Puplava:
Friday September 6, 2002 Market WrapUp
>>Technically, the stock market looks weak. This week we experienced our first 90% down day. This sets the stage for a bout of panic selling to begin in earnest this fall. When the investor finally wakes up to the fact that corporate profits aren’t improving, that the economy isn’t getting better, and the fact that they might lose their jobs, we could be in for a real bout of fear driven selling. Fear, unlike greed, exerts a more powerful effect on the markets. Bear market panics tend to be swift and deadly, catching most investors by surprise. A 30-40% drop in stocks when added to the 20-33% losses year-to-date should really create some white-knuckle days for investors. Don’t be surprised if you see the Ostrich effect disappear very quickly. During this next market plunge you will begin to hear the word “stocks” accompanied by a rash of four-letter words coming out of the mouths of your neighbors. When the panic attack comes, investors are going to feel like they have been kicked in the gut.
Fasten your shoulder harness, tighten your seat belt, and put on your foul weather gear--you will need all three as the next phase of the storm will shortly be upon us.<<
Below The Benchmark
The major averages suffered through their second weekly decline with benchmark indexes heading toward their third straight year of losses. The S&P 500 lost 2.4% this week and is now down 22.1% for the year. Since its peak of 1527.46 in March 2000, the index has lost investors 42%. The Dow dropped 2.7% this week and is down 15.9% in 2002. After peaking at 11,722.98 in January 2000, the blue chip average has given back 28%. The NASDAQ this week lost 1.5% and is down 33.6% for the year. Since its pinnacle in March of 2000, the tech-oriented index has lost investors 74%. Despite these losses, the markets have much further to go. The Dow is still selling at 23 times trailing earnings and offers a dividend yield of only 2.2%. The S&P 500 is trading at 32 times earnings with a dividend yield of 1.7%. The NASDAQ has no earnings and offers a paltry yield of only 0.40%.
Forget the talk about the stock market being a bargain now. Stocks today, even after the fall, are more overvalued than they were before the October crash of 1929. Earnings are even more suspect. So if you want to look at value, you only have to look at dividends. You can also forget about all of that nonsense written in books about stocks being a low-risk investment. Losses of 74, 42, and 28 percent make these arguments nothing more than worthless dribble. If you lost 74% in a now worthless tech stock, Internet company, or telecom such as WorldCom, do you really believe that stocks are low risk investments?
What's Your Definition of Cheap?
Fund managers and analysts are telling investors that stocks are cheap because operating earnings are rising again. Operating earnings is the spread between sales and direct costs. They are rising only because of cost cutting, and not revenue increases. The rest of the accounting equation that follows after operating income includes such things as depreciation, interest expense, and nonrecurring charges. All three are rising. This is reducing profits, which is why Wall Street doesn’t talk about them anymore. The result is that we now have myriad ways in which to spin the profit picture to investors. When you hear some bubblehead on TV, an analyst, or fund manager talking about rising profits, you better get the rest of the story.
What has surfaced this week sending stock prices lower is emerging evidence that the economy is heading back into recession. Sales at retailers such as Wal-Mart, Sears, and Kohl’s are starting to fall. They are still growing, but at much lower rates of growth. Most of these stores are starting to see a moving downtrend. This month has been important in that back-to-school sales usually give retailers a lift. If sales don’t pick up the rest of the month, we could be in big trouble. After all, there is a limit to how much consumers can continue to borrow given that they are up to their eyeballs in every imaginable kind of debt from credit cards, installment debt, mortgages, school loans, to margin debt.
Another signal of a weakening economy came from the ISM non-manufacturing Index, which measures the service economy. The index fell for the seventh straight month to 50.9 in August. At 50 the index would signal the service economy is contracting. The fact that it has fallen for seven consecutive months already says that it is heading back towards recession. Today’s unemployment report showed unemployment dropped last month. However, many of the reports’ forward looking indicators show signs of slipping in the months ahead, especially given the number of announced layoffs last month by major corporations. Even demand for temp workers is falling off. Hiring plans are dropping off, and what few jobs that have been created have been mainly government.
Many companies such as Intel continue to report weakening sales conditions, while others such as IBM are laying off thousands of workers. Without growing demand companies continue to shed costs, mainly through payroll reductions. If things were improving as many economists and analysts have been telling investors, it certainly isn’t evident from what companies are reporting, saying, and doing. The second half recovery myth is slowly dying. Very few people are talking about it. Instead, the new mantra is Fed rate cuts. Does anyone really believe this will save the market? After eleven rate cuts, the Nasdaq has still lost 74%, the S&P 500 42%, and the Dow 28%. What good is another half a point going to do, other than give us a temporary rally?
War Talk Rumbles Deeper
Another factor weighing in on this week’s market has been the talk of war and rising oil prices. Intelligence reports from Jane’s and Stratfor.com indicate the al-Qaeda and Taliban have now regrouped and are of sufficient strength to begin a new war of terror. The opening salvo occurred yesterday in an attempted assassination on Afghan President Hamid Karzai, which killed 10 people. The attempt occurred in Kandahar, a US patrolled city. Several factions in Afghanistan now oppose the Karzai government and the US involvement in the country. Attacks are increasing and many intelligence experts now believe a full-scale guerilla counterattack is about to begin.
The guns of August have given way to the attacks of September. There is a high degree of probability that some kind of unexpected event is more likely to occur this month or next, with a full-scale war against Iraq to begin sometime in October or November. The Bush Administration has presented evidence that the Iraqi dictator has acquired unmanned drone airplanes capable of delivering biological and chemical weapons.
In addition to this, there is growing evidence within the Arab world that they are aware of a terrible event that is about to unfold. OPEC and the IEA have issued a joint statement that “oil is not a weapon.” Energy analyst Joe Duarte believes OPEC is launching a public relations campaign in order to distance itself from the coming events in the Middle East. According to Duarte’s views, the recent frantic public relations campaign indicates fear of something big is about to happen.
The US has already deployed over 100,000 troops in the Middle East. Experts believe it will come as surprise attack. It will happen when no one expects it. You’ll simply turn on your TV and begin to hear stories of massive bombings and an invasion of the country. Washington has already deployed more than 1,000 military planners to the Persian Gulf. The military has already been increasing its troop transport ship fleet while increasing its air cargo fleet. Boeing has been ramping up its production of smart bombs, which have tripled since the beginning of the year, while the US central command has set in motion a plan to ship 200,000 tons of heavy weapons to the region.
Bumpy Ride Ahead
Meanwhile, oil prices continue to rise as stockpiles continue to fall in the US. The American Petroleum Institute reported this week that oil stockpiles fell to an 18 month low. This is creating worries that the US is vulnerable to a disruption of supply ahead of a major war. During the last war, US stockpiles of oil were close to 400 million barrels. Currently they have fallen to 298.9 million barrels. Oil inventories have dropped 7.2% since June. Oil prices have been hovering close to or over $30 a barrel for more than a month. The tightening of supplies, the threat of an unexpected terrorist event, and the advent of a coming war with Iraq, when added together don’t bode well for the economy.
By mid-month, October and November consumers could be glued to their TV sets instead of borrowing and spending money in the malls. The slowdown in consumer spending, a falling dollar, and a bursting of the bond market bubble could deliver a knock out blow to the economy.
Technically, the stock market looks weak. This week we experienced our first 90% down day. This sets the stage for a bout of panic selling to begin in earnest this fall. When the investor finally wakes up to the fact that corporate profits aren’t improving, that the economy isn’t getting better, and the fact that they might lose their jobs, we could be in for a real bout of fear driven selling. Fear, unlike greed, exerts a more powerful effect on the markets. Bear market panics tend to be swift and deadly, catching most investors by surprise. A 30-40% drop in stocks when added to the 20-33% losses year-to-date should really create some white-knuckle days for investors. Don’t be surprised if you see the Ostrich effect disappear very quickly. During this next market plunge you will begin to hear the word “stocks” accompanied by a rash of four-letter words coming out of the mouths of your neighbors. When the panic attack comes, investors are going to feel like they have been kicked in the gut.
Fasten your shoulder harness, tighten your seat belt, and put on your foul weather gear--you will need all three as the next phase of the storm will shortly be upon us.
Overseas Markets
European stocks surged after an unexpected drop in the U.S. unemployment rate buoyed optimism about profits at companies such as Royal Philips Electronics and DaimlerChrysler that sell goods to Americans. The Dow Jones Stoxx 50 Index posted its biggest one-day gain in almost a month, climbing 3.9% to 2637.71. All eight major European markets were up during today's trading.
Asian stocks fell as Japan's Nikkei 225 Stock Average had its biggest weekly drop in six weeks after a U.S. services industry report signaled that growth in the world's largest economy is slowing. Companies that sell their products overseas, such as Canon Inc. and LG Electronics Inc., led declines. The Nikkei fell 1% to 9129.07. The average dropped 5.1% this week. South Korea's Kospi index shed 1.7%.
Treasury Markets
At day's end, the benchmark 10-year Treasury note retreated 25/32 yielding 4.03%. On Thursday, the note hit its lowest yield in about 40 years. The 30-year Treasury bond slid 1 9/32 to yield 4.86%.
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