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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: TRINDY who wrote (6711)	10/31/1997 8:41:00 AM
From: Cynic 2005	Read Replies (2) \| Respond to of 18056

Robert, welcome to our world. A good note. I for one don't buy the new-era theory. For every product and service, there is a supply-and-demand equation. And it applies to stocks as well. I was trying to locate some numbers from my files here, which I can't find. But, to the best of my recollection, the household asset shift towards stocks from 1992 to 1996 was something like 26% to 38% and it is much higher in 1997. I suspect now the stocks represent the largest portion of individual assets, outgrowing real-estate. The pity is that CD's and Money funds have slipped from 20+ in 1992 to 16% in 1996. It must be lower now. Continued 401k investments aside, where do you get more money from to take this 12 trillion beast higher and higher? Today's WSJ reports that people are not exactly pouring money in to mutual funds this week. As I pointed out earlier, judging by the steep increase in volume in the last 3 days, it is very well possible that we have at least seen a local bottom. However, the valuations are still high S&P PE ~20 with growth outlook diminishing. The case I make for a further decline is based on fundamentals. The case for a "bottom" is technical. So far, this year the technicians have done better than fundamentalists. The biggest mishap of the technicians is giving out a buy signal on Oct 17, the options expiry day. One of the main reason give was that the closing tick on Oct 17th was something like -1750, the lowest ever recorded. I am speculating that, perhaps, this volume indicator is also a false technical "rebound" signal. We are at a crucual juncture in terms of investor sentiment. A typical investor may face these issues: 1) If he has amassed a lot of wealth in this leg of the bull-market, would he rather lockin some of the gains, if not all, or take this as a buying opportunity and add to his positions? 2) If he bought in one of the 5 dips (300 points or more) between Aug 6th and 3rd week of October, he must be hurting now. Will he average down or cut losses in to strength. 3) Given the macro-economic picture and the worldwide rout in equities markets will he be as aggressive as he was early this year towards equities. In otherwords, did he open his eyes towards the risk associated with stocks? If one can identify a prevalent sentiment, we could profit from it. My read is that the market has cracked and every rally will be used to sell in to strength to lock-in yearly gains. In the mean time, if the economy shows clear signs of weakness or if SE Asean troubles prove to be significant for American business, we will see a crash of a bigger magnitude. Ine absense of a crash, I think at some point in the coming few weeks, the selling will dominate buying and we will be headed for new lows. I wouldn't be surprised to see a new 52 week low on the dow in 1997. I am wary of the possibility of high volume being an indication of a bottom, so I will stay alert to protect my gains. Good luck! -Mohan

To: TRINDY who wrote (6711)	10/31/1997 12:06:00 PM
From: Mike M2	Read Replies (1) \| Respond to of 18056

Hi Robert, there are many points I would like to address in your note but I will only take on a few at this time. The fall of communism has opened new mkts for goods and services but it has also dramaticly increased the supply of labor which has a deflationary effect on wages. I suspect many of the workers will focus on basic needs such as food and clothing before they buy manufactured American exports. The point of "better than expected earnings" it is well know that companies that beat estimates are rewarded and those that don't are punished. The street and the companies have a vested interest in a continuing bull mkt, as a result, companies guide the analysts estimates downward as the Q progresses if necassary so the company can beat the lowered estimate. There are many big name companies which the analysts have lowered their numbers on last Q. On the issue of no inflation there no price inflation as indicated by the cpi&ppi,there is however, monetary inflation-M3 is up 9% the last year and running at a 12% annual rate since June. There are several reasons why this monetary inflation has not yet caused price inflation. We are importing deflation from the rest of the world. Most important is the fact that the monetary inflation is going into financial assets. For those who think this is good I must remind you that two of the biggest bubbles in the world this century occured in an economic environment of subdued price inflation. Specificly the US mkt in the 20's and the Japanese "bubble economy" of the 80's . We all know how long it took the US and the world to recover from the 20's. Japan has yet to recover and i believe their situation will deteriorate. More later Mike

To: TRINDY who wrote (6711)	10/31/1997 12:38:00 PM
From: Mike M2	Respond to of 18056

Robert, on the issue of earnings. The decline in interest rates has reduced corporate interest expense and a result it has provided a one time boost to profitability we cannot expect this to be a significant factor going forward. The use of stk options as a form of compensation also overstates a company's true earning power especially in high tech. How is that you ask? Companies can pay lower wages and have a lower compensation expense on the income statement because they give them stock options. When options are exercised they hit the balance sheet through a reduction in shareholders equity but do not show up on the income stmt as an expense. In addition, companies take a tax benefit in the amount of the difference between the grant price and the price when exercised why does this not then show on the income stmt. FASB wanted to correct this distortion but the companies whined so they backed down. Stock buybacks are also misleading because a company can report eps gains much greater than actual revenue %gains.- coke and IBM are great examples of this. I am listening to James Grant and he reminds me of other accounting gimmickry such as Boston Chicken's accounting for franchise sales,Cokes earnings on sales of bottlers,lower tax rates ie IBM last Q. In the case of OXHP, i have not looked into the matter but one must wonder if the desire to make the estimates perhaps influenced them to be unduly optimistic with their estimates for reserves. How does a company that has executed its business plan so well make such an egregious error for uncollectible receivables. I am especially confused because success in the HMO or insurance field requires sound actuarial guidence. One more point is some companies are making huge sums selling derivatives. There are many more issues I will address later my typing skills limit my thoughts. Suffice it to say things are not what they appear to be. Mike