Thanks from Tim Lamb..great report, every long needs to digest it well..
From Don Hays morning commentary. Hey I’m only about 10 hours late with this one. My one comment is with every client I have but one they are contributing to the retirement plans and putting the money in money market funds vs. mutuals or stocks. Its not a large sample. Here is the commentary
Okay, I think you have the message from me. I believe very strongly that the 10-day Arms index, which is supported strongly by my asset allocation model, is telling us the stock market either has or will make an important bottom within a 20 trading day window subsequent to March 16, 2001—the day it moved above the 1.50 trigger level. If you are a new reader, make sure you spend a few minutes weaving through that important “Sign of the Bull” link on the home page of our website, haysmarketfocus.com. This statement is what I strongly believe, but then comes my short-term fine-tuning, and even though I believe in it and act on it in my managed accounts, I don’t act with the same conviction or efficiency as that first belief.
My short-term fine tuning guesstimate is that the broad market made its final low, only four days after that March 16 trigger day, on March 22, 2001, and even though I still expect that the ebbing-and-flow-wicked-volatility will/can continue for about another week or so, I believe that a strong advance will lift off in the very near future, strongly imitating the advance subsequent to the March 24, 1980 signal given by the same 10-day Arms index.
Now let’s get to the anecdotal evidence. To begin with, the 91-day t-bill rates are plunging. This is EXTREMELY bullish. If you look at the charts on our website that are in our Monetary section, you will see that we don’t have one chart that shows the fed funds rate. I know they are the chief focus of the world, but in my opinion, wrongly so. I believe that the Fed virtually never leads the market, and even though Greenspan acts all-knowing, he is simply tagging along with what the market makes him do. So when the t-bill rate dropped to a 3.86% yield on Friday, which is 14.2% under the discount rate, that is VERY BIG news in my opinion. That is just one day, but if that disparity continues for a few more days, I do believe that the Fed will conduct an inter-meeting rate cut very soon. Before I put that in concrete, I need to see a few more days, but that plunge was certainly something to give me good anecdotal evidence of what will/could energize the expected bullish move.
While I am on this subject, remember, I am not an Economist. I respect economists greatly, which is a dirty word in some people’s minds, but over the years even though they, like market “guru’s,” are seldom right as a “herd,” they in general are very bright, honest, and students of the statistics. In my mind, that is the root of their problem, since the statistics they follow are almost always backward looking, but a few of them have the ability to focus on some forward looking bits of anecdotal evidence. And if they would incorporate psychological indicators as leading indicators it would help them greatly.
But for this old engineer, I believe that anecdotal evidence and a few key parameters will give much more valuable clues as to the future. One of these is the yield curve. Simply stated, that is the ratio of the long-term bond yield divided by the yield of the 91-day t-bill. Let me quickly state that some mistakenly use the difference in the two parameters as this variable, but I strongly disagree. You simply can’t compare a differential of 16%-14% the same as 4% - 2%. But that is a different debate. Let’s just assume you accept my quotient calculation of this valuable parameter. The Federal Reserve’s statisticians over the years have found the yield curve is the single best predictor of the economy one year in advance. From simply a long, long observation, I have found that when the yield curve is under 1.0, a recession is in the future. That became the case in July 2000, almost simultaneously with the other anecdotal evidence that I received when over 15% of the working population left their jobs voluntarily. In both cases, the evidence is overwhelming that a recession is in the cards in the next 12-18 months. Since that time, I have been predicting a recession would become obvious to the world by October of 2001.
That was then, what about now? The next important trigger level in my mind is when this ratio climbs above 1.2. In my observation this is the initial slope of the yield curve that will create an economic growth pattern again. But not immediately, more like in 12 months. Now remember, the stock market also looks ahead by at least six months, and more often 12-24 months. So I believe the stock market, even though the commentators would have you believe that they are pegged to Mr. Greenspan’s every whim, is much more in tune with the t-bill rate.
Last year, when I was sending the recession message, it was a hard message to sell. No-one even mentioned the R word until after the weak Christmas season, and until the NASDAQ entered its second bear market phase in early February of this year. But now the word rolls off the tongue of the economists so easily. They are still, as a body, looking at the rear-view mirror. Yes Greenspan is a died-in-the-wool herd economist. If Friday’s plunging t-bill rate holds, it will blast this important ratio above the 1.2 level for the first time since the fall of 1999. Again, I said IF, but I believe it will. So how does that affect my scenario, the flesh that I try to fit on the skeleton that my asset allocation resurrects for me? I believe the U.S. recession will be very short-lived, maybe only lasting the minimum of two quarters—the second and the third quarter of this year.
Of course, the Fed will not really start to worry about the recession until the rear-view mirror gets very cloudy, but that is already starting to occur. For instance, last week the employment numbers revealed the first drop in employment since May of 1995. David Orr’s economic team at First Union pointed out a very important view of this when they correlated the leading characteristic of the number of employed temporary workers. In the latest report, it revealed a very sharp drop in temporary workers. The Challenger survey reveals that there has been a 383,000 drop in temp’s since October of last year. That was Greenspan’s first real clue. It will be very interesting to see if the retail sales that are reported this coming Thursday substantiates this continued drag.
While you are looking at the monetary charts on our web site, also look at the chart that shows the t-bill rate in relation to the discount rate. As I say, Friday’s plunge might bounce right back up, and our calculation invokes a 5-day exponential average, but if this does continue, it would bring the t-bill rate under the discount rate by 14%. This almost always means a fed funds rate cut is right around the corner.
If you remember, I believe the market direction is almost always determined by the psychology first, and then the monetary second teaming up to drive the market either up or down. The logic is that the psychology components are largely determined by contrary indicators that are almost always wrong in their decisions. (That alone should remind you of Greenspan.) So the more bearish they get, the more bullish we get. And since Greenspan is also motivated by the same fear and greed headlines that these wrong herds are, a wave of panic almost always results in a cut in the fed funds rate, and a flooding of the system with money.
But you might say, the Fed has already been cutting for almost a year, and so far the market has continued to plunge. That is a huge mistake some commentators are making. The market has been waiting until the rates are cut enough, and until they produce a yield spread of 1.2 it has still been looking at the negative anchor of the still too-high short-term interest rates. Of course, the required yield curve is based upon how low or high the yield of the 10-year T-notes yield is at the time. That is a market function that is one of the better ways to tell the future of inflation and economic trends. If you remember our comments from last year, we felt it was a huge negative that t-bill rates were moving higher, while the T-note yields had been dropping since January 18, 2000. Of course, Greenspan was still tagging along, so the anchor was firmly attached to the U.S. (which means the world) economy’s tail. But in late December of last year, this began to change, as fear started to invade the system. Our psychological indicators started to turn positive, and then right behind them came Greenspan. He has been flooding the system with money ever since, but now, for the very first time the yield curve is saying that the next move should get them where they should be.
Now remember, all you economists, I’m an engineer, but this has worked for me for so many years, please don’t try to inundate me with your theories as to why it is too simple to really work.
You can see, that I think it is a huge mistake for anyone to mistrust the market. Now I’m not talking about just the indices, but the entire market. I have to admit, that evaluating what the market is doing is about 70% science, but also 30% art, and that part simply escapes some (most.) But now, as I try to defend my new bullish stance, that has admittedly had some volatility since December 22, 2000, I am seeing all kinds of supporting evidence. This new bullish evidence is being very effectively hid by the still-plunging NASDAQ that is still being camouflaged by those top 100 technology stocks.
But look at the majority of charts, There are still 56% of the stocks on the NYSE trading above their 200-day moving average. Carl Swenlin, has an entire grouping of this study on his www.decisionpoint.com website, that shows this study for a lot of different universes of stocks, i.e. S&P 500, S&P 100, the NDX, etc. It is amazing that almost all of these made their low point on that March 22, 2001 date that I still believe will turn out to be the eventual low of this bear market. But not for the NDX, as they still have only 6% of all their stocks above their 200-day moving average.
When I look at so many different charts over the week-end, I see that most really have traced out a pattern of that March 22, 2001 low, and now have bumped up against their falling 21-day moving average. That seems to be the important resistance that needs to be penetrated. But as you know, last week I started the process of getting my equity allocations back up to the desired level. This week, I expect to finish that task. If the 10-day Arms index historical record is still intact, the last day of the 20-trading day will end next Monday, on April 16, 2001. Is there any significance that this comes on the same day that good old Uncle gets my check?
What stocks do you buy? As I stated in Friday’s comments, I am looking hard at stocks in the healthcare, financial, and energy, with 15% of the portfolio allocation slated for technology. I still have 0% in telecommuncations, which has helped our performance a lot over the last 12 months, but I do notice that old Worldcom, which was a leading stock as telecommunication turned south, is now tracing out a solid looking bottom formation. This is not a buy signal, but simply something to watch out for. |
