You Must Be Joking 26-Jul-02 13:40 ET
[BRIEFING.COM - Robert Walberg] The other day Briefing.com turned more bullish on the market's near- to intermediate-term outlook. We provided a number of technical and fundamental justifications for our change in tone. Despite the fact that the major market indices launched into one of their biggest gains in history that very day, many of you wrote to tell us just how wrong we were. Though the feedback ranged from respectful to juvenile, the overall message was fairly consistent. Among the more common points were: Wednesday's gains just another example of a bear market rally; stocks are still significantly overvalued; economy is in trouble given lack of leadership at the top; no catalyst to get buyers excited over the long haul; and last, but not least, you're all a bunch of thieves.
Instead of responding to each message individually, Briefing.com will use today's Brief to respond to each of these points and then conclude by clarifying our message for those that missed the point. So let's start with the concern that Wednesday's price surge was nothing more than the most recent short-covering led, one-day spikes. Have to admit that the lack of follow through buying over the past 36 hours hasn't been very comforting - especially the broad declines in technology. However, it would be silly to think that the market would wake up one day and figure that all of its problems are gone. There are plenty of folks out there - as you're feedback proves - that think that this bear market still has plenty of life in it. Sellers have also been condition over the past 2 1/2 years to think that they can make money by selling into any signs of strength. It will take time for this psychology to change. Briefing.com remembers a few years back when investors criticized anybody that spoke cautiously about the market. Such people simply "didn't understand the new paradigm." Back then traders were also condition to buy every dip. Those that turned a deaf ear to the cautionary comments and stuck to the buy-the-dips strategy, which had worked so well for nearly a decade, paid a very dear price for following the herd. Despite what many of you concluded from our Brief the other day, Briefing.com isn't trying to pick the bottom. We simply identified market psychology as being both universally and excessively bearish. And more often than not when the vast majority of investors are reading from the same page, it's time to get a different book. Wednesday's advance was not the usual one-day gain that we've seen over the past couple of months. It was historic in its scope and impressive in its breadth. Sellers have tried over the past couple of days to work the old magic, but they aren't achieving much success - at least not a broad scale. Consequently, it's too early to label the gain as just another head fake. We won't know that for another week or so.
The "stocks are still significantly overvalued" claim comes, we think, from investors that still see the technology sector as the market. Briefing.com doesn't deny that many technology stocks are overvalued even after plunging by as much as 70%-80%. Demand has dried up, there aren't enough new "must-have" products and there's still way too much supply. However, the tech sector is only a small percentage of the overall market. There are many fine, conservatively managed companies with clean balance sheets in the retail, regional banking, housing, lodging, insurance, defense, drug, restaurant, beverage and tobacco industries which are trading at very attractive multiples - especially when you consider that interest rates are so low and that inflation is nonexistent. Leadership has changed. Once you make that realization and start to expand your investment search beyond yesterday's superstars of tech and biotech, Briefing.com thinks you will agree with us that there is value in this market. Additional declines in tech might weigh on overall market performance, as it did again on Thursday, but in the end we think enough investors will see value in enough other industries to push the market higher.
As for the economy, the majority of evidence suggests that it is doing just fine, thank you. Our Chief Economist, Tim Rogers, spelled out several reasons why investors should be optimistic about the future of the economy in a recent Bond Brief. The following are just some of the reasons why Briefing.com thinks that the economy will help to underpin, not undermine, the market going forward:
A lengthening string of gains in the base components of durable goods orders argue that the bottom in investment spending has been seen. While increased scrutiny on the corporate bottom line is likely to stall any strong upturn in investment, the steady declines have ended. The softening in the annual growth of compensation costs (the employment cost index) adds to the strong rise in productivity to leave unit labor costs (labor costs offset by productivity) lower than a year ago -- quite helpful to weak corporate profits. Should note that yesterday's much weaker than expected Durable Goods report was disturbing in its severity. However, the data can be volatile and the recent trend is toward improvement. However, this number should be watched closely next month for signs that business investment isn't turning down once again.
Interest sensitive home sales are booming with the five strongest months on record all within the first six months of 2002. New home sales surged to a new record level in June. Lower rates are spurring another wave of refinancing and cash-out borrowing -- helpful to both the consumer and spending.
Initial unemployment benefit claims are down 90K from the peak in Oct and continued claims have fallen in 8 of the last 9 weeks as the labor market begins to firm up.
Recent actions by Congress and the Bush Administration to curb corporate excesses, while debatable in there merit, should at least help to bolster confidence in the markets. And restored confidence will bring stability to the market, thereby removing a potential drags on the economy (negative wealth effect/slower consumer spending).
Turning to the question of what will trigger the buying, we admit to not knowing. Nobody ever does really. Markets usually start reversing course and it takes a couple of months before we look back and can point to what may have been the trigger. There are some obvious possibilities such as the death of bin Laden or the imprisonment of one or more criminally negligent CEOs/CFOs. But more likely than not, the market will simply start moving higher and the advance will surprise us in its strength and sustainability. As for the reasons why the market will move lower from here - cooked books, lousy earnings, sluggish economy, lack of political leadership, threat of terrorism, etc. - none of them are new. These concerns have been in the market for months if not years. Old news rarely pushes markets sharply in either direction.
The "you're all a bunch of thieves" theme is the one we find both the most ridiculous and the most worrisome. The comment is ridiculous because anybody who has spent any time in the financial industry talking to business leaders, analysts, bankers, etc. knows that most of the people in this industry are hard working decent folks who give their best day in and day out. Obviously there were people who were seduced by market/business conditions during the bubble into making some very bad decisions that hurt many people. But to paint the financial industry and business community with the broad brush of criminality is obscene. Having said that, the depth of anger toward the financial/business community is a very real concern. As noted in our bullish Brief the other day, Briefing.com perceives the breach of faith between corporations and the investing public as the biggest risk to stock market gains. If the loss of confidence runs so deep that investors turn away from the markets for years and not months, than we could be looking at materially lower stock prices from current levels. We don't think we're at that point, but it is a serious threat to the markets.
Finally, Briefing.com did not say that the market had bottomed. In fact, we wrote that we weren't sure if the "bottom will come today, tomorrow, next week or next month." Our goal was not to pick the bottom, but to point out that in light of scope and duration of the decline the risk/reward ratio (in our opinion) had finally turned attractive enough to justify buying. Thank you for all of your feedback.
Robert Walberg <mailto:bobw@briefing.com> |
