The ultimate bull has gone totally bear.
Wrong! Rear Echelon Revelations:
Back to 1990, and Worse
By James J. Cramer
8/30/98 9:00 PM ET
I was wrong and too optimistic about this market. I thought I
had not seen it before. I said there were no similar
paradigms.
But I have now gone over my diaries for the 1990 period and
examined my trading and have decided that the similarities
are too great to ignore. We are trapped in a 1990 scenario
and I want to first tell you why I did not see it, and then tell
you what the consequences of 1990 might be.
In 1990, Iraq had invaded Kuwait, and the market had been
parabolic right before the incursion. Through the spring and
early summer of 1990 the Cokes (KO:NYSE) and Gillettes
(G:NYSE) had gone up every single day. Suddenly,
commodity prices shot up -- led, of course, by oil --
consumer spending went down, and the world became a
very uncertain place. The market nose-dived almost 25, but
like now, most stocks dropped far more than that.
I didn't see the parallels between that era and this one
because of the decline in commodity prices and the collapse
in yields this time around. I always look to the bond market
first for clues and I could not imagine that bonds could
diverge so much from the 1990 scenario and stocks do as
poorly as they are doing. That was where I was very wrong.
Nobody likes to admit they are ever wrong, particularly in
this business. But I know when I am and I know when I have
to admit it. We are now on parallel course with 1990, which
is very bad news for a host of sectors, including the banks,
savings-and-loans, retail and ultimately cyclical tech (semi
equipment, for instance). It is very good news for almost no
one because the only way for things to play out positively is
for interest rates to rise on the long end, which will kibosh
the nascent drug and consumer noncyclical rally.
However, there are three key differences between 1990 and
now, and all of them are negative divergences. One is that
there is no commodity inflation, so any stock that has
anything to do with the commodity business is a short. Two
is that stocks are so much higher that we can't ask the Fed
to come to our aid. Stocks have created too much wealth for
the Fed's meager interest-rate tools to handle and stymie
borrowing and spending. Stocks threaten us with a 1985-86
Japan scenario. Believe me, the Japanese central bank
would love to have slammed the brakes on then because
now it is singularly unable to restimulate because of trillions
lost in the stock market when the bubble burst.
In 1990 we had the pending collapse of the U.S. financial
system, which put the Fed on our side. We don't have that
now. In 1990 we had the potential for a deep recession. That
may be the case again, but I am not seeing it from any of
the data. I give Padinha his due on this stuff.
There is no recession in sight. The Fed won't come to our
rescue until the price-earnings multiple of this market is
within reason and not irrational. In other words, below 6900
on the Dow.
Finally, and most insidiously, we did not have a culture of
buying on the dips in 1990 that we have now. This culture
created an era in which we viewed stocks as having no risk.
The trampoline/safety net of down 10% will not help us this
time. Now the dip buyers, including me, have egg on our
faces. I want to wipe it off and get on with a new market.
Others want to suffocate under it.
The dip-buying culture will be obliterated here, just as Byron
Wien, the only strategist who will come out whole during
this period, predicts. The long-term holders will do fine, I
guess, because they never acknowledge pain anyway, God
bless them.
Now here is why we are in 1990 and how we get out of it.
The reason we are in 1990 is because the wall of worry
which the stock market climbs is periodically too high, or
too electrified or too dangerous to scale. Things have to
resolve themselves before we can be sure. Like in 1990, the
news teases us with resolutions daily, but there aren't any.
Let's go in the way-back machine to recall what 1990 looked
like. At the time there were plenty of people who doubted the
U.S.' resolve to draw the line in the sand. Plenty of people
thought that the Iraqi Republican guard could give the U.S.
Army a run for the money. Others felt there was a chance
that we would lose a huge amount of the world's oil capacity
and oil would go to $50 a barrel. (Oddly, now the problem is
whether oil goes to $5 a barrel, two sides of the same coin
and whole sectors of the economy get trashed by both
hyperbolic moves.) Still others felt that the whole
post-Communist world would reverse itself and the Arabs
would team up with the rear-guard Communist Soviets to
create a resurgence of world chaos and a rollback of
capitalism.
In the meantime, a real-estate recession in the U.S. had
knowing talking heads arguing that Bank of Boston
(BKB:NYSE), Chase (CMB:NYSE), Citi (CCI:NYSE),
Manny Hanny and Chemical would all fold. Citicorp was
widely reviled for being bankrupt. A skyrocketing oil price left
even Supertanker Japan reeling, and Japan was the one
breath of hope in the world because it had the liquidity.
Wow, how things have changed. And how they have stayed
the same. Now we are the Japan of 1990, with a stock
market that has been hit, but liquidity still in place. Japan is
us of 1990, with their Citis and Chases (Long-Term Credit,
Sumitomo, Dai Ichi Kangyo, etc.) all insolvent.
Russia is still Russia, threatening to go Communist.
Emerging markets are not only submerging, but looking like
they have given up the capitalist ghost -- after all, the Hong
Kong government's resolution of its curious stock-market
game is nationalization of all industries, because if HK plays
it out to the hilt, it will own every share of every stock,
Soviet-style.
I had thought we could best this wall of worry, too. But with
a hobbled president, a vice president about to be
investigated by still one more special prosecutor (now we
are talking '73-74, which would be even worse than I am
describing) and a nation reeling from the scandal, we don't
have the moral authority to cobble together a resolution as
we did in 1990.
Of course, 1990 led to 1991, when the U.S. reasserted the
coalition, capitalism prevailed and we won the war handily.
We had the greatest buying opportunity of the decade, and
all worked out well in the end. But we had to wait for it to
resolve itself. The opportunity did not occur during the
chaos. Then, as now, the opportunity was not the dip.
In 1990, as I was telling Jeff Berkowitz, my partner, on
Friday, you would come in and some Iraqi blowhard would
give you hope for a peaceful resolution, or James Baker
would make some pronouncement of peace in our time, and
boom, the futures would trade up and if you bought, you got
crushed. But if you sold, or shorted, you made good money.
The U.N. created more upticks for shorting than Abby
Joseph Cohen does now.
And then that hope would fade away and stocks would settle
down and the bear raids against equities would take place
and the market would go lower. This scenario played out for
seven months until the resolution occurred and in the interim
all rallies were sucker rallies that led to more bleeding.
Sure, it is possible that after Labor Day we get the mother of
all rallies as those who are on vacation come back to work.
But I have bad news for those who are looking for something
big from this. Like in 1990, when I got pulled off of Martha's
Vineyard on day one of what was meant to be a 30-day
vacation, anybody who can pull a trigger is already at his or
her desk because to not to be is sheer irresponsibility. The
big money is back at its turrets, and nothing is happening
except pain.
Like in 1990, I am have shifted to market neutrality. For
every long I have I want a short. Every long demands that
you speak to someone at the company every day because if
the company stumbles, a la St. John Knits (SJK:NYSE) or
Parametric (PMTC:Nasdaq), you are history because of the
parabolic moves most stocks have enjoyed.
In the end, sweet ironies occur. Abby Joseph Cohen goes
bearish. Goldman, the greatest placer of stock in the
history of capitalism, places its deal at the worst time ever.
Jim Grant becomes Merrill's chief strategist.
So why not be totally short? Because one day the situation
will resolve itself. Hong Kong will give it up, Japan will
collapse and a new regime will come in, Russia will go
insolvent (as it actually is) but order will be restored (we
must hope that Yeltsin is not Weimar, though, to Lebed's
Hitler), China will devalue and Latin America will go down so
much that values will prevail. Clinton will resign or limp out
and a new uninvestigated government will come in. And we
will be left with bountiful prices, a Fed on our side, and a
reasonable P/E.
We don't know when it will come, because unlike the Gulf
War, there is no deadline. We have to hope it does not have
to wait until the 2000 election, but it may. We have to hope
it does not have to wait until Japan lets things trade and its
banks all get merged and go belly-up, but it may.
In the meantime there will be vicious rallies that will make
you wish that you were 200% long (and make you glad you
kept on some Intel (INTC:Nasdaq) and some Cisco
(CSCO:Nasdaq)) followed by sell programs and liquidations
that will have you tearing your hair out that you didn't short
those buy programs, as you had to do in 1990.
But until we get a resolution, until the razor ribbon and the
electrified wall of worry gets turned off by the events
themselves, 1998 will play out like 1990. With the exception
of sporadic rallies, the market will go lower until the
international financial war is won and the U.S. reasserts
itself as the moral and political and economic beacon of
capitalism. And I am as optimistic as ever that we will win,
but pessimistic that we will win at Dow 8100.
The market will not change direction by itself. It will not
bottom by itself. The negatives will never be so discounted
until the international events occur. It will bottom when
enough of the world's woes are solved. Until then, stocks
like Dell (DELL:Nasdaq), which rally and rally and rally in
the face of all of this, will just seem like arrogant soldiers
that think they won't get hit by machine-gun fire or shrapnel
as they make their way boldly toward oblivion. Sure, some
soldiers get through. They always do.
But I'm a bettting man, and I am not betting that way. Not
any more.
James J. Cramer is manager of a hedge fund and
co-chairman of TheStreet.com. At the time of publication
the fund was long Cisco and Intel and short Gillette, though
positions can change at any time. Under no circumstances
does the information in this column represent a
recommendation to buy or sell stocks. Cramer's writings
provide insights into the dynamics of money management
and are not a solicitation for transactions. While he cannot
provide investment advice or recommendations, he invites
you to comment on his column by sending a letter to
TheStreet.com at letters@thestreet.com. |
