Hi Tom,
Don Hays 11/18 commentary writes on Norman Forsback's "Two Tumbles and a Jump" wheatfirst.com I believe Forsback is one of your Gurus:
Today's Comments
I LOVE ALAN GREENSPAN!
THE GUY WINS THE AWARD-Salesman of the Year.
We did not believe he would be able to pull it off, and indeed yesterday the Federal Reserve cut the fed funds rate for the third time, and much more important, the cut the discount rate for the second time. THIS IS A BIG DEAL!!!!!!
This activated the buy signal from the "Two tumbles and a Jump" rule for the 20th time since the Federal Reserve was created in 1914. To explain this rule that was developed by Norman Fosback back in the early 1970's, it states that a major buy signal is given any time the Federal Reserve reduces one of its three major policy tools--either the discount rate, stock margin requirements, or commercial bank demand-deposit requirement, two times without an intervening act of increase. As a practical matter, most of the Two Tumbles and A Jump buy signals are activated by cuts in the discount rate. These signals come very rarely, and in the past only about once every four years. This time, it has been even longer, since February 1, 1991.
We like to look at the success of this indicator in two ways, one that includes the total performance since 1914, and the other since 1932, only after the crash of 1929. Looking at the total action, you see the following success ratio of this index. Since spread sheets of these statistics don't show up as tables on the e-mail spread sheets, let me just write the numbers out for you in sentence form.
In this following days after the prior 19 signals I am going to list the number of days, the average change in those days, and the number of times that the S & P advanced. For instance, in the next 5 days after these signals were activated, the average percentage change has been +0.7%, and an advance occurred on 11 out of 19 times. Then in 10 days, avg. change has been +1.6%, and advanced in 13 of 19 times. Now let me be more concise. Following 15 days, +3.5%, in 16 of 19 times. In 20 days, +3.7%, in 15 of 19 times. In following 3 months, +11.1%, successful in 16 of 19 times. In 6 months, +16.0%, successful in 18 of 19 times. In following 9 months, +20.9%, successful in 18 of 19 times. In next 1 year, average gain +30.3%, successful in 18 of 19 times. In next 15 months, + 34.8%, successful in 18 of 19 times, and finally before you drop off, in the next 18 months, +35.3%, and successful in 18 of 19 times.
Hopefully this describes how important this message from a Federal Reserve has been in the past. Looking at its entire 74-year history, the only signal that is somewhat debatable occurred on November 15, 1929, when there was a maximum loss in the following 12 months of 23%. But even that time produced a strong bounce, and astute investors could have also made a maximum gain on the ensuing bounce after that second cut in the discount rate of 28%--before the market took another dive. If you analyze all the signals post crash, since 1932, you find every signal created a major successful long-term buy opportunity. They don't all start immediately, however, but certainly close enough that an investor with a time horizon of 12-18 months would have never lost money. The median average gain in the following 12 months has been 20%, far above the median gain of the markets that includes all days.
You can see why we include this indicator as a major input for our monetary composite, which just received a +5 point boost. Once again this morning we pledge our allegiance to our asset allocation process, that once again predicted this major signal ten weeks ahead of time on the data that was received as of the week-ending date of September 4,1998. For those of us that followed this signal, it took our cash assets off the sidelines and into stocks, in the midst of tremendous investor fear, and ominous headlines.
With that said, let me set your mind at ease, we were only kidding about loving Alan Greenspan. But admittedly, he has definitely changed his stripes. I would give a lot to see the inside data that he is privy to that drug him into a new generous mode. Even with that said, all of you Greenspan worshipers, please note that all he has done is "follow" the market. The t-bill rate, which typically mimics the fed funds rate, or vice versa, is still .31% below the fed funds rate. That disparity had more to do with the Fed's cut than the Fed did, in our opinion. Thank goodness for "free" markets, that we don't have to be held totally hostage by any one person, or any one theology of any one person or group of persons. For that reason, we don't even include the fed funds rate in our monetary composite, but instead watch closely the action of t-bill's and t-bonds.
What do you suppose Greenspan sees? Could it be that lay-offs are soaring? So far, those lay-offs have been sopped up, especially since we are in a baby-buster generation of very few new workers coming on the scene. But we suspect that much of this sopping is also being done in lower paying retail jobs in preparation for Christmas shopping season. In that light, we do note that retail stocks are very fragmented, and it appears that low-cost discounters, i.e. Wal-Mart and Home Depot, are far outperforming the department store crowd. We would be very interested in the credit numbers that he is seeing and the generosity of the banks to lend in today's environment. The international scene continues to teeter, with Russia hanging on by a thread, and Latin America very woozy. The trade deficit number today will be very interesting, but the prior numbers show very conclusively that the rest of the world would have a hard time digesting a slow-down in US consumerism, and US consumerism is very dependent upon the health of the stock market.
So, the intense fear that was around during the late August and early October declines has worked its magic, and we believe that it is just now starting to get interesting. We believe that before this is over, the fed funds rate, and discount rate will be at 2% or lower.
Now, that is our 12 month outlook. What about the next 12 minutes. As stated yesterday, we don't expect much either way. The market is very overbought and has some digesting to do. The optimism by those investors who traditionally are wrong, option traders and advisory services, is too bullish now. We believe that this digestion process could easily last until mid-January, 1999, and we believe that the Fed will not cut interest rates again until that time.
We also see the volume on the New York Stock Exchanges really drying up after a huge flurry on the rally off of that August 31,1998 bottom. At the same time, the large-cap portion of the market has taken firm control again. With a P/E ratio in the high 20's, it is possible for the S & P 500 to go higher, especially with all the money supply flooding the system, but we don't expect it to be anywhere close to dynamic.
The bottom line, however, is to get bullish, not necessarily for the next 12 minutes, but for the next 12 months. Put your energy into finding exciting stocks for the years ahead. Our favorite aggressive area to watch is still the Bio-tech area, but there are a lot of stocks "under the radar screen" that are very attractive. The corporate insiders certainly agree with us. There is an amazing level of insider buying, but not by the corporate leaders of the big, awesome "nifty-fifty" stocks. The buying is coming from corporate leaders of the "run-of-the-mill" companies in America. That is where you should be looking for new buy candidates, unless your time-schedule is the next 12 minutes, of course. In that case, flip a coin, and buy an Internet stock. (I'm just kidding you guys.)
That's it for today. As described in yesterday's comments, we have started a new three times a week (M, W, F) schedule of producing these reports. So unless something dramatic happens before, we will be stuffing your mail-box again in two more mornings, on Friday morning.
|
