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Guest Editorial 6/24
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Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Monday's Stock Market WrapUp
Trust Waning in the Markets
Today was a day like many others in the market with stock prices taking investors on another roller coaster ride. Both bulls and bears fought for every inch of ground with the bulls winning the battle at the end of the day. The question is, Will today’s victory be permanent or another shallow one-day victory? In war there is more than just one battle; there are a series of battles and victories that determine which side is victorious. It isn’t easy these days to make money in the markets. Sure things in equities aren’t there any more. There are those stocks that rise momentarily because some idiot says they are cheap because they have fallen 40-50%, so now they are a buy. Cisco has lost 23% this year on top of losing money last year and the year before. Even though Cisco is down three years in a row does not make it a bargain. Because it is now selling at 93 times earnings instead of 200 times earnings doesn’t make it cheap. It is less than likely that Cisco is going to be growing its earnings at 30-40% a year in the near future given its current size. Nothing against Cisco, but this poster stock of the technology mania isn’t cheap by any yardstick. It is still very expensive.
This stock has much further to go before it ever becomes cheap again. What could make this stock much cheaper in the future is that there are a lot of investors still holding on to the stock, hoping, praying, and making sacrifices to the gods that it will come back so they can recoup their losses. We are still in the early days of what will become a major bear market. In a major bear market like the one we had in the 30’s and 40’s, or the one we had in the late 60’s and 70’s, unfold over long periods of time. This is different from a correction or a pullback in stocks in a bull market. In a correction, stocks give back some of their former gains. They consolidate, base, and then make a new charge upward and make new highs. That is what is going on now in gold and silver. They are in a new bull market while equities, or paper assets are in a developing bear market. Look at the charts above of gold and the S&P 500 over the last 2 ½ years; you can see the difference between the two. One chart is descending while the other is ascending. This is what bubbleheads have yet to acknowledge. The bull market is over and it is not coming back for a long, long time.
This morning I got to watch a portfolio manager explain why he is still bullish over the stocks in his recommended portfolio, which were down between 40-50%. The response was typical from what you have heard over the last two years. The manager responded by saying he believed that stocks would rally in the second half of the year with the economy. He also thought they represented a better buy now that they have fallen 50%. This is typical of most money managers these days; they have to play defensive. Following the interview, a reporter mentioned things that were doing well this year, with gold at the top of the list. The comments regarding gold were that its rise was temporary. Both the interview and the reporter’s comments reflect what you would expect when markets have traded places. Both instances reflected denial--denial that a bull market in stocks was over and denial that a new bull market in gold had begun. Such is the state of confusion in today’s markets.
Trust has been lost and it’s not coming back for a long period of time. Wall Street could help restore some of its credibility by telling investors the truth. When the Dow is trading at over 24 times profits, when the S&P is trading at over 40 times earnings, and the Nasdaq has no earnings, the industry should refrain from telling investors stocks are cheap because they have fallen. They might also tell investors more of what they could do to protect capital. Alternative asset classes might also be recommended. If stocks are going down worldwide, then looking at alternatives to protect capital in a bear market would be helpful.
Investors are starting to lose faith in the system. Nobody trusts anyone--not the CEO’s who run the companies, not the accountants who audit them, not the analysts who recommend the stock, nor the anchors that report the news. Each day there is a new scandal to remind investors why they shouldn’t put their trust in the financial markets. Do the analysts and anchors think investors believe them anymore? A reading of some of today’s headlines tells the whole story. The following is just a sample of the many stories that are proving to be confidence busters:
- Martha Stewart Living shares decline over Insider trading concerns.
- UAL files for $1.8 billion in Federal loan guarantees.
- Global Crossing says records were destroyed at offices.
- WorldCom drops to 12-year low after Grubman cuts sales estimate.
- Probe of Global Crossing intensifies.
- U.S. weighs funding to halt Amtrak shutdown.
These are not exactly the kind of headlines that would breed confidence. Today, with stock prices going down, investors pay attention, if for no other reason, to find an excuse to sell.
What is also being ignored is the world has entered a new era of conflict. There are conflicts between tribes like what we are now seeing in Africa. There are regional wars. There is ethnic genocide, and the Middle East is front-page news every day. Then there are the terrorist threats, which are something new for most Americans. Terrorism was something that happened someplace else, but not in America. It is often the political events that are often ignored at great expense to the financial markets. Wars and rumors of wars give investors anxiety. War creates uncertainty and the markets abhor uncertainty.
The markets have changed public psychology going against it. Events that were ignored in the past, such as a restructuring charge, disappointing earnings, and lower economic numbers now have negative consequences attached to them. In a bull market they were ignored. Today these events are scaring the sheep out of the bullpen. On top of negative events, we are still playing catch-up to the bogus earnings, the hype in earnings, and to earnings that are disappearing. One reason stocks have become more overvalued today than in 2000 is that earnings have fallen, and are still falling faster than stock prices. Stock prices still don’t reflect underlying fundamentals. At this point, stocks should not be selling for more than 7-10 times earnings, reflecting lower profit growth. The reason they aren’t selling at those levels is because of hype, hope and prayers that they will some day come back.
The capitulation phase of the market has not happened yet. That is when all prospects for redemption, hope or whatever you want to call it, are abandoned. This is when investors wake up and can no longer bare the pain of seeing their net worth disappear. At this point, they abandon ship and look for a life preserver. This is what the analysts and the anchors are trying to avoid. They want to keep the sheep corralled because once they panic, the real damage of the bear market will be felt. That is when the capital markets dry up. Analysts, investment bankers, brokers and financial planners lose their jobs. Right now the issue is one of job security on Wall Street and in the media. How much longer do the managers at cable financial stations think people will be watching financial shows when stocks keep going down, or when investors bail out of mutual funds or equity funds in their 401(k) plans? As this trend continues, daytime soap operas will attract more viewers. Housewives will go back to watching soaps instead of day trading, and men will go back to sports.
Meanwhile, there was a minor gain for the major indexes, but the general direction of the market was down today with losing issues outdistancing advancing issues by larger margins. A swirl of scandals, earnings disappointments, and political turmoil took their toll on investors. The fact that the Nasdaq has lost over 70% of its value and investors are still holding on goes to show you how embedded the bull market is with investors. The fact they have held on through this downward spiral is a testament to the marketing efforts of Wall Street and the financial media.
Benchmark indexes have fallen for the past five weeks. Pessimism is growing, and normally when it seems like it can get no worse, we may get that eventual summer rally that I still see coming. The only caveat I have is that unexpected event, such as another major terrorist attack or the breakout of war in the Middle East. Barring the unexpected, sentiment is coming close to the capitulation point. What we need is a few heavy down days with big point losses on heavy volume. We still haven’t seen that, although today was close. Markets intra-day were close to new record lows not seen since last September. Heavy buying in a few key stocks helped to give the major indexes a lift and turn them around even though the majority of stocks went south. This has been a trend we have seen before whereby a select few are buying a few key stocks and turn the major indexes around. Today, it was Intel, Microsoft, Home Depot, and GE. In the case of Intel and Microsoft, they are key components in the Dow, the S&P 500 and the Nasdaq by virtue of their market caps or price. Wall Street knows that unless the markets start rallying soon, stock prices are going to start dropping through the floor, given that consumer confidence and the confidence in the economy rest so much on the stock market. Investors should look forward to a new PR assault coming from both Washington and Wall Street. This is year three and the markets are still losing ground. Wall Street is still trying to keep the sheep corralled and keep them from leaving the bullpen. Let’s see if that is still possible.
The market plusses right now is negative investor sentiment. The latest UBS Warburg poll found that optimism fell sharply this month from 90 to 72 in May. Now only 38% of investors are optimistic about future prospects for the market. Volatility on the VIX is also rising. Analysts have slashed their projections down dramatically for the second quarter and still are in the process of driving down estimates even further. The estimates are getting so low that at some point next month when companies start reporting actual numbers, they will all be beating estimates. It will remain a question as to how many suckers get dragged into this brief rally that will determine its strength and duration.
Inside most of today’s selling, technology stocks took the brunt of the sell off. Chip stocks led on the downside followed by hardware and software issues. Other groups losing ground were airline, utility, defense, tobacco and consumer cyclicals. On the plus side were oil and energy issues as it looks like OPEC is going to leave production cuts in place for the remainder of the year.
Volume picked up to 1.57 billion on the NYSE and 2.04 billion on the Nasdaq. Market breadth was negative by 19 to 13 on the big board and 20 to 16 on the Nasdaq.
Overseas Markets
European stocks tumbled, led by insurers including Zurich Financial Services, as the worst first half year for equities since the 1970s reduces their ability to pay claims. The Stoxx 50 declined 82.06 points, or 2.8% to 2890.49, the lowest since Oct. 29, 1998. All eight major European markets were down during today’s trading.
Japanese stocks rose, erasing earlier losses, as the government sold yen to stem the currency's rally to a seven-month high against the dollar on Friday. The Nikkei 225 stock average added 1.1% to 10,471.32, while the Topix index rose 1.1% to 1013.23.
Bonds Today
Government issues plunged as stock prices turned around. The 10-year Treasury note slipped 1/2 to yield 4.825% while the 30-year government bond declined 26/32 to yield 5.455%. No economic reports were released today, but Tuesday's lineup will include June consumer confidence and May existing home sales. The Fed will also meet to decide on short-term rates Tuesday and Wednesday. Everyone on Wall Street expects no change in the overnight fed funds rate. Attention will again turn to the central bank's statement.
© Copyright Jim Puplava, June 24, 2002