Warp,
You asked for thoughts. Maybe the simple thoughts of a simple mind might offer a different perspective. Have been painting my home all day, so I’ll continue to use the broad brush of generalizations.
Things have changed, qualitatively, IMO.
1. B+H investors have been creamed. Back to square 1997 for today. Monday, who knows, but with preview of Barrons calling for 7400, I am glad to 80% cash and 20% MAGFX (about 5% net gain since recent buys at 9.75) and PFOAX (which has done nothing in same time period.)
2. Within last week or so, received a detailed commentary about market strategy from major brokerage. Recommended 70% stocks. Of course, I am not, but let us assume a good % of their clients are that deep, with 20% bonds, and perhaps 10% cash. Now, when I received this, Dow was about 9000-9100, and at that time, buying seemed reasonable. So how much $ do these investor’s have to BUY at today’s current ‘bargain’ levels? Clearly, the aggregate is not that great, IMO. Further, even if we discount their fear of a bear trap rally, and even if we discount new negative news items (like J&J today), would it be prudent to assume they will rush back to the market. My guess is, No. Capital preservation of their remaining assets will remain a higher priority, especially after they think about declining IRA accounts. Most conservative investors will probably back away for awhile, 1-2 months at least, perhaps a year or more. Big turning point will be probably come after the Nov. elections and the question of war in Iraq is resolved. Best guess is there will be continued selling into strength, so I don’t anticipate, though I don’t dismiss, a big rally across all indexes until Nov.
3. To revitalize the markets to some major plateau above today’s close, a positive, major macro event must transpire. Such an event must be clear, compelling, and easy to understand for all investors. I don’t see such on the immediate horizon, other than a new price level of DOW 7000, or less. Thus, a downward bias will remain for some time, or until 7000 range.
4. Thinking about the macro events of tech since ’94 when I first got on the net. There was great hope, and great reason for hope as the net expanded, people bought IT products and companies ramped up for production. Now, the rationale for IT spending explosion has fundamentally evaporated. Thus, what might lead us to believe another epic story will capture the imagination of investors for 3 years or more? Can’t imagine one. Thus, no tidal wave of new investments is about to transpire across the broad tech sector. It will take a long time for the gross over-investment in tech to be rationalized. Further, companies with new investment ideas will find the task of raising capital difficult. IMO, the tech story since ’94 was a classic case of over-investment and it will take longer to rationalize than many think.
5. Thanks to a trail of contemporaneous reports of Commander Cricket, I believe tech is going to sink further. Isolated exceptions, of course, but can one pick the winners? Doubt it. Even if we can pick the winners, won’t their PE compress as the market declines? Yes, I think so. Thus, even if you have or can pick winners in the future, you’re risking the 3M story. Today, on no news I could find, it declined 7%. CVX down 5.34%, while XOM was down 6.9% and AHC, sporting a PE below 9, declined 4.45%. Even GE was clipped for more than 4%. Point is, there may be even fewer great story stocks that won’t decline with broader market averages. If a nifty trader can win in this environment, great, but if the Dow can rise 400 pts in a ½ hour, it can fall that fast as well. Will PE compression continue below 14? If so, how far? Suspect from a technical view, not much. However if car sales decline by 25%, unemployment rises to 6-8%, 14 might look very expensive.
6. Housing bubble will burst only if and as unemployment increases 2% or more. New construction will probably decline, but I don’t anticipate a decline in broad base of prices until many thousands are forced out of their homes by declining incomes/unemployment. Of equal concern is potential for decline in auto sales. If sales fall, the correlated side effects will be great! IMO, big question is negative wealth effect and its impact on new car sales.
7. Betting the USD will continue to decline against the major currencies. Current account deficit is too great, etc., and foreigner’s will continue to sell dollar-denominated assets. Don’t know of a situation where any nation could turn the forex market, so markets rule. Will USD reach 1.05 to 1 Euro? Probably. What will be upper range? Don’t know. 1.15 would not surprise me, but the big variable will be the issue of Iraq and the potential of a total disaster throughout the ME if things unravel in ways we fail to anticipate.
8. IMO, losses of pension funds will be a huge issue going forward. How will derivatives and hedges unwind? No way to know, but it could get even more ugly than we might anticipate. How will 3rd world debt issues unfold? Argentina, Brazil, etc., ? Not optimistic but seems reasonable to assume a major dislocation will contribute to world economic problems.
9. Risk events of some form of terrorism? To answer Dirty Harry, “I’m not felling lucky.” To me, this poses a huge risk to anyone who doesn’t watch the trading screen 24/7, especially for 401’s that can’t be liquidated in a moment’s notice.
10. Falling knives have both velocity and mass. Looking to buy at 7000. When and if time arrives, will 6000 look even more tempting? And the impact on the NAS if companies are forced to expense stock options? I’m certain others were thinking the same when NAS fell from 5K to 2K. As US debt increases, medical costs continue to escalate, and imports become more expensive, I’m merely trying to assess the range of objective realities going forward. Yes, there is a ton of money on the sidelines, but this has been the story for more months than I can remember.
Regards,
whitepine |
