Market Summary 10/18/99
"The Bulls are Going, Going, Gone"
Simple Simon has found it oh so easy to play the bull side of the market but darned if he didn't find out this week that he's been
led in this game by an idiot of similar intelligence. The only question in our minds is when does he finally admit that Wall Street
may be entertaining but playing their game has cost him his shirt!
On Tuesday last, we returned to our position of two weeks ago where we were 100 percent short (and had been close to it for
fully six weeks). If ever there was a case for technical analysis, it was proven on Tuesday as the commonality of trend reversals
in Stochastic, MACD and RSI indicators showed that any near-term rally was dead.
You wouldn't hear that from Wall Street however. The Street has always played the public for Simple Simons, but now we think
that some of the CNBC anchors have also crossed the line. Some have become cheerleaders for the securities industry, whose job
it is to create and distribute securities.
You should know that a financial analyst is an objective person who, when studying cause and effect, tries to relate a result, or
effect, back to its root cause. The Street however dishes up a steady diet of just the opposite. They are involved in the art of
synthesis, or story telling, always taking you from something they've started, to someplace they want you to go, which is ultimately
to buy securities at prices higher than they've paid for them.
The securities industry is built on a conflict-of-interest platform, the likes of which does not exist in any other walk of
free-enterprise society. But, that's the capitalist system. Only here do you find that your agent is, if he so chooses, also a principal
in the same transaction, and because the industry is self-regulated, he is also rules-maker, judge and jury.
As we recently stated in presentations to the Canadian Senate Banking Committee and to a forum of all the securities commission
chairs in Canada, it's a little like going into divorce court, both sides represented by the same law firm, with the hearing in front of
a third partner in that firm. With such conflicts-of-interest, the public simply cannot be well served. At times, they will be taken
advantage of.
Are you at this point in the stock market cycle, like many, feeling a little betrayed by your broker or your favorite media anchor, as
your portfolio drifts quietly into money heaven? You have to acknowledge that for many weeks now, we've been screaming out
the message: "Protect yourself!" Go back through our weekly Dow 30 Journals for several months and ask yourself who else has
so clearly articulated the problems in this market? Who else has put their entire portfolio of 30 stocks on the line week in and week
out, just to prove a point?
Well the truth is that trillions of dollars in portfolio values have been lost to the public these past few months, but the so-called
experts from Wall Street will still be driving their limos from their monster homes to their country clubs on weekends. They'll look
knowingly at one another, satisfied that once again they've fleeced the lambs.
We know of what we speak. Thirteen years ago, we rose to the industry penthouse, the top floor of the Stock Exchange Tower in
Toronto, where starting from 13,000 square feet of unimproved space and no staff, we built a full-service broker-dealer, one that is
now part of an international firm. We then left the Street for the comforts of the Caribbean islands, where we learned and
practiced the art of offshore finance.
But, now we've returned to Canada, where we begin this weekend to build a new electronic brokerage firm with an impressive
group of partners, including multi-billion dollar financial institutions and media companies. Our mission is to serve the public right.
Surely, in recent years, individual investors have been given lip service, not quality, value-added service to help them grow their
personal wealth. A bear market will soon clear out most of the industry opportunists, those who may understand technology but
not the science of investing, nor the art of real customer service.
There is a saying that the market makes great theatre. The only problem is that it should be a war theatre, not a place for
entertainment. There is no fun in losing. We have personally seen the ravages of bear markets on individuals and families, from
the bears of 1969, 1973, 1981 and 1987. Most of you have not. When a portfolio goes down in value by 50 percent or more, those
assets have been lost. It's like death.
Don't be fooled by those who would say to you, "Just hang in because the market always comes back". If you succumb to this
philosophy, you will never be able to take responsibility for your own actions. Accountability will never be an important principle in
your life. You will be destined forever to be a follower of those who are not qualified to lead.
Our Dow 30 Journal portfolio this week is up over 100 percent annualized for the past year. During the past 31 weeks since we
have been publishing our journal, the DJIA is up 1.4 percent but the results of about 200 trades in these Dow 30 stocks is in a
different league altogether. We are up almost 100 percent and about 85 percent of our trades have been profitable.
More than anything, here's the point: You have been misled by Wall Street, but we have presented a consistent investment
philosophy, strategy and tactical plan, accompanied by a continuous analysis of market events, that could have helped many
persons avoid the massive destruction their portfolios have suffered.
When the new Internet brokerage firm we are building is ready to take on business, probably January 3, we will expand our Dow
30 Journal to a list of 100 blue-chip stocks. This list will include the Dow 30, the top 10 of NASDAQ, the Toronto Stock Exchange
35, and a quality group of 25 foreign stocks listed for trading in the U.S. The total capitalization of these stocks is presently about
$6 trillion, of which about 66 percent are U.S. companies, 25 percent European, 5 percent Canadian and 4 percent Japanese. We
will continue to write a weekly journal plus a daily market commentary for the public's use, but daily journals and trade blotters will
be available only to our valued Account Holders.
For the next ten weeks, we continue to see a difficult market for the bulls. Our Dow 30 Journal headline this week says: "The
Bulls are Going, Going, Gone!" With regrets to those losers in the bull camp, and with expectation of greater profit in our 100
percent short portfolio, this headline cannot in fact be true. If everybody was bearish, the market could fall no further. It would be
the dawn of a new bull market. Since that's not the case, yet, it means there are still many bulls running up and down Wall Street,
although few we suspect are still of the "raging" variety.
We can thank Joe Battipaglia, Abby Joseph Cohen, Larry Kudlow, and Ralph Acampora for being -- to be kind -- wrong.
Thankfully there are still more than 50 percent of you who still believe in those Wall Street icons.
To try to do justice to our reporting, let's repeat some words of wisdom from our Dow 30 Journal for Week 34 (August 28: Dow
11090), entitled, "Waiting For The Shoe To Drop":
We've moved to a position of 86.7 percent Short (26 Dow 30 stocks) and only 13.3 percent Cash (4 Dow stocks: IBM,
MCD, T and UK). We are long no Dow stocks this week as we have turned decidedly negative on the market. (The prior
week we had been 73 percent Cash, 10 percent Long, and 13 percent Short).
This past week the Fed raised rates a second time since we assumed our neutral stance. Whenever the Fed is in a
tightening mode, U.S. equities give less than average returns. Just because capital is pouring into stocks today, money
flow could turn on a dime.
As we've often pointed out, suspending reality is a temporary phenomenon that cannot last if capital markets are to
function properly in the future. We're waiting for the shoe to drop.
One of Wall Street's gurus, Ralph Acampora, is obviously unconcerned about the present state of the market. On July 6
he "raised (his short-term) expectations for the Dow Industrials from 10500 to a conservative target of 12000-12300".
Last week he told CNN he even believed that this target would be partially reached in September, with the index up 1000
points in the next five weeks. Oh Ralph! What's going on over at the Pru?
The following journal Week 35 (Dow 11078), entitled, "In Your Dreams," we pointed out that some CNBC anchors had crossed
the objectivity line, into fantasy. We were also critical of the CNBC/Shroeders' chief economist Kudlow. Recall what we had to
say:
The DJIA has traded within a remarkably narrow range of weekly closing prices in the past month: 10973 (Aug 13),
11100 (Aug 20), 11090 (Aug 27), and 11078 (Sep 3). The problem for the average investor, who is trying to make some
sense of all this, is the day-to-day push and pull counter-forces in the market. No longer can investors regard the
market's action as being one of longer-term ebb and flow. Spin-meisters for both the bear and bull camps are working
full time and the daily action is too hot for that.
For the bulls (and who doesn't want to be bullish) there is a formidable CNBC team of Kudlow-Battipaglia-Bartiromo. It's
really not fair to push the eminently qualified, exciting and pleasant-to-look-at Bartiromo into the bull camp but, really,
Friday morning was just another example of how reporters cross the line to become cheerleaders.
In her pre-opening time-slot from the NYSE floor, there was what only can be described as the shrill voice of Ms.
Bartiromo screaming at the viewers: "This market is going to rocket higher at the open! Indications for AOL are 93-95
(from Thursday's close @91.25)…what's that? … (Leaning toward the nearby AOL trading post) …96! 96!" (AOL opened
95.25, up $4.00, closing $96.81. ed note: Eleven days later it hit $80 before rebounding again to over $111, the point
being that prices fluctuate.)
Oh, the sheer ecstasy of ‘fast markets'. But, in the interest of objective reporting, have you ever observed Ms. Bartiromo
as excited when stock prices are going south? No, there was almost a black cloud over CNBC on the mornings of
Monday and Tuesday when it was apparent investors had become net sellers, continuing a trend that started the week
earlier.
Friday morning, back in the Ft. Lee home office, Kudlow was using the moment to ‘diss' Fed Chairman Greenspan
("Alan, leave us alone would you already! We don't need your meddling! Everything's perfect, already.")
This long weekend, sit back and give your head a shake. Is it any wonder why the small investor is terribly confused at
these goings-on? The market, we say, is now marketing. Wall Street has become Madison Avenue. It is a game that plays
people. Where, we ask, have the Jim Cramer's of the world gone? Where is the integrity in today's market commentary
and reporting?
After the close this week at Dow 10019, when the mood had turned decidedly ugly, many jumping off the good-ship Greenspan,
where was Kudlow? Finally, doing his job, calling for another 25 basis point hike in the Fed rate. Only now is Kudlow seeing what
others have been speaking to for some time: the economy is over-heating because people are spending faster than they are
earning. Expectations have become unrealistic.
Steve Ballmer had it right when he referred to today's "gold rush mentality." The air has to come out of the market index balloon,
and we refer here to the index problems created by inflation in such stock prices as those in the Dow and the NASDAQ top 10,
which are trading at multiples well above their historic norms.
We foresee an orderly ratcheting down of the share prices of the top 50 stocks. There is not likely to be a panic because the great
majority of stocks have already been hammered down 40 percent and more from recent highs. Besides, the top 50 stocks are the
blue-chips held principally as core positions by financial institutions. These professional investors will not throw away a GE or an
IBM like others did with a Xerox in the past week. They may however lighten positions to raise cash to go right back in at the
start of the next year, or late this year.
In 1987, the whole market was over-priced, especially small and mid-cap stocks, so the bear phase correction was quick and
devastating. In 1981, interest rates had climbed well over 20 percent and the Fed had squeezed the remaining breath out of the
preceding 1970's inflation cycle, so the bear phase correction took a year or so to work through. Markets in 1969 and 1974 did not
have near the full-disclosure reporting and independent analysis that does go on today. Companies that miss their numbers today
are the immediate beneficiaries of severe share price corrections, even if others in their industry group are unaffected.
This is a more sophisticated market, which we think understands that for widespread panic to occur, factors like prices of goods
and services and the cost of money must be rocketing upward, or the dollar index crashing. To the contrary, prices are mostly
stable with only temporary rallies in commodities such as oil, gold and, this week, coffee. Prices are rising generally but unlikely to
get out of hand. Also, long Treasury Bond yields may have moved north of 6.3 percent but the prospects for a return to six
percent yields, or even lower, are at least as good, we feel, as an early move above six and one-half.
While many investors today are losing their heads, this is the right time to be looking forward to re-establishing positions in the core
stocks of your portfolio. We'll be looking at GE, IBM, WMT, XON, MRK, C, T, JNJ, PG, HWP, MCD, and DIS – but not just
yet. When we think the time is right, we'll let our readers know. We may even bang our shoe on the table to get your attention.
|
