November 29, 1999
Market Comments
by
Don Hays
I absolutely love the Internet, and I'm not talking about the benefits of
on-line shopping. The real drawing power of this medium is the immense
amount of power and assess to knowledge from innovative market observers.
I hesitate to say this, knowing that every pseudo market observer is about
to deluge me with trivia, but this morning I can't help but shout my
praise. I am an early riser, and especially on Monday mornings. Every
week I save all the interesting reports/analysis that pass by me during the
week. On Monday morning, I review the entire stack, helping me to put it
all in perspective.
But I have to admit, I have a powerful filter to help me weed out the good
from the fluff. My asset allocation model serves as the traffic director.
As I have explained many times over the years, I have never found anything
as accurate as my asset allocation model to point me in the right direction
for the next 6-24 months of stock market action. I didn't say perfect, but
the little bit of success I have had in these last 30 years is a
testimonial to using this quantitative techno/fundamental approach. The
stock market is the best barometer in the world to project future trends,
and goes up based upon tomorrow's headlines. I have found that tomorrow's
headlines depend upon the combination of three variables based upon today's
analysis of psychology, monetary conditions/trends, and valuation. Since
today's monetary and valuation components are in such negative trends, and
even psychology is suffering a relapse from the positive condition of two
months ago, my "direction pointer" says to pay particular attention to
writers/analysts that are finding potential problems.
I call the asset allocation model my "skeleton," and the story that I am
able to design is the "flesh." The shape of the flesh obviously takes the
shape of the skeleton. So now I find the skeleton is in very bad shape,
and if you have ever tried to run, walk, or even crawl when the vertebra's
are not lined up correctly, you know why I am filtering out much of the
"new era" prognostications. I am giving the bulk of my time trying to find
flesh that fits this wretched skeleton.
In the last two months, as I really get into the building of my new
Internet delivered market letter, many of you have introduced me to new
websites with extremely innovative, creative market analysis. For instance
the chart from Decision Point (www.decisionpoint.com) that shows the
comparison of today's CBOE Internet Index to the AMEX Biotech Index of the
1991-93 period is very eye-opening. Will the headlines of tomorrow be the
same as it was for the biotech's during its "bust" cycle in 1972-73? I
also have been drawn to the same type of breadth statistics as illustrated
on Decision Point's website from that 1927-29 and 1970-72 period to today's
dismal record.
In that same vein, last week I saw another comparison to those periods
featured on the Comstock Funds website, www.comstockfunds.com where they
point out that in the period leading up to the exciting peak in the bull
market in September 1929, the advance/decline line had been dropping for
the previous 16 months. In the example that I have been citing, the
similar 1972 period, the advance/decline line had been tanking for the
previous 21 months. So far in today's world, the advance/decline line
peaked out in April 1998, 19 months ago. From the 1929 peak, it took the
Dow Jones 25 years to return to that level. In 1973, it took 10 years.
I have several Economists that I regularly glean info from. My longest
tenure has been with Ed Yardeni, who like me was among the biggest bulls
until about 20 months ago, but has been getting all kinds of barbs thrown
at him because of his extreme concerns of Y2K. His is a paid subscription,
but well worth it, but on www.yardeni.com, he gives his earnings forecast
for the upcoming year--2000. Except for him, every Economist featured
there is showing up earnings for next year, with the range from the low to
the high growth rate projected from 5.2% to 19.6%. Yardeni--now remember
this guy has been one of the best to recognize significant evolving trends
over the years--is projecting a recession that will knock 22.5% off of the
operating earnings for the S&P 500 next year. Now I don't expect any of
you to believe Yardeni, but my asset allocation model says that something's
wrong with this skeleton, so I'm going to lean his way.
The second Economist that I find extremely helpful is David Orr with First
Union. Since I no longer get my paycheck with their logo on it, hopefully
you don't think this is buttering up my performance appraisal. David and
his crew are among the best at analyzing the economic releases and cutting
the fat off to see the real numbers. For instance, on his website that can
be assessed through the First Union site at www.firstunion.com, he points
out that the GDP numbers last week contained the first look at corporate
profits. He cuts away the headline numbers and shows that when adjusted
for inflation on inventories and depreciation, the gain was only 0.9%, and
just 4.7% from last year's depressed numbers. Looking at adjusted domestic
profits, there was an 0.2% Q/Q decline, and only a 1.8% yr/yr gain. Hmm,
Mr. Yardeni, maybe that projection is not so crazy after all.
My first look almost daily is to the Northern Trust Economist, Paul
Kasriel, and his fellow economist Asha Bangalore. I think I relate to them
because it seems that we seem to think/write/analyze with the same
skepticism. They also are strong "free-market" economists that believe
markets are far superior to government regulations. In the latest reports
from Paul, on the web site that can be assessed through the Northern Trust
site at www.ntrs.com, he also reveals the poor earnings numbers when the
international and special factors are removed. He also makes sure we pay
attention to the special accounting rules being used to massage corporate
earnings. For that reason, he gives special attention to the government
report of corporate earnings from last week's GDP report.
But the real winner this week comes from a brand new website for me,
www.cross-currents.net. In this report Alan M Newman, no that is not
Alfred E., presents one of the most amazing parallels I have seen. In this
report, he projects that daily trading volume for 1999 will finish the year
200% above the Gross Domestic Product. In plain English, that means $2 is
being traded each day in stocks, for every $1 traded in goods and services.
Why work to produce goods and services when you can trade stocks, so my
friend Sturt tells me. Mr. Newman states that only one stock, Microsoft
routinely trades 10% of the daily GDP each day. There is so much in this
report that helps me to put flesh on my asset allocation model's skeleton,
that I could almost reproduce the 7-page report, but he shows how in that
trading flurry of 12 days ago, the top 10 stocks in dollar trading volume
amounted to 82.5% of GDP. Now listen to this. Even excluding the stocks
that had no earnings, the top ten traders on November 23rd on the New York
Stock Exchange had a 55.1 P/E, and on the NASDAQ 155.6. That is not a
typo, my friends. Tulip Bulbs anyone? I have quoted this statistic
before, but 99% of the 50% explosive upsurge on the NASDAQ Composite this
year has been fueled by only 65 stocks. Only 10 of those 65 accounted for
65% of the move.
One more. This week's comments from David Tice, at www.prudentbear.com
compiles many of the economic factors that have to be giving Alan Greenspan
some anxious moments--as they should be. He cites that the unemployment
claims dropped 13,000 last week, the lowest number since mid-September,
with the continuing claims falling to 115,000, the lowest since December
1998. Other economic statistics reveal similar trends as the New York
Purchasing Managers survey revealed a jump to 64.1 from the 60 level in the
previous month. Even more significant the manufacturing sector rose to
69.1 from 55.6, and the prices paid rose to 75 from 64. It is amazing how
Hillary has already reinvigorated that state. The nationwide help wanted
advertisements rose 3 points to 86, and the University of Michagan consumer
confidence survey rose to 107.2 from 103.2. Topping the amazing economic
surge is that the mortgage application, right in the face of rising
mortgage rates rose to the highest level since July 2, 1999. The mortgage
purchases are up 24% since October 22, 1998.
Isn't a roaring NASDAQ wonderful? There is a very good correlation
between retail sales and the NASDAQ market index, so this Christmas should
be a barn burner-- with the bulk of it being financed. But why not, with
stocks going through the roof? In the last 4 weeks, bank credit has been
rising at an annualized 12% rate, with margin debt this year is up by $38
billion, equal to a 27% annualized rate. When you can buy these tulip
bulbs, and they are sure to go up, why not leverage them to the hilt, buy a
new house, car and necklace, and enjoy the rewards of your great ability to
pick the right bulb?
But it does seem that fewer and fewer tulip bulbs are still playing the
game. So I guess I need to sell those that are not, and put all my eggs in
that one beautiful golden basket. Or better yet, maybe buy options. The
option trading volume is knocking the roof off, setting all records. Maybe
I could write call options against my tulip bulbs, and maybe buy more of
those good-looking ones with the proceeds.
Sounds good to me. That's enough for today. I have to go shopping.
The Hays Market Focus Advisory Group does not guarantee the accuracy or
completeness of the report, nor does the Hays Market Focus Advisory Group
assume any liability for any loss that may result from reliance by any
person upon any such information or opinions. Such information and
opinions are subject to change without notice and are for general
information only. Hays Market Focus Advisory Group, 2828 Old Hickory
Blvd., Apt. 1808, Nashville, Tennessee 37221. |
