This article nicely summarizes much of what I've been writing here. Too many public figures, the same who are wrong 95% of the time and helped create the bubble, are touting their bullish views based upon historical statistics while ignoring the realities of our very unusual circumstances and all that is going on in and out of the markets. Statistically, the results of a fourth flip of the coin aren't affected by the prior three. So why would they suggest the prior down markets open the door for a positive one this year.
Every minute, day and year of the market is completely independent and blind to what happened just before. This author is free-lance and without strings.
Reuters
Wall Street Handed a World of Deuces Wild
Saturday January 11, 10:17 am ET
By Pierre Belec
NEW YORK (Reuters) - People swear that Wall Street has been penalized enough for its excesses in the 1990s. The market has fallen so much over the past three years, they say, that it should turn higher, no matter how bad the economic script.
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But the smart money says: Just because the market has racked up four straight years of losses only once from 1929 to 1932, doesn't mean it can't do it again.
"If there is a fourth down year, many investors are likely to look for a fifth -- or a case of them," says James Dines, editor of the Dines Letter.
"What bugs me is that economists insist America is still in an economic upturn, but I find myself disbelieving their numbers and conclusions," he says. "Are they fools or knaves?"
The jump in the jobless rate to 6 percent in November from 5.7 percent in the previous month doesn't have the footprints of an economic upturn by a long shot, Dines says. More bad news came on Friday, with the unemployment report for December showing a surprising drop of 101,000 non-farm jobs. The jobless rate held at 6 percent, stuck at an eight-year high hit in April. Before April 2002, the last time the nation's unemployment rate was this high was in August 1994.
So much for the much-ballyhooed "jobless recovery."
PLAYING THE NUMBERS
Some of the reasons the bulls are touting to predict better times ahead are mind-boggling. They cite historical market patterns, such as years ending in "3s"and the third year of a presidential term, which have often been good for stocks.
Then there's the famous "January Barometer," a prognosticating tool that has helped investors anticipate how the market will perform during the rest of the year. In a nutshell, based on whether the Standard & Poor's 500 index is up or down in January, the market has posted whole-year gains or whole-year losses.
Among the bullish cheerleaders, Banc of America this week raised its 12-month targets for the Standard & Poor's 500 index to 1,100 and for the Dow Jones industrial average, to 10,600, which would put the major indexes more than 20 percent higher than at the start of the year.
Banc of America painted a rosy outlook even as it estimates corporate earnings will inch up by only 9 percent in 2003. A lot of the optimism is based on hopes that President Bush's economic stimulus package will shore up the economy and the stock market.
"One of the notions is that the market can't decline four years in a row since the only other time it has done so was during the Depression, and we're not in a depression," says John Hussman, professor of economics at the University of Michigan and head of Hussman Econometrics, a research firm.
"The difficulty is that the market's decline from its 2000 peak began when stocks commanded a price/peak earnings multiple that was fully 50 percent higher than the valuation at the 1929 peak," he says.
In March 2000 when the speculative bubble burst, the P/E ratio was more than 30, the highest of any bull market in history.
What's a P/E? It's a ratio that gives investors an idea of how much they are paying for a company's earnings power. So the higher the P/E, the more investors pay for the stock and therefore, the more earnings growth they are expecting.
Hussman's philosophy: No form of investment risk is worth taking without regard to the market's valuation, sound fundamentals and a good economic climate.
The latest numbers point to an economy that is still not out of the doghouse. The Institute for Supply Management reported that growth in the service sector, which creates 80 percent of the nation's jobs, slowed in December.
Turning points leading to recovery in the economy are hard to see. But in this post-bubble environment, it has become much more difficult to predict.
The advice from the pros: Pay attention to what the economic data are saying.
A NEW GOLDEN RULE
The mindset of investors says a lot about where the market is heading. For example, the rush by nervous investors to the safe haven of gold, is a sign that things are just not right.
The price of gold this month rose to a 6-year high on jitters about the health of the world's biggest economy, a falling dollar and the continued risk of war against oil-rich Iraq.
Historically, a strong gold market is bad for Wall Street because the people who buy the precious metal don't buy stocks, which explains why gold moves in the opposite direction from stocks.
In the "who-would-have-thought-it-could happen" category: Conseco Inc., the insurance and finance giant, became the nation's third-largest bankruptcy last month. United Airlines, the world's second-biggest airline, and its parent UAL Corp. also filed for bankruptcy protection in December -- becoming the biggest air carrier ever to seek court protection from creditors.
By one estimate, companies with assets of more than $375 billion have sought protection from their creditors in the past year, eclipsing the record of $258 billion in 2001.
McDonald's Corp. reported its first quarterly loss in the 37 years it has been a publicly traded company.
"In view of factors pointing in so many different directions, it is unsurprising that the stock market is flat since it itself is probably uncertain which way to jump," Dines says.
THE SHAPE OF THINGS TO COME
The most important thing that will affect this year's stock market will be the shape of corporate earnings. But before earnings start to rebound from depressed levels, they will first need to stabilize. And a turnaround will take time.
Corporate America's health can be measured by its investments in the future. Right now, there are few signs that businesses are willing to open their wallets in a world of tepid growth and spend on new technology. Most have called "time out" on buying fancier tech stuff after their investment excesses in the late 1990s.
Here the problem arises. In order for the economy to lift off and create more jobs, businesses will need to start spending. It's a vicious cycle.
The latest survey of the largest U.S. companies' spending plans on information technology makes grim reading.
In December, when companies set their spending goals for the following year, Goldman Sachs found that businesses planned to cut IT spending by 1 percent in 2003. In the previous survey two months earlier, the same companies said they planned to increase -- yes, increase -- spending by 2.3 percent.
For the week, the blue-chip Dow Jones industrial average rose 183 points or 2.1 percent to close at 8,784.95, based on the latest available figures. The tech-laden Nasdaq composite index jumped 61 points or 4.4 percent to finish at 1,447.75, while the broad Standard & Poor's 500 advanced 19 points or 2.1 percent to end at 927.57.
(Pierre Belec is a free-lance writer. Any opinions expressed are those of Mr. Belec.)
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