[It's new game, fellas, old rules don't apply]
Here's an interesting article from the Reuters news service -- I'd say the old rules apply and it's just a matter of time before this speculative bubble pops.
So, are you people called bulls because you behave as a herd of cattle waiting to be slaughtered? I could use other metaphors, like how cattle stampede when spooked...
Paul McGinnis
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Stock Market Divorcing Itself from Real Story?
February 21, 1998 7:44 AM EST
By Pierre Belec
NEW YORK (Reuters) - The economy is slowing, corporate earnings are slipping and Asia is still a time bomb just waiting to explode again but the stock market keeps making new highs. Has Wall Street gone nuts?
The Dow Jones industrial average rocketed to a six-day streak of record highs in a head-spinning rally that took the world's most closely watched index of 30 blue-chip stocks this week above the 8,400-point level for the first time ever.
But some experts say the market is ignoring a bunch of negative factors that threaten to put the brakes on one of the most powerful bull markets in history. Stocks have produced annual 20 percent-plus gains in the last three years.
Aside from the lag in growth of the economy and corporate profits, there's the threat of a U.S.-led military attack on Iraq.
The White House sex scandal involving President Clinton could be another negative. Wall Street is worried that a weak president could mean a weak stock market.
After a miserably flat performance in January, the Dow raced higher in February, standing 6 percent up for the year.
The rally is being fueled by mutual fund managers, whose trading activity has added tremendously to the market's upward momentum.
''The fund traders have got to put their money in stocks every day and they don't get paid to build up a lot of cash,'' said Alfred Kugel, senior investment strategist for Stein Roe & Farnham, which manages $5 billion in mutual fund assets.
''During the events of Asia at the end of October, the fund managers might have raised their cash holdings from three to five percent, but with all the money that keeps coming into 401K and Keogh retirement plans, they had to stay invested,'' he said.
There's concern that the mutual funds' spectacular gains over the last few years might be creating a false sense of confidence that the market can only go higher.
The mutual funds, the experts say, seemed to have abandoned reason and, as a result, they've created a market that is technically strong but fundamentally weak.
The constant flow of cash into stocks has forced the market to essentially divorce itself from the real economic picture, they said.
The fund managers' cash positions are now at the lowest ebb since early 1972, and the upthrust behind the market seems to be simply the exuberance of fund managers who must keep their money in play.
The mutual funds' philosophy is that if customers are paying someone to manage their investments in stocks, than the fund had better be in stocks.
Liquidity has been a big force behind the fast-rising market but the problem now is that the higher the market goes, the bigger the appetite for money to support it and to keep prices going still higher.
There are warning signs of possible trouble for this liquidity-driven market. So far this year, average weekly cash flows into mutual funds have slipped to $1.7 billion, which is well behind last year's pace of $4.1 billion.
Indeed, investors were fascinated with the market last year as they threw $200 billion at stock mutual funds, bringing the total assets of equities funds to slightly more than $2 trillion.
Don Hays, director of investment strategy for Wheat First Union in Richmond, Va., said Wall Street is only looking at one side of the ''Great Mutual Fund Story.''
Corporate stock buybacks are also responsible for boosting the market, he said.
''The popular story that people are talking about is that the public has been buying billions of dollars in mutual funds but the truth is that this is only part of the equation,'' he said.
''While the Baby Boomers bought $156 billion worth of stocks, the Golden Agers sold $336 billion of direct ownership of stocks in the last 12 months, and this works out to a net withdrawal of public holdings in the stock market,'' he said. ''I can't find another source for all the market's gains except the corporations' buybacks, mergers and acquisitions ... and they are buying back stocks like there's no tomorrow,'' Hays said.
General Motors Corp. and Chrysler Corp. are each repatriating 10 percent of their stocks, and International Business Machines Corp. is buying back $7 billion in stock.
''When you realize that their entire market capitalization is only 22 percent, they could totally go private in the next 10 years if they keep up this pace,'' he said.
Hays said the market could be skating on thin ice if business conditions go bad and the companies run out of cash to keep buying stocks and cancel their ambitious repurchases programs.
''That would be the thing that could actually stop this crazy bull market,'' he said.
Hays believes 1998 will be bearish for stocks and he expects to see the ''scars'' of slower earnings growth from the Asian economic meltdown and dampened U.S. activity.
''As we get closer to March 15, companies will start to report a huge number of negative surprises for the first quarter because of Asia's pricing power,'' he said.
The impact of the Asian turmoil, which will cut the Pacific Rim region's purchase of U.S. goods and bring a flood of low-priced Asian products here, Hays said, came too late to ravage corporate earnings in the last three months of 1997.
''The first quarter will just be the beginning of bad profit stories and I think every other quarter will get a little bit worse,'' he said.
On Friday, the Dow ended with a gain of 38.36 points, or 0.46 percent, at 8,413.94, which was just short of Wednesday's record close of 8,451.06. For the week, it was up 43.84 points.
The Nasdaq composite index was up 1.12 points, or 0.06 percent, at 1,728.13 and ended the week with a gain of 17.71 points. The Standard & Poor's composite index of 500 stocks rose 5.93, or 0.58 percent, to 1,034.21, and was up 14.12 points for the week.
The NYSE composite index of all listed common stocks was up 2.48, or 0.46 percent, to 537.49. For the week, it rose 6.21 points.
c Reuters Ltd. All rights reserved. |
