Gary:
The latest market comments of Don Hays
December 6, 1999
Market Comments
by
Don Hays
In the world of market forecasting, my biggest curse over the last
30-years has been from being too early. Oh how I wish I could get
the
signals that I've had over the years, but get them 20 minutes
before they
would be carried out by the stock and bond markets. It wouldn't be
that
practical for clients, since they wouldn't have time to act on the
signals,
but it sure would help my blood pressure and the media would love
it. In
my career up to this point, the most extreme period of anxiety
occurred in
that 1981-82 bottoming period. My work started to say that the
worst of
the damage was over in the fall of 1981 when the Dow Jones fell to
824, but
the next 11 months were extremely stressful as the climactic bottom
did not
come until that early August 1982 low at 769. That was only 55
points
lower, but the time to cover those 55 points required almost a
year. I was
fortunate to catch that impending climactic beginning of this
tremendous
bull market on August 5, 1982--12 days before it lifted off, but
our 11
months of "crying in the wilderness" that the bottom was near had
started
to fall on deaf ears after the first few months.
Happily those deaf ears quickly opened back up when the dynamic
rally
erased those 55 points and many more in just a few weeks. The
patience had
been rewarded multiple times. Up until the last 8 months, that
period had
been the most frustrating, but obviously the recent experience is
setting
all kinds of records. Has it been the "new era" that is causing
the
frustration? I hardly think so.
If you look at the stock market as a market of stocks, rather than
just
the indices, it is obvious that the negative conditions read by our
asset
allocation model has impacted the market of stocks. For instance,
even
with the huge rally on Friday that added * of a trillion dollars to
US
stock holders wealth, only 28% of the stocks listed on the New York
Stock
Exchange have been able to nudge above the 200-day moving average.
So this
rally continues to become even more selective. As we noted from
the
Salomon, Smith Barney report from last week, even the recent
strength in
the Russell 2000 has come from the stocks with no earnings. On the
New
York Stock Exchange that trend is even more dramatic.
So if it isn't the "new era" that is propelling this rally, what
is it? I
don't think anyone can make a convincing case that the
"baby-boomers" 401K
buying is providing the fuel. The public has put an astounding $40
billion
in money market assets in the last two months--much more than
invested in
equity mutual funds. That smacks of public selling of stocks on
balance,
not buying them. When you try to do any kind of a "flow of funds"
approach, the only thing feeding the kitty comes from a rapid
escalation of
debt, and money supply.
Last week the New York Times had an article quoting Michael
Belkin, a
widely respected Fed "expert," as stating that the Federal Reserve
was
paranoid about the concerns of Y2K. As evidence he pointed out
that the
Fed was engineering the biggest expansion in Fed credit in the
history of
the institution. This week's numbers added frosting to the cake,
as M2
exploded up by another $25.7 billion with M3 up by a whopping $35.8
billion. In the last 11 weeks the M3 component has been blown up
by $194
billion at an annualized 15% rate. Remember the Fed's target
growth rate
for this aggregate is 5%. Six months ago, when the Fed had started
trying
to remove some of their excess money creation from the previous
year's
Russia/LTCM crisis, the stock market had shown very weak signs. In
the
wake of today's partying, most of your probably don't remember the
panic
that caused, but the S&P 500 fell from 1418 to 1247 (12%), and the
NASDAQ
Composite fell from 2864 to 2688 as the "free lunch" was removed.
Our
psychology composite picked up that panic of October 15, 1999, and
evidently so did Mr. Greenspan's tentacles. Because the Fed
couldn't stand
the heat. Just as Arthur Burns turned the money machine on wide
open in
the early '70's to try to get Nixon reelected, so too has
Mr.Greenpan
become very sensitive to making anyone feel any pain. It is
amazing what
marriage has done to Mr. Greenspan's former Scrooge personality.
Money supply is a career in itself, and I have never been able to
totally
figure out what comes first, the chicken or the egg. But there is
no
doubt, whether the Federal Reserve creates it or not, they allow
money
supply to do what it does. So that fear attack in the middle of
October
worked its magic on the Fed's money machine. And as it became
obvious to
the crowd that this Fed is once again cooking up a "free lunch,"
the margin
debt and bank credit has exploded. But wait a minute, bond prices
have not
exploded. With all this free money burning a hole in the banker's
pocket,
why haven't bonds done better?
I think that is being explained by the psychology sentiment
indicators.
In the latest American Association of Individual Investors survey,
the
bullish sentiment has exploded to 62%, and bearish sentiment down
to only
13%. It doesn't get much more bullish than that. So as the bubble
gets
bigger, and the tulip bulbs pick up their price momentum, why would
anyone
buy bonds? Even though the study that IBES developed, and the Fed
has
adopted, shows that the S&P 500 is 55% overvalued in relation to
the
10-year government Note, that is not the same as tulip bulbs that
double
every three months, and seem to picking up momentum.
But the truth is that every once in a while (it used to be every 4
years)
the Valuation investors let the Momentum guys have their day in
sun. But
valuation always wins out. Markets will continue to plunge, or
soar, until
finally the Value guys decide that they can't pass up either the
buying or
selling opportunity. That doesn't happen on a single day, or
usually a
single week. And you can always tell by looking at the
advance/decline
line. This sounds strange coming from me if you have read my
reports in
past years, because 90% of the time I downplay the advance/decline
form of
analysis. It is true that it has a downward bias in relation to
the
indices, so you don't use the long-term cumulative advance/decline
numbers.
But you can get some valuable insight in watching the obvious lack
of
confirmation in the rallies measured by the indices.
Over the weekend, in the wake of that 247-point feeding frenzy on
Friday,
as my faith was being shaken a little, I went back to the
chart-book. Was
there any precedent for this behavior occurring and not resulting
in a bear
market. I'm happy to report this morning, that it hadn't changed.
If you
review every significant non-confirmation over the last 30 years,
you will
see that eventually that signal brought the market averages to lows
that
rewarded a defensive posture--usually a dramatic reward. I believe
the
advance/decline line is a much better gauge of what the
value-investor is
doing. With that premise, that explains why money market mutual
funds have
been getting more than 2 dollars for every 1 going into equity
funds.
Three years ago, you couldn't find any thesis that was still
espousing
momentum investing outperforming value investing. Three years ago,
Warren
Buffet was the hero of the world. Three years go the battlefield
was
littered with the small-cap gunslingers that chase the hot stocks.
But
that all began to change with the first global panic in the summer
of 1997,
escalated with the second one in August 1998, and now with the Y2K
paranoia
of the Fed has really produced a stampede of the tulip carts.
Judging from the reaction of the markets during the meltdowns of
the
currencies in the world during the last two years, we believe the
big boys
are sliding into that same dilemma. The European currencies are
being
pummeled. The trade-weighted dollar is almost back to where it was
before
the crisis of last year. This is coming against almost every
currency in
the world, except the yen. And just as dramatic, the dollar has
been
pummeled against the yen. So when you look at this, it means that
Japanese
goods have just been marked up dramatically in the US, but even
more
dramatically everywhere else in the world, especially in Europe.
The
German mark is extremely weak.
And now this morning, we find the Japanese GDP declined by 1% in
the
latest quarter. This massive volatility in world currencies is a
symbol of
the fragile state of affairs.
So we can understand Mr. Greenspan's nervousness. We don't have
the
slightest idea of how Y2K is going to play out. From listening to
all the
"informed" sources, I have come to the conclusion that no one else
does
either. But the Fed is not taking any chances. But what happens
after
1/1/2000. One way or the other, I have a hard time believing it
will be
the time for tulip bulbs to sprout. If it is a hard freeze, these
new
blooms will be wilted quickly. But even if the weather is great,
the Fed
will have no choice but to refrain from adding the necessary
fertilizer and
water to the bed. So one way or the other, it looks like the
advance/decline line will win out.
It always has. |
