Got an e-mail about DOW 3,600 !!!!!!!!!!!!!!
Dow 3600
The Daily Reckoning
Paris, France
Monday, 7 October 2002
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*** Secondary reactions...is there still time to "bail
out"?...
*** Hmmmn...well, at least there's only another 37.5%
left to go (down) before the S&P before reaches
'overvalued'...
*** Interesting doings on the rue des Lombards... oh,
how we love animals... Daily Reckoning readers get what
they deserve, not what they expect... and, er, more...
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Once again we turn to the voice of experience: "every
bear market is made up of two or more downward legs and
at least one secondary reaction," writes Harry Schultz.
Uncle Harry, who began covering the markets in his
aptly-titled "The Harry Schultz Letter" nearly half a
century ago, has lived through more than one serious
bear market. He describes a "secondary reaction" - what
we might call a bear market rally - as a chance for
those who missed the early warning signs to "bail out"
and keep their capital intact.
As Eric points out below, the Dow closed out last week
at a five-year low...so its seems only pertinent to ask
on this cheery Monday morning: was the August 22nd high
of 9,053 the last of "secondary reactions" we're going
to see in this bear market? The last chance for
investors-in-denial to "bail out"?
"Some bear markets," Uncle Harry continues, "like the
one we saw in 1987, were confined to the minimum - two
down legs and one healthy 'secondary reaction'. Others
such as the bear markets of 1968 and 1973 had a number
of down legs and secondary reactions. The great 1929-32
affair was made up of no fewer than eight distinct down
legs and seven secondaries, a series not matched before
or since."
Well... we're not certain the bottom is in yet. Nor are
we sure we'll recognize "it" when that day arrives. But
maybe... just maybe... this bear market will give the
"1929-32 affair" a run for its money.
0ne thing is certain: the markets for the past few
months have been vibrating with such volatility they'd
make a fighter pilot lose his lunch. An article in USA
Today over the weekend points out that between Memorial
Day and Labor day, anno dominus 2002, the Dow saw 39
trading sessions with a 200 point swing one way or the
other... that's a full 57% of the total trading
sessions. Compare that with just 11 two-hundred point
swings during the same period in 2001 and 4 in the year
2000... throw in the fact that during the summer, the
Dow also logged its second and third-best all-time point
gains... and you can see that investors are speculating
wildly in desperation. The second biggest - a whopping
488 gainer - came on July 24th, one day after this year's
previous low...
Whatever happens from here on out, we Daily Reckoners
suspect you haven't seen the last of these wild
secondary reactions. What else would you expect, really,
as the market twists, sweats and groans through the
death throes of the largest speculative bout in
investment history...but even more spectacular gasping,
twisting and groaning? We suggest using these potential
swings to get your behind to safety.
Regards,
Addison Wiggin,
The Daily Reckoning
p.s. Rather than simply give in to the bear, some
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p.p.s. Bill was in the office on Saturday in advance of
a sojourn to Madrid, preparing both today's essay and a
few comments, which you'll find below... but first let's
check in with Eric in New York City...
-------------
Eric Fry, from the Street...
- "Bubble, bubble toil and trouble"...another ill-fated
week for the stock market. The Dow fell 173 points
during the week to 7,528 - its lowest close in five
years. The Nasdaq tumbled 4.9% to 1,140 - its lowest
level in more than six years!
- How could this be? Abby Joseph Cohen told us that this
would not happen.
- But now that it has happened exactly like she did NOT
expect, Abby feels confident that the worst is behind us
and that folks ought to be buying stocks.
- Fred Hickey, the correctly bearish editor of High Tech
Strategist, sees things a little differently. He figures
the Nasdaq Composite will continue sliding until it
lands somewhere around 600 or 700. The earnings just
aren't sufficient to justify current prices, says
Hickey.
- Addison Wiggin makes the identical point in the
Weekend Edition of the Daily Reckoning: "If you look at
the market through the simple lens of price to
earnings," says Addison, "we've probably got a long way
to go before this bear market reaches its nadir. At the
current level of 800, roughly 30 times earnings, the S&P
500 will have to fall under 500 - an additional drop of
about 37.5% just to reach an 'overvalued' P/E of 20."
- Hickey cites Intel as a prototypical example of the
market's overvaluation. Despite Intel's complete lack of
earnings growth, the stock is trading for about 30 times
earnings. "Even in the big growth years," he says, "from
1988 to 1996, big PC growth years, the P/E was as low as
10.7, with a high of 14.2."
- The stock market is well on its way to a third
straight losing year, which means that Wall Street
strategists are well on their way to completing three
straight years of devastatingly misguided forecasts.
- Like the French and German commanders at the bloody
Battle of Verdun, the Wall Street strategists - standing
well behind the front lines of course - urged wave after
wave of investors to charge into a perilous stock
market. The ensuing slaughter of innocents has been
unnerving to watch. And the worst part is that the
slaughter may not be complete. Merrill Lynch's chief
strategist, Richard Bernstein, for example, provides one
very compelling reason why the stock market sell off may
continue for a while: the Wall Street strategists are
STILL bullish.
- Berstein's "Sell-Side Indicator" shot up to its
highest reading of the past 10 months.
- The indicator is based on Wall Street strategists'
recommended asset allocations. In other words, the
greater the strategists' enthusiastic for equities, the
worse the market is likely to behave. The indicator's
current reading of 69.9% is the sixth highest on record.
As Bernstein observes: "Wall Street strategists continue
to believe that the current environment represents one
of the best times to buy equities in the last 16 to 17
years."
- Responding to the bullish readings of Bernstein's
indicator, Alan Abelson writes, "Ask us not, then, why
we're still bearish. Ask, rather, why are all those
people still bullish?"
- Good question.
- Dresdner Kleinwort Wasserstein predicts that the
market sell off of the last few months will put a huge
dent in consumer spending. "The potential negative
wealth effect of stock market losses on consumer
spending has gotten markedly worse in a short space of
time," the brokerage firm observes. "At the beginning of
April this year, the total capitalization of the US
stock markets was about $14.8 trillion, slightly more
than the $14.6 trillion average for all of 2001. So,
although equity wealth was down from its peak in 2000,
it appeared to have stabilized and was no longer doing
significant damage to household net worth...However, all
that changed over the last four months as stock market
averages went into a deep and protracted decline. The
broad Wilshire 5000 stock index is now down 20% since
the start of this year...[Therefore], consumer spending
could fall about $80 billion this year compared to what
it would have been otherwise."
- $80 billion is a lot of spending...we might notice its
absence.
--------------
Back in Paris...
*** Bill writes on a bright, sunny Saturday morning:
"This little corner of Paris where the Daily Reckoning
makes its headquarters is a delight. There is always
something absurd going on.
A man across the street, on the 4th floor, is washing
his windows. As he wipes off the dirty suds, he flings
the suds into the street. Passers-by look up and can't
figure out where the water is coming from; it doesn't
look like rain.
Across a few windows down, a pretty young woman has her
window open and walks around in her underwear.
Hmmm...those 'dental floss' underpants... hmmm....
And down on the street, one of the geriatric prostitutes
paces in her black raincoat and boots while a drum band
makes its way across the street.
And what's this...a group of vegetarians has begun to
demonstrate. "Love Animals" they chant.
How can your editor keep his mind on his work!"
*** "I love animals," said a friend at lunch, "with a
good wine sauce."
*** A Daily Reckoning reader writes: "In light of [your
editor's] comments that people will get what they
deserve, I whole heartedly agree. The idea that actions
do not have consequences is so pervasive in our society
that most are going to be blind-sided by their effects.
"I recently graduated from college and am working my
first post-school job. I live in California, have 4
children and my wife is a homemaker. I make $27,600 per
year. By national standards, I am in deep poverty.
Yet...
"We bought our dainty little 3 bedroom cottage one year
ago where the mortgage eats up only 30% of my income.
"We pay 10% of our gross to tithes. Both of our cars are
paid off...
My school loan is paid off...
We don't need a cell phone...
We don't need cable or satellite...
We don't need Nintendo's or CD's or Playstations...
"All we need is food, books and one another's company.
So on this meager income with a family of 6 in
California we are doing just fine. In fact, we are able
to put a little away every month and also add to my
company 401K plan.
"Personal finance is ever so simple, SPEND LESS THAN YOU
MAKE! In the marketplace of life, discipline is key. It
is the discipline that states: I don't need this, I
don't need that, etc. It is the discipline of
prosperity!"
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---------------------
DOW 3600
by Bill Bonner
Markets make fools of us all - sooner or later. Trying
to outsmart them, we say things we will later regret.
"We will not have any more crashes in our time," wrote
the world's foremost economist, John Maynard Keynes, in
1927.
"This crash is not going to have much effect on
business," wrote Arthur Reynolds, Chairman of
Continental Illinois Bank of Chicago two years later.
They might have been right. But, then, who would have
remembered?
James K. Glassman found a memorable title for his 1999
book, "Dow 36,000." Now, he tells us that the book "was
not so much a prediction as an explanation of how stocks
should be priced - and whether for the long term, they
are undervalued or overvalued."
If stocks were undervalued in 1999 imagine how much more
undervalued they are now. We appreciate the earnest
optimism that Glassman brings to stock-market guessing.
He believes you can run a few numbers through your
calculator and figure out where stocks ought to be
priced. And now, even though the Dow is more than 28,000
points below his target and headed in the opposite
direction, he thinks we might still be interested in how
he thinks stocks should be valued.
Glassman refers readers of his International Herald
Tribune column to a formula on Ed Yardeni's website that
"allows you to plug in estimates of S&P earnings and
interest rates. Based on consensus earning projections,
Yardeni on Sept. 25 found the market undervalued by
45%."
A 45% increase does not get you anywhere near to 36,000,
but even the longest journey, as the Chinese say, must
begin with a single step.
Instead, Yardeni and Glassman stumble. Their formula is
based on the 'Fed Model,' it turns out, which compares
the yield on 10-year treasury notes to with the earnings
yield (for the year ahead) on the S&P 500. The consensus
earnings estimates put the yield on the S&P 500 way out
in front of the yield on a 10-year T-bond, so when
Glassman punches the numbers into the Fed model formula
he gets a little giddy. According to these numbers
stocks are more undervalued than at any time since 1979!
Maybe even before '79 - his chart goes back no further.
For all we know stocks may be more undervalued than at
any time in the history of mankind.
"I would never try to bully or cajole any fearful
investor into the market," writes Glassman, "But history
and reason are firmly on the side of stocks for the long
run. "
"History shows that this could be just the right time to
reconsider stocks," says his headline.
A man who argues that he has God or History on his side
should look around him. God and History will decide for
themselves, and often end up on the other team.
We don't know, of course. Maybe Glassman has guessed
right about the direction of stock prices. All we know
is that the Fed Model is absurd. First, the 'consensus'
for earnings is the same confederacy of dunces that saw
neither recession nor bear market coming...and now says
it has been struck dumb by this 'baffling economy' and
cannot find words to describe it.
We offered a few simple words last week...this week, we
add a familiar observation: that when what goes up comes
down it comes down to about where it was when it went
up.
Even if they got their numbers right, the idea that
stock prices are determined by the bond yields is, as
Andrew Smithers put it, "supreme nonsense."
When the yield on the 10-year note goes down, says the
formula, stocks are worth more. But what makes treasury
yields go down? Well, the Fed can drag them down. Or the
market can push them down. In neither case is it
necessarily a good omen for corporate earnings or stock
prices.
Imagine that the Fed could drag rates down further...
desperately trying to avoid a deflationary "liquidity
trap." Imagine that it has the same effect as Japan's
zero rate strategy. Now, try to imagine how this would
make stocks more valuable. You might just as well
imagine putting Tom Daschle at the head of GE; the stock
price would be no more likely to go up.
Or, imagine rates falling further of their own weight.
When business goes bad and consumers feel threatened,
they typically stop borrowing, cut costs and begin
saving. We have no formula to prove this point; it is
just something we've noticed. As people stop expecting
to get something for nothing, the demand for nothing
goes down...and with it, the price of credit. The
economy goes into a slump, interest rates fall, and
yields drop. According to the Fed model, stocks should
be suddenly more valuable. But then, according to
Glassman, the Dow should be at 36,000 too...
In a boom, falling rates give stocks a boost. People are
eager to borrow, spend and invest. Lower rates make it
easier to do so. But in a real bust, you can lower rates
all you want. It is like offering a box of chocolates to
your mistress, after commenting that she might need to
lose weight; it's too late. The damage has already been
done. It is time for regrets.
If what goes up later comes down to where it began,
investors who stick with stocks will have many more
regrets before the bottom is reached. In 1982, when the
great bull market began, the idea that stocks might go
to 36,000 was even more preposterous than it is now. The
Dow was under 1,000 and traded at only 8 times earnings.
No matter what the Fed model says, eight times earnings
today would put the Dow near 3,600.
Yours truly,
Bill Bonner
---------------------
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