Gary I saw this on the QCOM thread today, it'll give bambs something to think about.
Doug Kass: The Coming Bull Market for Cash
By Douglas A. Kass
Special To TheStreet.com
8/16/98 12:15 PM ET
Despite the market's many attempts to rally since the recent downturn, and despite the healthy debate about the market's direction, I believe that the great bear market of 1998-2000 has already started and we will have a mini-depression in 2000.
Many of you who know me understand that I have a proclivity toward negativity. The Wall Street Journal dubbed me the "Bear of Boca" earlier this decade. But I believe the bullish tones that have so dogged the bears for these past several years are starting to fade.
Most of Asia is already in depression. The current unemployment rate of 4.1% in Japan (an all-time high) would be equivalent to a 20% rate in the U.S. The Japanese banks have $1 trillion in bad loans. Chinese banks have substantial amounts of bad loans. The weakness in Asian currencies is already affecting the profits of multinationals in the U.S.
The Asian Flu is infecting economies from Vancouver to Buenos Aires to Moscow. France is already in a depression. It has a true unemployment rate of nearly 30%. Then there's the declining price of oil. Further drops in oil prices would put enormous financial pressure on the already ailing economies of Russia, Indonesia, Venezuela and possibly Mexico.
There is also a derivatives problem. There is an estimated $50 trillion outstanding worldwide in derivative contracts written by banks (half by U.S. banks). About 40% of derivatives written by U.S. banks are for Asian customers. More importantly, the 20 largest banks in the U.S. have equity capital of $250 billion but a derivative credit risk exposure of $370 billion. This is a disaster waiting to happen.
Valuations on stocks are ridiculously unprecedented. Price-to-earnings ratios are at incredibly high levels. Old valuation measures, such as the dividend yield, are miles from historical levels. Speculation is high -- higher, in my opinion, than the speculative heights reached in 1929. Household involvement in the market is heavier, with some 50 million persons active in stock trading and investing in mutual funds. There are almost 5 million "speculators" trading online for $10 or less a trade. A $10 ticket is a great lure for compulsive gamblers.
The massive involvement in this market is breathtaking. I recently met a young chap in Boca Raton whose father is a cardiologist. His dad comes home lunchtime and trades options for an hour. A few months ago, a friend took me to a "public trading parlor" in Florida. There were 25 traders sitting in front of computer terminals. My childhood friend, a heart surgeon, is playing the market even though he isn't clear what a P/E ratio means.
I know people in today's market dislike comparisons to 1929. But such comparisons are almost eerie. Back then shoeshine boys and taxi drivers gave tips to customers instead of the other way around. Expectations of stock market profit are very high. Fear of loss is very low.
The party's over and either nobody knows it or wants it to be over. Or both.
The best top-down economic forecaster in the country I know (not a professional economist by trade) thinks we are about ready to have an old-fashioned capital goods recession later this year, or early next. I agree and predict we will be in a recession by year's end.
U.S. corporate-profit growth has slowed dramatically. Multinationals like Coca-Cola (KO:NYSE), McDonalds (MCD:NYSE), Gillette (G:NYSE) and American Express (AXP:NYSE) (Warren Buffett's Fab Four) are going to have their earnings severely reduced by unfavorable currency translation owing to the super-strong U.S. dollar. Earnings on growth stocks are overstated anyway. If companies like Microsoft (MSFT:Nasdaq), Dell Computer (DELL:Nasdaq) and Cisco (CSCO:Nasdaq) properly accounted for stock options (which all their employees get in lieu of salary increases and cash bonuses), their reported earnings would be reduced by between 60% to 80%, according to my calculations.
In the great Bear Market of 1973-74 (the Yom Kippur War/Watergate bear market) the Dow Jones Industrial Average fell 48%, but some of the Nifty 50 one-decision stocks of that day -- Polaroid (PRD:NYSE), 3M (MMM:NYSE) and Avon Products (AVP:NYSE) -- plunged by 90%.
Almost all the technical and sentiment indicators I look at have been flashing major sell signals over the last three months: odd-lots, the OEX put/call ratios, the equity put/call ratios, mutual fund cash, Lowry's Buying/Selling Power lines, breadth divergence, new highs/new lows, volume patters, advance/decline and up volume/down volume Moving Averages, TICKS, Dow Theory signals, market reactions to good and bad news, investment advisor sentiment, etc.
The "thin-reed" indicators are all there, too:
Citicorp (CCI:NYSE) and Travelers (TRV:NYSE) merger announcement of April 4 (breadth topped out on the New York Stock Exchange the day before).
Some 12,000 people converge on Berkshire Hathaway's (BRK:NYSE) annual meeting in Omaha.
Abby Cohen, the bullish strategist at Goldman, on the cover of Business Week in early May.
Goldman Sachs announces its plans to go public.
Market commentator Joe Granville, talking on CNBC in May, calling for the mother of all bull markets (14000 by 1999).
Jack Grubman, a telecommunications analyst, receiving a $25 million compensation package, according to published reports.
And then there is President Clinton. Equities rarely fare well when the president is under attack. Again, witness the 1973-74 bear market.
This is going to be a long, deep, multi-legged bear market. The OTC market has already experienced its first downleg. The first leg down on the Dow started June 10 when Alan Greenspan gave his bullish testimony to Congress and implied interest rates would not be raised at the June 30th meeting of the Fed Open Market Committee.
The Great Bear Market will hit bottom in the first quarter of the year 2000, with the economic and financial distress caused by the Year 2000 problem. The DJIA will have dropped by three-quarters by the first quarter of that year from its high of 9400. The Nasdaq Composite Index will have dropped by a similar amount by then.
I predict that 90% of the stockbrokers now practicing will be out of a job by Jan. 1, 2000. The overall unemployment rate will rise to approximately 15%, a mini-depression number. Yes, these are extreme views.
How can I be so certain about all of this? One final reason: Recently, a majority of my limited partners withdrew their capital from Kass Partners, L.P., my short fund, causing me to close the partnership! |
