apparently today is don hays last column.
September 29, 1999
This is it, so I have been told. On October 1, 1984 I had the extreme pleasure of joining the great firm of Wheat First Securities (later becoming Wheat First, Butcher and Singer), serving as the Director of Investment Strategy almost exclusively for the Private Client side (public investor) side of the business. During the next 15 years, I also developed a very extensive institutional relationship. On October 1, 1999, 15 tremendous years later, I will be history for the Private Client side of the business--as I detailed in my lengthy report of September 22, 1999.
A few weeks ago, I thought that I would use this last report to bid you farewell, with a certain amount of sadness leaving so many old friends, and a certain amount of joy concerning the exciting future. But for some reason my heart flowed those words out in that September 22, 1999 report. I hope you got a chance to read it while it was available, since it expressed my thanks to all of you fantastic people. But if not, just know that I will never forget those battles that we fought and won together--tough times that always turned out for the better. Keep up the fight, my friends. We've been a great team, and I'm sure that the team will go on to fight and win even greater battles in the years ahead under the new Coach.
I can't leave this subject without thanking the 1200+ fond e-mail responses to that briefly available "farewell" message of last Wednesday. I read them all, almost like looking at a family picture album, recalling our past and thinking about the future.
Okay, that's enough of that. Let's look at this mysterious market. We now have a market that has been plunging through all the resistance levels. Of my 19-benchmark stocks, only 4 are still looking even slightly bullish. Massive breakdowns have occurred in the decline of last week, and the beginning days of this week. I find it so strange that the super-star of last year, Coca Cola, that was being revered just as much as today's super stars like Cisco Systems, is so ugly that its chart looks like a death-spiral with no bottom. But no one really seems to be noticing, since their eyes are so glued to the last bastion of strength. Was Solomon right, that there is a season for everything? I wonder what the next season will hold?
Hey, what a theme--the next season. We believe that history will reveal that the interlude between the two bullish seasons began in April 1998, when most stocks began their bear markets. I think those future observers will be amazed at the amazing camouflage that took place, as fewer and fewer stocks carried the bullish banner after that April 1998 peak. But they will see that those stocks were the ones that had the biggest influence on the widely followed indices, so the public and the "talking heads" kept believing that the miracle of the US stock market was still alive. Lemmings must be a distant cousin of the investing public, because they certainly share the blind belief that something wonderful lies right over that cliff, and NOTHING can change their minds as they scramble over the edge giggling all the way.
As written in Monday's comment, we suspect that this side of the mountain (the downslope) will look similar to the other side (the upslope), when the S&P 500 was climbing up to that July 16, 1999 high. In other words, it climbed to the peak on that day, and now has started downhill. That tells me that instead of the bears getting their immediate gratification with an instant "waterfall" decline, we suspect that on the short-term they will see a volatile up/down period throughout the historical "crash" month of October, trying to tempt them to flip-flop back to the bullish side of the story. The mirror image of the current period saw the S&P 500 laboriously move sideways. But I also warned you not to try to play this "hunch" of mine, since this short-term call is risky at best. If I am wrong, it will be that an additional decline will be set off by some catalyst that will roll stocks over to even worse declines in the weeks ahead. So stay true to the very defensive posture. I think there is very little chance that the S&P 500 can climb significantly above the 1330 level in any potential rally here, and the risk after that is so much greater, it is sheer folly to try to play my hunch.
So just suppose that my "hunch" is right. If so, the market will back and fill, with a very slight downward bias until mid-December. That will set up some crazy vibes--a spent-out, over-leveraged consumer, a further dearth of technology purchases by corporations, a China that could be growing more belligerent over Taiwan's new stance of independence, and Y2K worries right around the corner. We expect the waterfall decline to commence at that time.
How long will this interlude last? It is impossible to say. As you long-time readers know, my biggest weakness in market analysis comes when I am divining the long-term distant future expectations. Even though I have been fairly accurate at describing the imminent trends, sometimes I expect them to develop sooner that they do. For instance, in April of 1998 I never expected the Federal Reserve to pull the shenanigans that it did in August/October of 1998, as it postponed the necessary cleansing action normally resulting from bearish market action. Instead they just blew the bubble up another notch. Thankfully, my asset allocation model has normally pulled me along (as it did on September 5, 1998 turning bullish), to help me to catch those intermediate swings that occurred--slightly deviating from my time-frame. That is why I put these long-term expectations out there, but always urge you to be flexible if my asset allocation model changes. (By the way, I will be keeping the calculations of that model up in the future, with several much needed upgrades) Both the old and the up-graded model is still very much telling me to stay the course with the bearish projection. The psychology leg has turned slightly more positive, but not nearly enough to get the Fed's attention. As a result, the monetary leg is still very negative, and of course, the valuation leg is a "dead-duck." So this 1 ½ legged stool is going to be very hard for the bulls to find its footing on. If any catalyst comes along to push it over, it will be a crash to the floor.
Where is the floor? Once again, these projections are not worth the paper they are printed on, but everyone wants an answer. In my mind, the minimum downside risk is 16% under last Friday's level. That does not sound so ominous, but as I said that is the minimum risk assuming the long-bond yield would be back to 5 % and that the decline would only push the markets back to "fairly-valued" status. I have never seen a real bear market that did not push the indices to at least an "under-valued" status, and that would create much worse declines.
But rather than note the extent, I believe the more important fact is the time required to reach the next bullish "season." In the last 8 years we have been spoiled with corrections that only lasted a few weeks. That is what I expect to be the big difference this time. This historic bull market has created historic excesses, and I don't think those excesses will be rooted out in just a few months. I suspect the new season will not be able to start until the 1st year of the next Presidential cycle, which would be in the late months of next year, or the early months of 2001.
If I am right, that next bull market will find a world that is starving for growth. Instead of this long 19 years with "real" short-term interest rates remaining high, it will find them back down to a level that will push that $4.9 trillion of short-term liquid assets out from under the mattress, seeking growth.
That will produce the next wonderful "season." The secret is to get through this next 9-? months of tough times. You can see why I am saying don't be fooled by any short-term rallies in the weeks ahead. Please don't let anyone convince you that you should be uncomfortable with the cash reserves that we have built up since March of this year, in anticipation of the current problems that are just now starting to show their true colors. There will indeed be some short-term buying opportunities in the months ahead, but this is not one of them.
Believe it or not, despite my caution for the next 9-? Months, the best is yet to come. Wow!! That was a theme that I used in the first months when I joined Wheat 15 years ago. Investors were battered, and not many bought into that "buy equities" theme on first telling. It wasn't Abby Cohen on the bully pulpit then, it was Henry Kaufman. But over and over again, our team told the story and scored time and time again. It turned into a rout. We killed those bearish devils. Now the defensive theme is just as hard a sell. But judging from those 1200+ emails and letters that I received, from just two hours of readers on our web-site, the wisdom of our current defensive stance is also starting to take root.
With great respect and admiration for all you old, and even new "Wheaties" I wish you the best. Keep the faith. Hopefully our paths will cross again.
I'm excited, and you should be too. Thanks for listening, have a GREAT LIFE.
wheatfirst.com
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