Weekday Commentary from Jim Puplava
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Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Friday's Stock Market WrapUp
In a Nutshell...
This week can best be summed up in four words: Martha, Bernie, the dollar, and God. Just when your think the scandals are over, a plethora of new ones arrive on the scene. Martha Stewart, the doyenne of Middle America, made the cover of Newsweek. The media is shifting its coverage from deification of the 1990’s business icons to their demonization. Each day brings fresh new scandals leaving the markets wondering, Who will be next? In fact, there are so many scandals to cover, that there is little coverage of anything else. The fallout from these revelations of corporate improprieties has hit markets worldwide. The U.S. markets have tumbled with each new scandal and global markets have fallen as well. Today, Xerox became the latest to join the distinguished list of American companies that have been tarnished by corporate greed, malfeasance, and charges of false accounting. It brings back memories of the accounting and business scandals that were brought out in the aftermath of the 1929 stock market crash and the Great Depression.
The fact that it has become so pervasive brings further doubts as to the credibility of the 1990’s economic and stock market boom that was hailed as a "new paradigm" in American productivity. This myth of a "new era" should be discredited even further next month when the government releases its revisions for GDP growth during the 1999-2001 period. They will be the last stake in the coffin that puts that "new era" myth to rest. Most of the miracle statistics, such as GDP growth, the capital spending boom that contributed to this new productivity, and the growth in personal income will dispel any last remaining beliefs in and myths still held about the economic boom and the stock market mania that accompanied it. (See this week's Storm Watch Update.)
Like the scandals that are now with us each day, that new era was more the product of fraud, deceit, malfeasance, and greed on the part of companies, accountants and analysts. This week’s revelation of WorldCom shows just how big and widespread the corruption was throughout the whole financial system. Many have written about the phony numbers and the earnings manipulation for years, especially when it became so obvious in the final years of the boom. The only problem was as long as stock prices were going up, everyone was willing to look the other way. There were plenty of blind eyes and winking when everyone who was a professional knew things weren’t kosher on the earnings front. You can’t have earnings growing at 20% per year while sales are growing at only 2 to 3%.
I suspect after a brief summer rally, companies will start to warn they aren’t going to meet their third and fourth quarter numbers -- no matter how those numbers are spun. With Congress and regulators taking a closer look at accounting fraud, no CEO is going to want to chance goosing his numbers in light of the consequences. When it is realized that the second half recovery that Wall Street is currently projecting doesn’t transpire, a hard dose of reality is going to hit the financial markets.
The dollar could then become a real problem for the U.S. financial markets. At that point, foreign investors may decide to reallocate a good portion of their assets out of the U.S. This will drive the dollar down as much as it drove the dollar up when the money was freely flowing into the U.S. financial markets, contributing to their gain. This withdrawal should impact bonds and then stocks with a devastating result. The major indexes should be hard down and reaching new significant lows by year-end. As this chart from our friends at Elliott Wave shows, the markets are resembling a pattern very similar to the Dow in the 20’s and the Nikkei in the 90’s. Prices for the major indexes are hovering around their neckline support. According to Elliott Wave analysis, they should oscillate there for a short period of time and then head south. The chart patterns would indicate the next leg down in the markets would take stock prices down significantly.
Used with permission from www.elliottwave.com
John Q. Still Hanging In There
Moreover, the general public is still significantly invested in stocks despite the third year of decline. According to a recent Sindlinger poll, the percentage of households still invested in stocks is holding firm at around 57%. This shows the vast majority of Americans are still complacent and have their money invested in stocks. Everyone still believes in the recovery scenario. A recent conversation with a friend only confirms this view. He thought that bear markets only lasted 7 to 9 months. I mentioned to him that they could last as long as 25 years as was the case following the 1929 stock market crash and the Great Depression. You really get the sense that today’s investor has no understanding or recollection of history, which is proving why Santana was right when he said, "Those who fail to learn from history are doomed to repeat it."
There is a lot of pain coming to the financial markets when the Joes and Sallys wake up to the fact that the market isn’t coming back. That is when the second phase of the bear market will come into play. The most damage to net worth will be done at this time. A lot of pain and suffering is still directly in front of us.
Dim Week and Quarter End Results
Looking at this week’s market and the quarter that just closed, stocks ended with their steepest decline in more than three decades. Scandals, fraud, earnings disappointments, geopolitical fears and a plethora of other worries contributed to their decline. The professionals and insiders are bailing out of stocks and contributing to their fall; while the public still holds on. According to the Vicker’s Weekly Insider Report, the sales-to-purchase ratio climbed to 4.18:1 in the last week of May. If insiders are selling, someone is buying or holding. That appears to be John Q.
For the week, the S&P 500 lost 0.1%, bringing its YTD losses up to 13.82% and down 13.8% for the second quarter. The Dow nudged lower by a similar amount this week slipping 0.1%, losing 7.81% YTD and down 11.2% for the quarter. The Nasdaq is looking terminal; it lost 1.5% this week. Its losses YTD are 25.01% and the losses for the quarter are 20.7%. Investors have lost $1.4 trillion in stock market wealth since the beginning of the year. Not since 1970 have investors lost so much money in the S&P 500 where a lot of money is invested through index funds.
Shockwaves to the Market
The market was in the rally mode until more accounting scandals hit the airwaves. Today it was Xerox, which revealed it inflated sales more than $1.9 billion from 1997 to 2001. The company admitted to misrepresenting sales of equipment and service contracts. In a report filed today, the company restated equipment sales from 1997-2001 by $6.4 billion, more than twice as much as acknowledged back in April. The purpose of shifting sales this way was that it allowed the company to meet their earnings forecast each quarter. The SEC said it would fine the company $10 million dollars.
In addition to these confidence shakers, U.S. planes attacked an Iraqi Command Center, while Israeli troops stormed the Palestinian Authority police center. A thin string is holding world political tensions back.
Another potential problem for the markets is the dollar. U.S. currency posted steep losses earlier in the day and is rapidly approaching parity with the Euro. It has taken central bank intervention to cushion its fall. The Bank of Japan intervened today for the third time this week. On the economic front, personal income rose 0.3% as expected. This number will be subject to revision in the future. The number was the weakest it has been since November of last year. The University of Michigan also reported its consumer confidence numbers fell to 92.4 in June from May’s 96.8. The Chicago Purchasing Managers June Index also slipped to 58.2 from May’s reading of 60.8.
And Yet . . .
Given all of the above, it is hard to make a case for a summer rally. However, when things seem their bleakest, a ray of sunshine appears. I still believe we will see a brief summer trading rally. Gold is falling for a number of reasons as predicted and stock selling pressure is coming close to an end. The good news on the earnings front should shortly start to come out, but it won’t be the earnings. The good news is that companies will beat estimates -- nothing more and nothing less. That should be enough to give the market a brief respite before different storm fronts start to converge.
Given all of the confidence shakers this week, it is no surprise money continues to flow out of stock funds. According to Trim Tabs, stock equity funds had outflows of $9.2 billion in the latest week ending June 26th. Bond funds took in a measly $1.2 million compared to outflows of $400 million the previous week. Gold and energy are still showing the strongest inflows of money; while technology continues to show large outflows.
Overseas Markets
The Dow Jones Stoxx 50 Index of European shares posted its second biggest rally this year on signs economies may be recovering. The Stoxx 50 added 3.8% to 3060.91, extending gains after a survey showed U.S. consumer confidence was stronger in June than analysts expected. All eight major European markets were up during today’s trading.
Japanese stocks rallied for a second day after factory production had its biggest monthly gain in almost a decade to meet increased U.S. demand. Honda Motor Co. and other exporters led the advance. The Nikkei 225 stock average rose 3.5% to 10,621.84.
Bonds Today
Long-dated Treasuries ended on an upswing as stock gains dissipated in the final hour of trading. The 10-year Treasury note added 3/32 to yield 4.81% while the 30-year government bond was up 1/32 to yield 5.515%.
© Copyright Jim Puplava, June 28, 2002
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