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Strategies & Market Trends : Stock Attack II - A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Paul Shread who wrote (27102)	1/6/2002 9:37:34 PM
From: Lee Lichterman III	Read Replies (3) \| Respond to of 52237

Deep thoughts, theories, possibilities and ramblings ..... I have been wondering about the valuations, lack of fear vs trading patterns, liquidity etc. Unfortunately for you all I couldn't sleep last night and found myself watching PBS at 3AM when of all things, some College course programs came on covering Micro and Macro economics. Over the course of the next few hours I found myself being reminded of BASIC things that I had lost site of over the course of all the late complex events. One thing they said last night stuck out in my mind and I have been mulling this over the last 18 hours and have come to a possible conclusion. The professor said that when Money creation exceeds demand, there is usually inflation, however inflation is defined as the over all increase in all goods however if there is no demand for goods, much of that excess liquidity gets stored for later use in the form of savings be it Home equity, Savings accounts or stocks and bonds. Now we know that Money supply has been increasing at an alarming record rate over the course of the last few years and is increasing off the charts even more so now since 9-11. MZM, M3 and velocity show this clearly so there isn't much arguement there that can be made against this case in my opinion. This alarming rate of money supply has made many fear an inflationary spiral however there hasn't been any signs of real over all true inflation as Businesses aren't borrowing or sopping up any of this liquidity as the Business loan data shows, there is little demand for goods as evidenced by the durable goods reports that despite a slower rate of decline are still clearly under 50 showing contraction. Perhaps the clearest sign of all is the CRB which has been declining steadily over the last few years and is now at 30 years lows. Despite some specific and narrow areas of price increases that don't fulfill the definition of true inflation, we are fairly clearly not inflating as over all goods demand is just not there. This would mean that for those that are not laid off, the tendancy is to then save excess money for later use or later consumption. In fact, with job security uncertainties, there is probably more of a tendancy to save than before. When we look at the US consumer savings rates however we have not been saving according to government statistics. In fact, consumer savings are lower than at any time in the past. This brings us to the arguement that has been raised for some time about what is savings? Do 401K plans, IRAs, etc count? According to the guy last night on PBS, he said Home equity, stock and bonds DO count. I tend to agree with him as I don't have a true old fashioned savings account. My checking account pays interest but I don't have a separate savings account. I keep extra cash in my broker accounts and withdraw that when rainy days occur, especially my trading account which is all that is for. The interest rates are higher than traditional savings accounts and the opportunities to make gains on short term moves in the market make it head and shoulders above a passbook savings plan anyday but I digress. My point is that there is a huge sloshing around of extra liquidity that Greenspan wanted to restart the economy but instead people don't want to consume any more. The smaller sheeple have huge debts but don't care or are just too dumb to know any better about paying this debt down or to start saving in this consume now, pay later generation. Also to their own defense, they aren't getting much of any increase in money making minimum wage or working blue collar jobs for companies that are struggling. However the more well to do and better educated portion of society knows how to make the most out of any extra cash. These people are not going to settle for traditional savings account rates of return and they can't be spurred into buying what they don't need. This group will put the money to work where they see the best returns. Savings plans are no good, Bond and treasury note returns are low so no money will move there. That leaves housing and stocks. Home mortgage rates are pretty low so why pay off your mortgage early when you can likely pay with inflated dollars 10 or more years down the road? If anything, now is the time to roll into a larger home, to take out home equity loans and lock in low interest rates freeing up cash to try for higher returns. This leaves stocks as the only likely place for high potential returns for those that have only learned every dip is a chance to reap huge returns over the last 18 years even if you know nothing about fundamentals, your money market manager knew nothing and even Barbera Streisand could be a day trader. -ggg- How many really understand that PE ratios are higher than at any time in history? Barring those that live on SI and this site etc, how many really know how the fed is pumping in billions each day when the market starts to recede? How many know that the 10Q and 10K releases on many of these companies show "other income" makes more of their earnings than real core business earnings. How mahy even know how to read a 10Q or 10K and how many care more about how many gloassy pictures are in a prospectus than what the debt to equity ratios are? Just look at the ENE blow up. No one has a clue how bad many of these company's balance sheets really are. Even the SEC admitted that they didn't understand ENE's finances or many of the other large companies accounting practices. We pointed out CSCO's problems and slow downs in business a year before the truth finally came out but wall street pros claimed no one could have seen it coming. We were screaming about the coming recession in 1998 soon as the yields inverted yet no one else could see it coming? My point is there are huge problems in the stock market still, there are going to be more blowups and there will likely be little in the way of real growth but it may not matter. There is just simply too much liquidity or money sloshing around with no where to put it until demand increases or until enough people get burned to make the over all population gun shy enough to stop buying with a total disregard for fundamentals. AS Randy Newman said, "It's Money that Matters". In other words, this could get a lot more out of hand, and create a larger and larger bubble until it just all ends very very badly and ends for good. People that were in total denial throughout 2000 and early 2001 and finally admitted they were idiots, swore they would never make the same mistake again are now re-appearing on SI and making the same stupid statements they did throughout 2000 and 2001. The worse part is they might be right for a while. We have a ton of money out there and more likely to get added in the name of domestic security since we can't let the market drop or it will appear that terrorists have won. We are coming up on an election year so we don't want any signs of a weakening economy. They may not start turning down the money faucet tap until next year after the elections are over and the terrorist stuff is forgotten. Greenspan as much as he says he hates the bubble, knows that inflation is easier to fight than deflation and will likely try to error on the side of being too loose than too tight. Also he was blamed for Bush Sr's loss as he raised rates prior to the election then didn't loosen back up in time to get things moving again until Clinton had won control. I doubt he will do this to Bush Jr. We are goig to be swimming in cash for a while and until we get a better place to put this cash, most of it will run into the market. One thing I am seeing though is more and more going into corporate bonds. Seems I was not hte only one with this idea over the last few months. It is actually starting to scare me as more and more bond offerings are showing up as it is starting to look like the IPO mania of 1999. If the street starts noticing this too, they may start shying away from stocks more and more since the bonds get to cut to the front of the line for profits and in the case of a blow up, get paid first leaving stock holders holding certificates only good for wall paper. As for valuations, one thing I was hoping to do this weekend was to get the earnings together for some of the majors from last year and then compute PE and PEG ratios based on today's stock prices. I figure the rosy side of projections, will likely go no higher than their earnings for Y2K at best. 1998 was a boom time for upgrades, new generation computer and telecom toys and some early Y2K preparation and likely not to be repeated. 1999 was a frantic last second Y2K prep that had unusually large budgets given to IT departments that won't happen again besides the providers getting to name their own prices with competition non existant. 1998 and 1999 were they last years of pricing power IMO. Telecom buildouts were still in high gear also as everyone thought there was going to be more demand than what really occurred. Year 2000 however saw the maturity of the computing market, telecoms finished thier major buildouts and thus I feel that may be our best read on where earnings should stabilize over time. These earnings given a lower growth multiple might give us a better idea of where prices should run longer term. As to the recent up tick in money creation... Normally if too many dollars are created, a devaluation effect is created. However since the rest of the world is a total basket case, no other currency is worth the risk of keeping assets denominated in foreign currencies thus most money is chasing dollars letting us get away with murder as we keep the treasury presses running full speed ahead. This caused me to think of some disturbing thoughts. How low would the CRB and the underlying commodities really be if the dollar would have been allowed to maintain it's old float and thus be even stronger? How much worse off would U.S. Corporations that sell world wide be if the dollar were even stronger and thus our goods appearing more expensive for foreign nations to buy? How low would gold really be? The reason I ask, is though South America, Japan etc have real deep fundamental problems that won't disappear over night, Europe's weak currency may just be based on sentiment due to the switch over to the Euro and the unknowns of if the U.K. is going to join or not. As the Euro gets accepted and proof of it's sustainability come about, it could pose a real threat to the dollar. A lower dollar may help global corporations but the exodus from US stocks by foreign money would likely offset this plus some. Farmers could get really really hurt and Greenspan may find himself unable to create money at his usual break neck pace. PS - Do we still have a Treasury secretary? I haven't heard a peep from O'Neal in ages!! I hope they are remembering to feed him since they tied him up in the dungeon. Good Luck, Lee