OT: coming market correction:
On July 30, 1998, I posted a WARNING on the AMAT thread, giving 16 reasons why I (correctly) thought the market was headed for a huge correction. See Message 5357744. Reviewing them today, I find that we are right back where we were last summer. The only one of my 16 reasons that has changed is the Fed, which is now loosening. Otherwise, everything is once again pointing to a return to a retest of 7500 on the Dow.
1. the market PE is back to 30, (trailing earnings on S&P 500). This is so far outside the historical range (10 to 20), that the only way you can believe the market PE goes up from here, is if you believe history is meaningless.
2. OK, if the PE won't go up, then how about the E? Sorry, that's highly unlikely. With unemployment below 5%, and wage costs the biggest part of business's costs, costs aren't going down. And noone (in manufacturing, and now service as well) has pricing power. With every foreign country trying to export their way out of disaster, U.S. companies will continue to have no pricing power. We'll be lucky to get 5% earnings growth in 1999.
3. Emerging markets and Japan aren't fixed. Everyone is throwing money at the problem, and doing short-term solutions, rather than permanent structural reforms:
Japan: still in recession, with no evidence of when it will end.
Korea: latest issue of Business Week has an article saying that the government has failed to control/restructure the chaebols, whose debt/equity ratios have actually gotten worse recently.
Brazil: facing recession in 1999, will be unable to defend their currency with interest rates of 50%. Cutting government budget deficits is politically impossible, but economically necessary. No way out. And the rest of Latin America will follow Brazil.
China: still may need to devalue in 1999. Still hasn't dealt with their own internal debt problem.
Russia: continuing slide into chaos. No end in sight.
4. The market rally from the October 8 low has been led by the group with the weakest fundamentals: the internets. The advance has narrowed. At the beginning of the rally, it looked like the small-caps were finally participating, but the relative strength of the Russel 2000 has faded, compared to the S&P 500, as the rally continued. Once again, it's only the nifty 50 (and internets) holding the market up.
5. Commodity price declines (oil, especially) make it clear that Asia has not recovered.
6. The U.S. trade deficit is heading to a politically unsustainable level. But, the Asians are counting on us to buy everything they make. How else (in the absence of structural reform) will they ever recover?
7. U.S. consumer spending is the foundation of this house of cards (the global economy, and the Dow at 9000). But the (now) negative savings rate indicates that we are spending our savings to keep our consumption at current levels. This is yet another unsustainable trend.
---------------
Responses based on fact and logic are welcome. |
