Bear Market Lessons From Land of the Sinking Stocks
By Bill Fleckenstein
Special to TheStreet.com
09/04/2002 05:24 PM EDT
Ennui Index Noses Higher: After its recent drubbing, Europe had a tiny bounce overnight, while the Asian markets continued their weakness. The Nikkei closed at 9075, the lowest level in about 20 years (more about that below). Our stock-index futures were rather moribund on the back of this, and at the open, there was a little selling pressure. Then we had a straight-up move of about 0.50% to 0.75%, depending on which index you looked at, followed by a bit of selling. In terms of the early action, there was really nothing worth reporting.
The Nectar of the Housing Sector: The early-morning rally was met with selling, and we made our lows about midday, at which point the indices were down some 0.5%. From there, we started a rally that basically lasted the balance of the day, and finished approximately at the prices you see in the box scores. The rally today appeared to be led by homebuilding stocks, which were up about 5% across the board. Biotech had a bounce, as well. The tech stocks were really unable to get into the action, though the SOX did manage a slight gain, in the face of bad news from Fairchild Semiconductor (FCS:NYSE - news - commentary - research - analysis) and National Semiconductor (NSM:NYSE - news - commentary - research - analysis).
The Interplay's the Thing: So, all in all, the market took a bit of a breather after yesterday's pummeling. I think that the near-term action will be dictated by the information we get from Intel (INTC:Nasdaq - news - commentary - research - analysis) tomorrow night, and the market's response to its news. I suspect Intel will have to guide lower, though that is becoming sort of accepted wisdom. My belief, though, is that at some point, Intel will have to guide dramatically lower, not only for this quarter but for the fourth quarter and next year. Whether they choose to drop that bomb on Thursday or a little further down the road, I don't know. But I do know that even at $16, Intel's stock is on borrowed time.
Yield to Maturity Now Playing, Rated 'Ca' (Consenting Adults Only): Away from stocks, fixed income was kind of quiet after the epic move it saw yesterday. The dollar had a nice rebound, both against the yen and the euro. The precious metals were modestly higher.
Run, Don't Wok: I'd like to talk about Japan for a moment, and by extension, bear markets generically. Regular readers know that as we approached the Japanese fiscal year-end last March 30, I was watching their market very carefully, with the idea that it might possibly be time to buy Japan. But the amount of manipulation that I perceived in the month of March, and the retreat from reforms that I also saw gave me cold feet.
Further, I was uncomfortable buying Japan at that time because of the real problems I felt were in store here in America, both from a stock market standpoint and an economic standpoint. I wanted to be sure of buying Japan on terms that I liked, and not let the market force my hand. So, for all these reasons, I backed off from the idea, and I haven't really talked about it since.
Aboard a False-Bottomed Japanese Junk: The Nikkei had a pretty good bounce from about the 9500 level up to the 12,000 level, which I'm sure was heralded by many people as the dawn of a new bull market. I, myself, was afraid for a while that maybe I had missed the turn. But it was just another big bounce in an ongoing bear market that has been in force in Japan since the end of 1989.
Now here we are, six months later, and Japan is under pressure once again. I think this helps illuminate the adage in a quote that we shared yesterday, about how during the aftermath of a bubble, you keep thinking things have gone down far enough and are due to improve, and then you're proven wrong. This has been the case in Japan for quite some time, as there have been many, many 20%, 30%, and 40% rallies that have amounted to nothing more.
Processed Food for Thought: What the example of Japan underscores is the point that market tops and market bottoms are a process. For a variety of reasons, tops tend to take longer to play out, and bottoms can be more V-shaped, though they don't have to be. However, once you talk about the top or bottom of a 20-year bull or bear market, and you overlay on that a bubble, then I think that both the top and the bottom become much more complicated. That was certainly shown at the top of our market.
Advice for the Twenty-First Sentry: So, given all that has come before us, and witness what we have seen in Japan, people should not expect that finding a good, safe, low-entry point (euphemistically described as "the bottom") will be easy. I think they have the wrong expectation about what a safe entry point might look like. No one is going to catch "the bottom." At some point, it will be reasonable to say that the risk has been squeezed out of the market enough to warrant safely allocating money to the long side. But this "point" will not arrive on any one day. It will evolve over a period of time.
Waiting for Mister (Right) Market: In all likelihood, we are going to enter a period where the market swings in a wide range for maybe five or 10 years. It will be possible to make money in that environment. It may be that many purchases will require being sold after six months or two years, rather than being held for multiple years. However, I believe it is still too soon to get started, because the idea of trying to get involved on the long side remains way too popular, and prices continue to be far too high, in the aggregate.
That is not to say there aren't pockets of cheap securities around. I'm sure there are. But I think the risk/reward ratio is not attractive enough to merit much work on the subject. So, for those of you who keep asking me to come up with an idea, if I found something to buy, I would mention it, just as I have in the past. But this is not something you can make up. It's very important for people to be willing to wait until they get just the right pitch. What counts is not merely being in the market, but knowing that when you make investments, you are dealing with good ideas and attractive risk/reward characteristics.
Metal-morphosis: Finally, I might also cite the gold market as an example of how a bottoming process works. In a bear market for two decades, it appears that gold made its final low at around $250 or $260 about a year ago, and it's kind of grudgingly moved back to around $315. I think gold is in the early stages of a bull market. Now, gold is a commodity (although it's also money), and not as well-followed as the stock market, so the bottoming process might be slightly different.
Eye on the Pariah: But I believe the psychology surrounding the gold market is quite instructive for bottoms at large. A couple of years ago, if you admitted to being bullish on gold, people would have looked at you as though they pitied you for being so dimwitted. In my opinion, that is the degree of disaffection we've got to see before it's safe to return to the U.S. equity market in any kind of moderately aggressive fashion. That, and lower prices. Of course, the two tend to go hand in hand.
Bread Maker Upbraided: Lastly, for those of you keeping score at home, crime -- in the form of corporate fraud -- still seems to pay. A story passed on Bloomberg today how former Sunbeam CEO "Windbag" Al Dunlap agreed to pay $500,000 in fines to settle SEC charges of fraud. According to the settlement, he neither admitted nor denied wrongdoing, and agreed to be barred from serving as an officer of any public company. Of course, this means that Chainsaw Al, who brought so much grief to so many, will be free to do whatever he wants with all the money he made. (The SEC did note that Dunlap paid $15 million to settle a civil class-action lawsuit, which the SEC "took into account." But I guess the "blatantness" of Dunlap's actions makes me feel that he still got off easy.)
I think this is a rather disappointing outcome to one of the longest-running, obvious cases of corporate abuse that we have seen for some time. As long as guys like him are allowed to get away with that, it certainly doesn't send a very strong message to others in corporate America, though I will admit that the environment and sentiment do seem to have changed in the last year. |
