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Posted on 06/23/2002 12:53:50 AM PDT by ThePythonicCow
Portfolio Strategy
Buy Stocks Now
It is finally time to get fully invested, although maybe only temporarily. Investors have dug down into pessimism too far for stocks not to pop upward nicely. My shift may surprise recent readers, who have seen me unremittingly bearish for 18 months. But bear markets last only so long. Why now?
Among the most basic market rules is that the market discounts all known information. To be bearish, you must see bad things others don't. One and two years ago I could (see prior columns on my Web page). Now I can't. Simply agreeing with others about the world's evident evils won't hack it.
What's so horrific now? The global economy is no longer collapsing. Layoffs have largely laid off. Corporate scandals abound and everyone expects more ahead, and that is discounted into pricing. And we know the terrorists will be terrible--our government now guarantees it, even promising that there will be future attacks. No surprise, so terrorism can't impact markets much. And everyone knows the market isn't statistically cheap, so valuations won't impact pricing. What will? Something basic.
Stock prices derive solely from shifts in supply and demand for stocks, nothing else. We can't think that way because our information-processing capability was hard-wired between the ears eons before stock markets. None of us arises daily gleefully contemplating supply and demand. No, our psyches evolved to deal with hunting and gathering--and their functional replacements, like earnings (rain), interest rates (wind), politics (tribes), trends (seasons), demographics (squalling kids) and demagogues (neighboring chieftains). We don't focus on supply and demand for securities. That's alien.
In the short term, supply is heavily constricted, tied as it is to the regulatory processes associated with its creation. In the long term, supply shifts freely and is the prime price-setting force--and our brains can't and won't begin to comprehend that. In the short term, since supply is constricted, it is demand's bouncing around that sets prices. Demand is a function of our collective emotion.
Emotion gets only so gleeful or dour; when it is too extreme for long, we regress toward the middle.
Demand fell apart in May, having imploded after a very long, lousy market. Lots of capitulation came with the last down leg, starting in March. Hence, with demand too low, it will rise--and with it stock prices. How long? How far?
Uncertain! It may be an up-move of only a few to 12 months, then may roll over again into more ugliness. Or it may be a real new bull market. Either way, it should last long enough to vaporize the emerging consensus that stocks can't have a major up-move soon. Some people can't quite fathom this because it seems like circuitous reasoning. It is. But that is exactly what I am saying and it is exactly how markets work. Meanwhile, buy some stocks; make some money. Life is good. It just doesn't feel that way to everyone now.
To get fully invested fast, put 57% of your money in the S&P 500 Spider (103, SPY) and 43% in the EAFE Ishare (118, EFA), which are fixed baskets of domestic and foreign shares, respectively. Later, you can lighten up on those positions and move into single stocks. Or if you're part active and part passive, put 57% of your index money in Spiders, 43% in EAFE, and with your single-stock money buy stocks like these: Dutch-based insurer and asset manager Aegon (nyse: AEG - news - people ) (19, AEG, down from 65 in 1999, www.aegon.com). It sells at 12 times earnings with a 5.5% dividend yield. Also, Credit Suisse Group (nyse: CSR - news - people ) (34, CSR, down from 64 in 1999, www.credit-suisse.com), sells at 65% of annual revenue, 11 times trailing and next year's earnings and yields 3.7%.
I like Australia's Telstra (nyse: TLS - news - people ) (13, TLS--down from 30 in 1999, www.telstra.com.au). It sells at a 4.3% dividend yield and 70% of annual revenue. Having double-bottomed last fall and this spring, it is among the world's best telecoms--from among the world's strongest economies. Another great telecom, TDC Corp. (nyse: TLD - news - people ) (13, TLD, down from 50 in 1999, www.teledanmark.dk), has a 3.2% dividend yield and sells for its annual revenue and 12 times earnings and only 5 times cash flow (meaning earnings plus appreciation).
Among consumer products Ford Motor (nyse: F - news - people ) (17, F, down from 41 in 1999, www.ford.com) is a real steal at 1.4 times cash flow, 20% of annual revenue--with a 3.7% dividend yield. Try U.K.-based Six Continents (nyse: SXC - news - people ), a brewer (Bass, Carling and Worthington), a gaming firm and a global hotel chain (11, SXC, down from 20 in 1998, www.bass.com). Earnings are down but cash flow is strong. It yields 4.3%.
Kenneth L. Fisher is a Woodside,Calif.-based money manager. Visit his home page at www.forbes.com/fisher.
Legal disclaimer - I am not an investment advisor, nor anything resembling such.
On k & C (CNBC) they had a guest who felt that the Big stocks were going nowhere but small and midcaps would be a decent choice now!
But I still think we are, long term, in a bear market. Which means buy and hold generally sucks. Play a few rallies when you see them, get in, and get out. No turning out millionaires by the bushel basket full like in the late lamented NASDAQ bubble.
Well, except perhaps for some happy gold bugs ... happy happy.
The tech stuff is still like white water rafting -- upstream. But the big stuff, like the S&P 500 Ken recommended in the above article, which has been losing ground, could be worth putting a little in, if you're willing to keep a close eye on it, and have come to terms with the age old question of deciding when to sell.
The wife complained, but even the dividends have to be better that the 1.9% the bank is giving me.
For younger investors (not me, that's for sure), it's good to take chances. That's because most of the money they invest over the next decade will be new money. If they score big on one investment, and completely blow out another, they win, and still have the nice flow of new money each year, to look for more winners. For older investors, most of the money they will be investing comes from returns on what they already got. One big mistake, and there is no way back.
Give it three more quarters and then there will be an increase.
The fall elections are having a depressing effect on the market also.
regards,
Chartcraft/Investors' Intelligence uses insider data from Argus/Vickers and Value Line as a forward indicator. They say that this data influenced them to exit the market in August '87 and miss the Crash. They are now saying that their look ahead indicates a double-bottom low coming up with an initial deep bottom in ~July followed by a retest in October which will be a decent buying opportunity for a tradable rally until about Christmas. In late December, the outlook begins to look neutral, followed by a bad market from after New Year into next spring, with possibly very bad market conditions next May continuing bearish into June 2003, viz. as far forward as their data will allow them to extrapolate.
After several years in a row (18) with yearly lows higher than the previous year's, they remind us, it's reasonable to expect some regressing to mean, and they expect 2002 and 2003 lows to be successively lower than 2001's lows. In short, they are bearish, despite the lack of focus provided by projecting insider data forward, which is further defocussed by the Value Line data on hand reflecting older data than the Vickers/Argus Research data.
Growth Fund Guide used to publish work on the decennial cycle and its composite curve reflecting superimposed daily or weekly closing-price graphs going back to 1890. According to their work, which Chartcraft does independently in their shop, the decennial curve is punk into the fourth year. Chartcraft/I.I. reminds us that, closing out a superbull run like we've had, we are likely to see a period now more like the early 70's than the early 80's or 90's, and urge caution in the next couple of years for investors exercising a buy discipline. Remember the spike blowoff of 1974 -- which, looking at it optimistically, was a fabulous buying opportunity but required ready liquidity to make anything of. Investors who were still long with equities bought toward the end of the previous bull leg (I recall a high-school football coach sitting with me in his car on my college campus in the summer of 1969 trying to sell me shares in the Keystone S-4 stock mutual fund; that was my Joseph Kennedy/shoeshine moment, in retrospect) were underwater and unable to profit from the 1974 blowoff, and didn't get any real relief until the 1981 rally which, perversely, was not centered in the old Nifty Fifty stocks a lot of people still owned, the "one-decision" stocks of the previous bull cycle.
Recent downside projections based on other point-and-figure chart work give them a fuzzy July bottom in the ~8950-9350 range as a "downside price objective". Their best market-timing results in the past, per Hulbert Financial Digest, has been achieved in their mutual-fund portfolios, on a timing-only basis. I interpreted these results in the past to indicate that one shouldn't look to Chartcraft/I.I. for fund or equity selection, but only for overall market timing signals based on their fund exposure. Right now they are 20% invested in their two (Fidelity Group and Rydex Group) mutual-fund portfolios.
They also have gold and bond mutual-fund portfolios. The gold portfolios are duplicated as are the equity portfolios, one for Rydex and one for Fidelity. They just closed out their Fidelity gold portfolio with a big gain, notwithstanding that other chartwork is still bullish for physical gold and crude oil.
T. Rowe Price's New Era Fund, which is a natural-resources fund (oil, mining stocks, etc.) recently gave a technical sell signal. These groups, Growth Fund Guide indicated years ago, tend to trail and outperform the wider equity market at the end of bull markets since these natural-resource stocks look to continuing economic activity, which tends to persist unabated for 6-9 months after the Dow Theory stocks have begun to discount future economic activity in the wider market.
That's for sure -- words to live by. Ask me, I recently got a reprieve from earlier losses in gold. I was in too early, taking Chartcraft's advice on gold in '97 and '98, before the central bankers started thowing their national reserves at the market price, targeting it for suppression in their enthusiasm to keep the G-7 monetary daisy chain intact. The result was some big early losses in Barrick common and Central Fund of Canada as the market was trying to bottom, and a U-boat ride in Battle Mountain (later Newmont) preferred that I recently closed out with a gain, having been under water still as recently as the start of the year.
Your words about "new money" and "old money" ring true. My industry is shedding older workers (illegally, but this is Texas, an employment-at-will state, and the malefactors are backed up in depth with a former Texas governor in the White House and a Texas oil-service CEO in the vice-presidency) and trying to rotate to Gen X and Gen Y as fast as they can to crush G&A by working the Gen X'ers on 72-hour workweeks and reneging on hiring, even (and especially) in the face of dire need. They are also using deliberate short-staffing as a tool to force line management to high-grade exploration portfolios. As a result, half the energy professionals in Houston, which is the energy capital of the planet, are underemployed or unemployed. This state of affairs reflects the advice dispensed to managements by Harvard B-school products over the last few years. A memorable Harvard Business Review article from 1994 or 1995 advocates imposing high work and intrapreneurial demands on the entire workforce, similar to what they did with the suite in the 80's and early 90's. No budget, no direction, but build us a division, a department, a wholly-owned subsidiary out of string and chewing gum. That kind of performance demand, the writer said, needs to be catholicized as a condition of continued employment. Well, they are in the implementation phase now, boy howdy -- people I know who are still working are twitchy-jumpy with multiple levels of fatigue and approaching burnout/neurosis/heart attacks pretty quickly. Hence the youth movement.
This Cheerleader is pumping and dumping you?
THE BIG SUCKING NOISE YOU HEAR IS THE MONEY BE SUCKED FROM YOUR POCKETS!!
Including a Q & A with the world's leading Austrian economist, Dr. Kurt Richebächer, highlighting ominous parallels to 1930.
Almost Every American Economist Is Dead Wrong
The "Bogus Recovery"
It's not what you don't know that will hurt you; it's what you think you know that's dead wrong and that can destroy your wealth.
Fasten your seatbelts, investor. You're in for a wild ride. Yes, I know that almost all you hear in the mainstream media is that the recovery is well under way. According to them, "Happy days are here again"... or at least they will be soon... But the truth is something quite different.
THERE IS NO RECOVERY.
It's bogus. This is a Bogus Recovery. Americans are being lied to. Wall Street, politicians and the media are all doing everything they can to keep consumer confidence high. They want to keep consumers consuming and investors investing. It's understandable. But it's also highly dangerous. Do not become their victim.
Stocks can go nowhere but down right now. In fact, if they return to normal valuations, the stock market could easily fall by 60%. And that is likely to happen. Investors who are not prepared will be in for a rude awakening.
A. The trade deficit.
B. Earlier the Asian economies were pumped and dumped by the moneymen. The US economy has been pumped and is now being dumped. It is Europe's turn to be pumped.
b) But not until the bottom is in place and successfully retested in October, to bring the rest of the buyers in, and
c) Only temporarily, until the hazards of Year 4 have been navigated....an investment in the summer or autumn of 2004 would be the most auspicious in terms of decennial cycles, if not presidential cycles.
If a Republican wins the presidency, market rallies in the past (Growth Fund Guide reported years ago) have tended to be about six weeks max, until the market realized that the new GOP president would want to take his medicine early in his term (like Reagan in 1981). Democratic presidents led to longer rallies, on the order of six months or so, before the presidential cycle's upleg played itself out.
As to the decennial cycles, in the 1960's bull market, we had a notch correction after JFK made his famous remark about businessmen, which was occasioned by the steelmakers' response to his tariff relief they'd asked for. (Instead of attempting to win back market share, they just reached for the nearby money and raised prices -- outing themselves as liars and, effectively, swindlers on a national-market scale who'd just sucker-punched a president of the United States.) The market swooned, then the rally resumed with a sharp uptick and went on its merry way.
In the 1970's, there was a series of rallies and selloffs after the 1969 superbull top until the market faltered in 1973 and began to fall, and kept falling, into the 1974 blowoff. Investors' Intelligence reminisced a few days ago that, except for the 15% shot the market took in August, 1974, it was more a meatgrinder selloff, the classic grinding bear (like 1931/2) that killed everyone a yard at a time -- keeping them in, and maximizing the damage by killing them slowly.
In the 1980's, a round-trip early rally in 1981 fell into the blowoff 1982 triple-bottom low. Then the market had its steep 1982/3 upleg for nine months and then wandered around or declined slightly for a year, as the early (small, techy) leaders gave back some of their gains, from the summer of 1983 until August 1984. Then the market finally woke up again and rotated leadership, sharply rallying twice (I still think of them as "stairstep rallies", since it was impossible to react fast enough to catch them on the way up) in August and November 1984, before the mega-bull of 1985 took off.
In 1994 the whole year was punk and punished people who got in in 1993; and prognosticators by and large didn't see the 1995 rally coming. Fed watchers got caught looking as the fuel for the rally came from Japan and Europe, the liquidity seeping under the door, as it were, rather than through the Fed window. It was very stealthy and succeeded in keeping a lot of people out after the punkishness of the previous year had convinced people (including me) that the superbull top must finally have arrived.
Go back and look at the old curves, sum them if you can do it mathematically or just look at them and sum them mentally, and see where we fit. I think I.I.'s forecast based on their interpretation of insider activity (statistically corrected for the normal excess of selling over purchases, because of compensation schemes) is a credible road map into 2003, and that it looks ugly. Their call, that we're going to get more of a replay of the 1970's than the 1990's, is correct. Technically, a washout correction of the bull back to 1982 would be the most desirable -- that would imply Dow ~6000 at some point -- even though it would be really uncomfortable for people. And despite the fact that "one-decision"/"buy-and-hold" players (Granville called them "bagholders") didn't make any money between 1969 and 1983, lots of other people made money in the 70's timing the market. Mark Hulbert's survey results from the 80's that I looked at closely 10 years ago, however, suggest that playing a two-legged strategy using hedges and shorts doesn't work, that bonds or cash are much safer and pay nearly as well as the best one could hope for playing the short side. I've almost learned that lesson myself, but will be severely tempted to try the Rydex bear-market (Arktos and Ursa) funds next January -- it may be a hell of a bear ride.
The key, though, will be to play, and then sell, this coming November rally. Remember that at the end of the good upleg in 1982, people hurried to the sell window immediately after the New Year, and the Dow rolled off on a mathematical-looking curve in January and February. But that was an initial bull-market correction in 1983/4, and this is the correction of a superbull. As Investors' Intelligence keeps pointing out, there is a lot more optimism around now than there was in the like period in the 1970's; what will it take to cure those bad sentiment numbers? I don't want to be caught dead long the market when that correction is administered.
I do see some areas where concern leading to correction could come from. The status of the dollar as a reserve currency makes the U.S. markets more beholden to foreign opinion of the dollar and our market. Bad loans worldwide could be brought to account, Japan leading the list but American banks participating in a huge writedown. Some combination of the two could drive U.S. interest rates higher despite Fed action -- the bond market could effectively do what the Fed, in its mistaken policy, did in 1929 and 1930 when it tightened in the face of need for liquidity. Inflation could return, driven by foreign markets' repatriation of dollars. It could be any number of things -- but I don't see the underlying damage to the world economies that was caused by World War I and its huge war debts (which caused widespread devaluation or delinking of world currencies from gold and silver), or to the U.S. economy in the 70's by the discounting of the Vietnamese War's economic cost, with the first OPEC oil shock piled on top of that, all under the cloud of perpetual confrontation with the Soviets, who had achieved strategic superiority in their nuclear arsenal while we fought in Vietnam. There are a lot more favorable underlying economic realities this time around. It would take war with China, and possibly the use of nuclear weapons, to set economic confidence back the way it was in the 1930's -- are those scenarios likely ?
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