The next market downturn:
There are various potential triggers for the market going back to the October 2001 panic-selling lows. An incomplete list is:
1. inflation comes back, and the Fed starts raising rates at every meeting. Unlikely in 2002, as inflation is dead, dead, dead. Maybe in 2003, I'll worry about this later.
2. Consumer spending collapses. IMO, this is unlikely also. Given events of the last 6 months, if it hasn't happened yet, it isn't going to. The consumer has shrugged off a series of events that should have caused a big retrenchment in consumer confidence and consumer spending.
3. stock valuations. IMO, this will put a ceiling on market advances, but won't cause a return to the 10/01 lows. Investors have written off 2002, and seem to be valuing stocks based on expected 2003 earnings. Now, I'm concerned that a lot of stocks are at too-high PEs (or P/S, if that's a better yardstick), even using optimistic assumptions and 2003 earnings. But investors seem to be ignoring the absolute valuations, and keying on the relative changes. For instance, NTAP just announced quarterly EPS of 0.04. This beat expectations, and was twice last quarter's EPS. It's pro forma. And, if you annualize those EPS, you get a PE of 18/(0.04 X 4) = 112. Relative to last quarter, it's a good result. And so the stock is up sharply. I'm seeing the same thing with a lot of stocks.
4. exogenous shock: economic collapse of a large country or company. The thing is, this has already happened, with Enron and Argentina, and investors shrugged this off, too.
5. exogenous shock: war. This is, IMO, where the biggest danger is, for stocks to retest October 2001 levels in 2002. It has, just in the last few days, become apparent that the Bush Administration has decided where the next campaign in the WarOnTerror is going to be waged. It's Iraq. The goal will be to replace Hussein, with someone who will end their weapons-of-mass-destruction program (including allowing verification). It's impossible to predict the course of this campaign, ahead of time. But, clearly, we are in a lull between two storms (Afghanistan and Iraq Part II). Ahead of us, there will be episodes when, once again, all our eyeballs are glued to CNN.
The campaign will start with an attempt to forge a broad coalition to support our goals. Preliminary indications are unfavorable; most of the allies who supported us in Afghanistan and Iraq Part I, have said they don't want us to wage another war against Iraq. Russia, Saudi Arabia, and our European allies, are all reluctant. Only Israel and England will be enthusiastic.
Next will be an air campaign. We can do a lot of damage to Iraq, but I doubt we can hit Hussein, or force his removal, solely with an air campaign.
Finally, we will have to have a ground campaign. Lots of problems here: Will Saudi Arabia or Turkey, allow us to stage our attack from their territory? After we've quickly marched on their capital, and surrounded it, what then? Take the city, street by street? Starve it into submission? No good choices, here. And, inevitably, a lot of civilian casualties, either way. The Kurds and Shiites in Iraq could, potentially, fill the role that the Northern Alliance did in Afghanistan. But we abandoned them, 10 years ago, and they control no territory, and have no armies.
I'm at 65% long, 35% cash, no shorts. I am considering selling some of my AMAT at 50, NTAP at 25, others. |
