Well I dumped FLC near the bottom, but bought more FSESX. You lose some, you win some.
Market wisdom from Don Hays. I think he is wrong about bonds but right about the stock market. This guy was as bullish as Abbbey Cohen for many years, but now is very bearish.
Don Hays' Market Update -- April 9, 1999
Today's Comments
D-day in our scenario is definitely approaching. We shouldn't have long to wait now. Over the last 60
years, one theme has been engrained in my psyche, that when everything gets so bleak, you know based
upon the natural laws that tomorrow will be better. Of course, that tomorrow always seems to take a long
time getting here in times of trouble, but it does come. On the other side of the aisle, when everything
looks so wonderful and the optimists are telling me that perpetual motion has been discovered, I'd better
start looking over my shoulder for the grim reaper.
Old slogans like "what goes around, comes around," "you have to pay the piper," etc. become very trite,
but they are just as profound as other indisputable laws of nature. In recent years the term creative
destruction has been popularized by some writers. Its message can not be disputed. Over the entire history
of mankind when creativity discovers wonderful new products and the company or the economy thrives,
that same attraction of the new era draws so much expansion and competition that it eventually eats into
the profitability, and attractiveness.
When I began my career in this business 30 years ago the most popular, idolized company was a
mobile-home manufacturer--Skyline Corp. In that same field was another super-star--Winnebago. These
companies had impeccable long-term growth statistics, and were considered sure things for future
success. Well, competition and external forces changed, and those companies have struggled for much of
the last 30 years.
The super-stars of one decade are NEVER the super-stars of the next decade. Success brings competition
like nothing else. In this light it is so interesting to hear about the new IPO's that are due to come public
today. All are Internet IPO's, of course. I haven't studied their particulars, but I would bet a dollar to a
nickel that none of them come even close to having earnings.
Everyday we are seeing the competition for Internet services explode. As an example, this morning IBM
has announced they are going to start selling PC equipment on the Internet. IBM has just taken a huge
write-off from losses in their PC market, and it sounds to me like the watermelon salesman who loses
money on every watermelon he sells, but is eager to buy a bigger truck to sell more watermelons. But
whether or not this helps IBM to lose more money, it excites the investing community because it is the fad
of the time.
The same applies to the only strong economy in the world, the US of course. This "lone-wolf"
phenomenon scares me. I am enormously optimistic about the next decade after some force comes along
to drastically push interest rates down, but that age-old truism noted at the beginning of this report
certainly gets my nervous antennae quivering. We now see Goldman Sachs preparing to do their IPO.
After making so much money over the last 20 years that it is almost ludicrous, they have decided to share
this opportunity with the world. Yeah! Do you believe that they are so benevolent? Maybe so, but I doubt
it.
In the summer of 1982, as we saw an amazing set of conditions evolve in preparation for one of the
strongest bull markets in history, brokerage firms were downsizing, and struggling to stay alive. Many
did not, as so many major names of that day did not survive the pessimism and lack of public interest in
buying their product. Only 8 years ago, Merrill Lynch's future, and that of most brokerage firms, was
very much in doubt, and the popular theme of the moment was that Merrill Lynch had lost their way. But
how things have changed. Yesterday, in the excitement of the large-cap new highs, Merrill Lynch broke
out of a small trading band, and now is considered a genius at their transition. Of course, there are now a
lot of geniuses on Wall Street. Bull markets tend to make a lot of people look smart.
But today in this environment of geniuses congratulating each other, we say that creative destruction may
be ready to work its magic. Of course, timing is very important. Being right, but being early by several
years is almost as bad as being totally wrong. We depend on our asset allocation for the timing, and it has
been warning us since February that the time was approaching when the stock market was going to be
vulnerable. It has been telling us that bonds and t-bills were a better investment, from a risk-reward basis
than the S & P 500. As we received this message and then coordinated it with the facts as we saw them, it
appeared to us that once again April 1999 would be the most likely critical fulcrum point when the bullish
tide would run out of steam. That still remains my message.
As I reported to you last week, I made only the second bond purchase of my life last week, buying
long-term treasury zero's. Early this week, I made my third bond purchase, once again in those same
long-term treasury strips, and so far so good. It is too soon to declare victory, of course, but with the
European nations in the monetary union cutting interest rates by *% yesterday, it is confirmation of the
underlying theme that we see unfolding in the months ahead. That theme would eventually bring "real"
interest rates down substantially over the next 12-18 months, and eventually set the stage for the broad
market to end their bear market. Yes, we said bear market. The broad market is indisputably in a bear
market that everyone with their eyes even partially open can see. In fact, there are only 97 stocks of the
entire 3600 stock universe on the New York Stock Exchange that are enjoying the same success as the S
& P 500 bull market. Even yesterday, when the Dow Industrials, the S & P 500, and the NASDAQ all
made new all-time record highs, only 44% of all stocks were trading above their 50-day or 200-day
moving average. Two hundred-day moving averages are often considered by many market technicians as
determining whether stocks are in a long-term bull or bear market. Using this definition, 56% of all stocks
are in a long-term bear market.
Keep your eye on oil prices, and the Dow Transports. We believe both items are important as a future
economic barometer. The Dow Transports have still not confirmed the new high by the Dow Industrials.
The high made in the Transports was way back on April 16, 1998. Even on the short-term, the rally in the
last three weeks by the Industrials has not been enjoyed by the Transports. So on the long-term, and
short-term this non-confirmation is just one more "fly-in-the-ointment" in the bull's case. We also believe
oil prices may be forging out a short-term high in price.
Oh yes, some other little news to help your mid-day naps. This morning, a so-far unconfirmed news
report says that the Russians have now redirected their missiles toward the NATO countries. This may be
totally wrong, with no actual basis, but it is a long-time phenomenon that economic-troubled countries
usually use aggression toward other countries as their technique to take their citizens' mind off their sad
plight, i.e. Adolph Hitler. After the last 17 years of relative peace, should my contrary nature start to
worry about a return of international discord? Should I worry that the conflict in Kosovo that is almost
being ignored by the typical US citizen is going to turn into something much more ominous? Should I
worry that Russia, with strong nuclear power, and no clear leadership, is very much angered about our
bombing of their Serb allies? What goes around, comes around, so yes I'm concerned.
And now comes China, with their economic miracle suddenly evaporating in the wake of the Asian Pacific
and world financial crisis. Another news event that was almost ignored this week came when another top
Chinese official waffled on their former promise not to devalue their currency. He said not to count on
that pledge too strongly.
As this traditional month of April evolves, when markets often change directions from bullish to bearish,
we continue to suggest that this is a time for stock investors to be very careful. |
