Iqbal Latif's Global Market Review
The 'mother of all bear markets'!! Does this unabated
selling has any end in sight?
By Iqbal Latif, London, Sunday, 18th March 2001
As I look out of my window and see throngs of crowd in the London speakers corner gathered around all seasons traditional speakers proclaiming the 'end of the world'. None of these 'end-mongers' seems to be least worried about the state of global markets. I should have thought that the ugly close on Friday should have at least brought one fund manger to proclaim that we are all dead. Global markets are seeing the worst kind of pressures since 1998, the most severely impacted being Technology, which includes Internet and dot.coms, media and tele-com. There are various factors in this market fall. As stocks continued to tumble down Wall Street this past week, the cascade of red ink has investors and traders wondering if this is a genuine buying opportunity or just another bull trap. While there are clearly no easy answers, the excessive bearishness among investors has created such a high level of uncertainty that even many of the most experienced traders are now unsure of what lies just ahead. So what is the best thing to do - buy in, bail out or stay out? As I brace for ther opening on Monday morning I think that we will see a big range from 1130 test on SPX to close at 1155, no one would like to go short for the FOMC meeting.
This is the essence of the predicament: with an FOMC meeting just ahead on Tuesday, we would expect to see, at the very least, a limited market rally as investors anticipate Fed chairman Alan Greenspan to offer a helping hand with a timely, if not super-sized, rate cut. Ima banking on the argument that we may have a surprise from AG, a small cut may actually help as after intital selling the relaisation htat FEd is too confident may put somekind of bototm to this ugly selling. On hte other hand we may see a huge 1 % cut if FED thinks that since .5% may not work anyway and asset deflation which seemed a huge task just a year ago has been achieved and they can err on the side of little inflation considering that right now market is selling on delfationary fears.
Unfortunately, the street is quickly losing faith in the former economic champions willingness to give the stock market a big enough slice of rate-cut cake to make a difference. Everyone isl ooking for the gates of capitulation leading to the proverbial market bottom that everyone has been waiting for might just open wide tomorrow. Markets like this one usually have to reach an excruciating level of anguish before the weak players decide they've had enough and throw in the towel . .The level of pain is rising quickly.
I have not seen investor sentiment this pessimistic since the Crash of 1987. The market is neglecting virtually every historic trading pattern that has reliably forecast a market bottom. One of the most reliable indicators, the 'Two Tumbles and A Jump' rule does not seem to be working at this moment, but eventually it will. This rule implies that after the Fed has cut the Fed funds rate or the discount rate two times, the market jumps. Over the past 50 years, the stock market has posted an average gain of 29% during the 18-month period that followed the second
rate cut. May be the next FOMC meeting may kick start this out of fashion 'Two Tumbles and A Jump' rule, we may get a new definition 'Three Tumbles and A Jump' however I see that as washout is eminent whatever Fed does, we may hit that 1580 area on NDX before we see the rally.
This is a strange kind of selling, which makes us believe that this is un-sustainable selling, the reason being that the overall economy is doing just fine. Although investor and consumer sentiments are dropping from highs of 1999/2000, retail sales,consumer spending and housing starts in the US are all doing very well. If this is the end of the bull market, then an economy that is about to go into recession does not display these kinds of numbers in the beginning of a recession. Undoubtedly, the asset
bubble has been pricked and the “easy money” era is all gone. Anyone expecting to make money overnight from dot.coms and interne has suffered huge losses. The financial models of most of these companies did not stack up together and these were the companies that helped the huge technology spending of 1999 and year 2000.
According to reports on analyzed basis, US$560 billion (equal to 5.5% of U.S. Gross Domestic Product) were spent on technology capital spending in year 2000 alone. That was the reason that telecoms and networking sectors took NASDAQ to the 5000 territory. Now, it is expected that this capital spending will be sharply curtailed and that may be reduced to 4% of U.S.’s GDP. Although this huge cut-down will slash corporate profits of companies like, CISCO, INTEL, NOKIA and MOTOROLA, the fact remains that these companies have been hard done by. The comaprisons of DOW with Nikkei are in currency, we are totally neglecting that Inflation when DOW was 1000 ranged from 8% to 14%, long bond was at 12% in 1977, the US GDP was 1/4th of the present level, percapita income was far lower and velocity of M3 dipped below 1.3. Today in just last quarter that has moved up, and liquidity is much higher from 1977.
NASDAQ is trading at a 2-year low and its nearly 68% down from the high. We expect that there has to be a last big selling pressure as markets do excessive things on the way up and on the way down. We do not believe that the technology revolution is dead. It is just a huge correction and we see that the underlying economy within three months will show that the broad market has to move higher as corporate profits will come out better than expected. Most of these companies have intelligently steered the earnings expectations lower. John Chambers, who is a master of managing earnings, yesterday announced that it was the worst decision of his life to cut jobs at CISCO. But, we think that Chambers has now created the possibility of
an upside surprise by June 2001.
Motorola, Cisco, Nokia are all hit by the worst kind of negative press nowadays and it takes a brave man to support these stocks, but I would suggest that aggressive investors should look hard at these companies. CISCO was expensive at $75, but there is not much downside room at $18. Motorola similarly was expensive at $55, but at $15 it’s a bargain. It is a company with state-of-the-art efficiency and productivity. Although mobile business is suffering, as NOKIA will emerge as the number one leader in the world and out of 500 million sets expected to be sold in 2001, 40% will go to Nokia. However, Motorola semi-conductor business is first-class. The irony of the matter is that both Nokia and Motorola have been slaughtered. The leader, which is going to emerge as number one in the world, is being hit hard due to tele-com sell-off, and the semi-conductor leader is being hit for its tele-com factor of its business.
Add with these companies some storage companies, like Network Appliances (NTAP) and EMC, and top it with Sun
Microsystems servers. If you want to add a little color in your portfolio, include some old Internet stocks like PCLN (PriceLine), now at less than $2.50 and Fashionmall.com. Of course, at the present time, you should only invest one-third of your total investments and wait for a further drop to add another one-third, or if there is a rally from here, you may add further above 1400 on S&P, a long shot but a doable one in next three months.
One should not be too optimistic on the top or too pessimistic at the bottom. But, anyway, who knows the bottom in this volatile market. One thing is sure – when companies like General Electric (GE) forecast a great year 2001, then I don’t see that a sector like Technology, which is providing productivity to companies like GE, will suffer too much from here. |
