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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: tradermike_1999 who wrote (599)	11/12/2000 3:29:31 PM
From: tradermike_1999	Read Replies (2) \| Respond to of 74559

The Business Cycle and Market Rotation: One long trend of economic growth has characterized the history of the United States. Since the creation of the original colonies until today our nation has made technological leaps and bounds to the point where its people enjoy the highest standard of living in the world. However, this trend of economic growth has been interrupted by periodic economic cycles of recession and depression. Economists call this cycle of growth and contraction the business cycle. These recurring ups and downs in economic activity last through several years. Economists have blamed these fluctuations on technological innovations and their impact on investment and consumption, monetary policy, or external events such as wars and changes in the price of commodities. Business cycles are made up of peaks, recessions, troughs, and the recovery phase. The peak is when business activity has reached its maximum levels. The economy has low unemployment and domestic output is close to total capacity. This is followed by a recession during which output, income, employment, and trade decline sharply. This downturn usually lasts between 6 to 12 months. It is generally the shortest phase of the business cycle. The recession period is followed by a cycle trough during which business activity reaches its lowest levels. This phase can be very or quite long. The Great Depression and 1970s era of inflation and recession were both extended trough periods. The final phase, recovery, is when the economy expands towards full employment and maximum output. The movements of the financial markets are closely linked to the business cycle. Price trends in the three main markets, stocks, bonds, and commodities, are heavily influenced by investors expectations of the future. Each financial market tends to peak and bottom at different points in the business cycle. Therefore, one can study the financial markets to determine broad trends in the economy. An expanding economy is generally favorable for the stock market, a weak economy for bond prices, and an inflationary economy for commodities, especially the price of gold. Let's exmaine the bond and stock markets to see what they are telling us about the future of the economy and what might be the best place to invest in. A growing economy is generally bullish for stock prices and bearish for bonds. The bond market tends to lag the overall economy. The bond market usually begins its first bull phase when the economy begins to slow down from it's peak rate. Bond prices also top out and begin to fall as the economy begins a recovery phase. The sharper an economic contraction the greater the rise in bond prices usually are. The most important bonds are government treasury bills. Investors all of the world use them as safe havens when there is political or economic turmoil. Economists have found that the point spread between 3 month Treasury bills and 10-year treasury notes is the best predictor of future economic activity and recessions. Throughout the year the treasury bills spreads have continued to widen and are now at -.18%. A Federal Reserve study found that a value of -.18% indicates that there is more than a 30% chance of a recession within a year. You can read their study at . The overall stock market tends to lead the general economy. Unlike the bond market, however, the stock indexes go up before the economy peaks and fall before it begins a recession. However, the stock market is made of a companies from various economic sectors. These sectors, and their stocks, rotate during different phases of the business cycle. A careful study of what these individual stock sectors are doing gives a much better read of how the stock market is factoring in the economy than just looking at the major averages does. Economic recoveries are often led by consumer spending and drops in consumer spending often lead economic contractions. The retail stock sector, likewise is a leader of the broader stock market and the economy and is usually one of the earlist sectors to peak out and to bottom. The same holds for the housing and construction industries, which are heavily influenced by interest rates. As interest rates are cut demand in these sectors grow and so their stock prices. The industrial and manafucturing sectors usually follow the moves of the retail and construction industries. As inventories become depleted demand for more manufacturing and industrial ouptput increases. Since the stock market leads the economy these stocks bottom out and recover as investors factor in economic recovery, more consumer spending, greater construction spending, and a growth in industrial output before these events occur. However, because the economic enviroment and news are often still bad investors are fairly cautious and first place money into companies with god earnings and cash reservces. As a bull market cycle grows though, they will place money into more speculative stocks such as technology companies. At the tale end of the bull market the hot sectors become these the market leaders. The larger the speculative bubble the worse the next market downturn becomes. At the beginning of a bear market money flows out of speculative issues and into safe havens, including bonds, high-dividend yield stocks, and staples such as food and drug stocks. This is exactly what we have been seeing over the course of this year. The top performing sectors have been utilities, drug manafucturers, and companies such as Pepsi. We are also seeing a complete breakdown in retail stocks. Although consumer confidence and spending numbers remain high the retail stocks have been breaking down. The stock market is confirming what the bond market is hinting: an economic slowdown is coming. We are already in a bear market and I do not see any bull market return until these retail stocks bottom out.

To: tradermike_1999 who wrote (599)	11/12/2000 5:18:55 PM
From: CountofMoneyCristo	Read Replies (2) \| Respond to of 74559

Either way, I wouldn't trust IMF forecasts they are usually wrong. Mike, I am curious why in one of your articles you use IMF reports to bolster your claims, but now you say they are not to be trusted? I am curious about all of this gloom and doom talk. I have stated 2200-2500. However, I warned of an impending crash at 3828 9/21 to our entire field in public, without hedging that call. I wonder where this disaster lingo comes from. First of all, foreign capital leaving the American bond markets is a ludicrous proposition. Where else do they have to go? Europe cannot raise rates with anemic growth, and the ECB's attempt to bolster the Euro has failed. So, the dollar is one of the strongest currencies in the world right now, and likely to strengthen further. No money is leaving Treasuries. I am a full-time Treasuries trader and I can tell you the recent massive rally in Treasuries belies your arguments. If anything, more money is flooding in. Please state how current conditions are worse than the Fall of 1998, with Russia defaulting on its debt and the massively hedged Long Term Capital very nearly causing a massive financial crisis. We are nowhere near that now. Again, why bring the fever pitch of disaster talk now? Where were you at Naz 4200, 3800 and even 3500? I do not recall hearing such dire predictions from you then. I would caution everyone here against following this line of commentary. It is typical of a near-bottom. Time and time again we have seen pundits crawl out of the woodwork during a panic to exacerbate the crisis so that shares may be taken on the cheap. Don't buy it. 1999 was a rally simply far too far too fast, and the economic slowdown is directly tied to the Fed overcooking rate hikes. They will have to cut and fairly soon. They miscalculated. Inflation was always under control. Now we reap what they have sown, which is a moderately slowing economy. They will soon have fingers pointed their way and do not wish to be responsible for recession. They will cut and quickly, when that becomes apparent. Not now, but next year, yes, I do believe they will be forced into action. As for stocks that are way up from their levels 12 months ago: 1. CSCO +25% 2. ORCL +119% 3. JNPR +264% 4. JDSU +38% 5. SDLI +244% 6. SUNW +68% 7. BRCM +91% 8. HGSI +277% 9. VRSN +35% 10. BRCD +210% Some pretty fat rallies, even after this huge pullback. The stock market is simply re-evaluating which companies should be participating in the going forward of the greatest economic expansion in the nation's history. This is a natural evolution. Would you please dispense with the disingenuous and belated disaster talk. I would be more inclined to believe your words if the facts you marshal were a bit more logically tied together, and your dire warnings had been made 2-7 months ago, and not now, when the panic is already underway. Sincerely, Olivier L. F. Asser