monetary system. The Fed had been trying to manipulate the markets higher all year and repeatedly failed, this time they would gamble everything to succeed.
The markets opened up and after a few days of fierce selling bottomed and rallied. That rally is continuing to this day.
The economy is still in a recession. The same economists who said the economy would recover 6 months out back in April are saying 6 months out again. Market analysts are now more bullish than ever and are using 6 months out as a buying slogan. Bullish sentiment in the Investor's Intelligence Survey has reached a point of extreme bullishness. We are at the same situation that we were at in last January where everyone believes that the stock market is going to go higher and higher and no one doubts. A poll of traders, analysts, and stock brokers done by CNBC a week ago showed that 80% of the respondents thought that the market would go up more than 10% this year and over 30% thought that the DOW would close above 12,000. If you are a contrarian then you know that when the consensus opinion reaches an extreme level of optimism then you better watch out.
I think the people who are predicting big gains are going to be disappointed. But I am not as pessimistic about the market as I was last year. A year ago I told a few people that would 2001 would be the hardest year to make money in the market. I turned out to be right. This year will have some great opportunities for people who know how to take advantage of them. It will be exciting.
However, you are going to see a lot of corrections this year. If you know anything about the history of the financial markets then you'll know that never has a major bear market ended to bring a new huge bull market that took the market to new highs. Instead huge bear markets usher in a phase between bull and bear markets in which the stock market bases and the economy recovers. 2000 marked the end of a 20 year bull market and - even more importantly - a stock market bubble. That bubble is the chief cause of the recession and the ferocity of the bear market.
Such speculative bubbles have formed throughout history. The Mississippi land investment bubble, Tulipmania in the middle ages, and the U.S. railroad stocks of the 1880's are just a few of them. In the 20th century this bear market can only be compared to the bear markets of Japan in the early 1990's, the US in the 1970's, and the US in the 1930's. Each of these bear markets came after 10 year long bull markets. Once these bear markets entered the stock markets entered 6-10 year long consolidation phases in which the markets remained range bound and made months long rallies and declines. This is what we are now seeing the beginning of or will see the beginning of before the year is over.
The Nasdaq is not going to trend up all year long or generate meaningful returns year after year for a long time. The average investor who has his money in mutual funds or is invested for the long term in "safe" stocks isn't going to see much of a return either. If they get 8-10% a year they should consider themselves lucky.
There is a lot of money to be made, but it will be made by knowing how to participate in the months long rallies and declines. That means buying strong stocks in strong sectors during the rallies and shorting weak stocks during the declines. And that is exactly what we have been doing and will continue to do.
In the short term I expect the current market rally to end in January or early February. We'll carefully watch options sentiment indicators to warn us to when the top is occurring. Once the signal comes I will take some profits on my long positions and begin to short stocks. I expect that the decline will take the market's down near their lows. It may even break them, but I'm confident that they'll bounce above them. It doesn't matter. We'll be in a position to profit either way.
The second market rally is likely to continue into the summer. It will then top out and again correct. I doubt that the summer rally will get very far above the January peak. Instead I expect the market to establish a trading range.
The average investor is not prepared for this sort of market. Goaded by Wall Street analysts and the financial press they still expect to make big returns just like they did back in 1999. This is a year in which expectations will be readjusted.
In the weeks following the September 11th terrorist bombing it was said that the entire world had changed. This isn't exactly true. Bin Laden had been at war with the United States for several years and terrorist violence is not a new phenomena. Ask the people of Israel, Palestine, Russia, India, Pakistan, Egypt, Philippines, Columbia, or Great Britain to name a few.
The terrorist bombing revealed a world most Americans have ignored and few understand now. Watching the images of the twin towers fall over and over again in the days that followed the bombing on the television, they projected their feelings of a loss of control into paranoid worries over anthrax attacks and nuclear explosions. As time passed the worries faded. The war became another television show.
But the national discourse has changed. The year 2001 was nothing like the 10 years before it.
The 1990's began with the collapse of the Soviet Union and the creation of the Russian Federation. George Bush fought a war in Iraq and proclaimed the beginning of a new world order in which global capitalism would spread prosperity and Democracy throughout the world. Strobe Talbott, who served on Clinton's National Security Team, saw the same forces and claimed that within 20 years there would be world peace and the United States would lose its sovereignty to international organizations such as the United Nations and the World Bank. All in all the world would become drawn together under the shared culture of commerce and the supervision of benevolent experts.
That might sound utopian, but the idea that global capitalism would create perpetual prosperity and world peace was the accepted consensus of the 1990's. Multinational corporations seemed to be more important and powerful than individual governments.
The word technology was the second half of this equation. Corporations advertised themselves as being creators of technology to the general public, instead of generators of profit for their shareholders. They promised to take care of you in their advertisements. They didn't just say buy their products. They told you to trust them like you would your parents and they would bring you heaven on earth.
Technology - meaning the computer, the Internet, and the corporations and experts behind them - would solve everything. They would bring the world together. They would make the economy grow forever. Greenspan embraced them. Greenspan said that they had made inflation disappear and through his own expertise he could control the economy and prevent recessions from happening again. The Treasury Secretary, Robert Rubin, said that the business cycle was obsolete. Everything was taken care of for you. All you had to do was obey, consume, and buy tech stocks. You didn't even need God. As the stock market went up and up who could doubt the new idol?
But these notions had nothing to do with reality.
The September 11th attack showed everyone that the world is not a peaceful place. No one talks about how free trade will bring world peace anymore. Americans now realize that there are some people who hate them. They don't understand why. But they know it is a fact. There is no world order.
The bear market proved to everyone that technology was not the miracle that everyone thought it was. The stocks that went up because of the Internet and the computer were nothing but bubbles.
The burst of that bubble pretty much discredited the so-called experts. As the economy fails to boom this year like people expect then they will come to realize that the economic growth of the 1990's was built on weak foundations.
People don't realize it, but the United States has been in an economic crisis since April of 2000. The economy has failed to act the way Alan Greenspan and his board members have expected it to do. They have cut interest rates over 11 times and have failed over and over again to make the economy bottom. At the same time every few weeks they have predicted the end of the recession and a return to growth within a few weeks only to wrong over and over again. Bush's Treasury Secretary, Paul O'Neill, even got on CNBC during the summer to proclaim that the US was on the "cusp of a golden age of prosperity." Over the course of the next week over 40,000 people lost their jobs.
Some people on the Fed, such as Alan Greenspan, have deliberately lied. Others have simply been confused and don't understand what is happening.
A year ago Fed members claimed that they would be able to prevent a recession by cutting interest rates. Alan Greenspan claimed a bottom was in back in April. But the economy continued to deteriorate. Robert McTeer, the head of the Dallas Fed, was quoted in the Financial Times as saying that the slowdown "took just about everybody by surprise."
People like McTeer were surprised because they stayed focused on the consumer spending numbers which remained strong and ignored the corporate investment numbers which were in collapse because of the high-tech boom and bust. The CEO's of Cisco, John Chambers, called this downturn a "100-year flood."
We knew the slowdown was coming. All we had to do was look at the charts of the stock market and read the economic numbers. Anyone who found themselves laid off knew the economy was bad. So did people running high tech companies. Taxi drivers knew. Everyone knew, except for people who live in a bubble or believe their own propaganda like Federal Reserve Board members and Wall Street analysts, or people who rely on CNBC for "news." Mark Haines, the morning anchor on CNBC, proclaimed the bottom of the market and the economy in February of 2000. Only 30 minutes before his director had walked on the set to announce that 25% of all of the employees at CNBC were being let go.
As the Nasdaq went lower and lower, the Fed got in a panic, cutting rates between meetings unannounced. Trying to make the stock market go up by tricking people by saying that the economy had bottomed and they wouldn't need to do any more emergency cuts and then doing one a few days later. Greenspan looked haggard on TV. He went to a book party for Chris Matthew's book What I Really Think. He sat in a corner and got drunk. Pushed people away who came up to him, while his wife reluctantly worked to walk people away from him. It was a pathetic scene. Bob Woodward was there. Guests wondered if he had done wrong when he titled a biography of Greenspan Maestro.
People gossiped for a few days. An ultra-conservative news site called NewsMax.Com published an article saying that he would resign within a few months. Robert Novak wrote a column in which he called Greenspan a dictator who controlled the Federal Reserve by insuring that yes men sat on the Federal Reserve Board. In Novak's eyes Greenspan easily bent the board members to his will because most of them either really didn't care about the job or were morons. When you saw people like Robert Ferguson and Robert McTeer on television it was easy to believe him. After George Bush got in an office an opening came up on the Federal Reserve Board. Bush picked an intelligent and independent man to serve on the board. Greenspan found the choice unacceptable and pouted for a week and even threatened to resign. Bush finally caved in to the cry-baby.
And then the terrorist attacks came and gave Greenspan a chance to redeem himself. A pathetic man whose policies had wrecked the economy now reinvented himself as a symbol of stability. Everyone made fun of Al Gore when he reinvented himself four times during the Presidential election. When Greenspan does it no one notices, because no one can understand what he is saying. It takes too much effort.
But to understand Greenspan you have to go over the past 10 years of Federal Reserve policy. Not coincidentally you have to do this to also understand the current state of the economy and the stock market.
In his youth Alan Greenspan was a student of the novelist Ayn Rand, who espoused free markets and cultural and social darwinism. Greenspan believed that the principles of survival of the fittest work best in the economy. Monopolies formed because of efficiency and superior competition. He wrote a paper saying that the government should not interfere in the economy. Greenspan became a gold bug, claiming that the U.S. currency should be returned to the gold standard. He wrote another paper in which he claimed that interest rates cuts cannot stop a stock market bubble from collapsing.
Then Greenspan got older. He worked in Washington and learned how to network with people. He rose up the corporate ladder and by the early 1980's had become the Chairman of Morgan Stanley. The man who had once been a free market philosopher and praised industrialists in college had now become an international banker. Unlike the characters in Rand's books he was not a "prime mover." He did not become a man who makes things or builds products. He had become a man who creates power through banking, the power of ownership.
Greenspan learned to work with the International Monetary Fund and the World Bank. He used their power to funnel loans for Morgan Stanley throughout the world and socialized with their leaders. He had come a long way from Ayn Rand's dusty apartment. Greenspan had now gradually embraced the notion that the engine of world economic growth is the flow of investment dollars coming out of international banks. It isn't the ingenuity of industrialists or the labor of workers that creates growth, it is the wisdom of international bankers to lend money and the interests of international bankers had to be protected at all costs.
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