Wednesday, 9/25, Market WrapUp (Why DID The Markets Rally?)

Financial Sense Online ^ | 9/25/2002 | James J. Puplava

[rohry]

 
Weekday Commentary from Jim Puplava
Home

Can We See The Forest Through The Trees?
This is a bear market.

STORM WATCH UPDATE Bubble Troubles Part I by Jim Puplava 9/13/2002	Bubble Trouble Part II Yes, Virginia, There IS a Housing Bubble by Jim Puplava 9/20/2002
Nyquist Column 9/24 Will the Real Bogeyman Please Stand Up

Wednesday Market Scoreboard  September 25, 2002
Dow Industrials		158.69	7841.82
Dow Utilities		4.85	209.23
Dow Transports		69.91	2167.08
S & P 500		20.37	839.66
Nasdaq		40.12	1222.29
US Dollar to Yen			122.865
US Dollar to Euro			.9776
Gold		3.6	323.6
Silver		0.07	4.6
Oil		0.13	30.64
CRB Index		0.25	226.34
Natural Gas		0.11	3.494
	09/25	09/24	Change
HUI (Amex Gold Bugs Index)
Close YTD	125.92	129.85	3.93 93.66%
52week High	147.82	06/03/02
52week Low	59.86	11/26/01
XAU (Philadelphia Gold & Silver)
Close YTD	72.35	75.47	3.12 32.03%
52week High	88.65	05/28/02
52week Low	49.23	11/19/01
All market indexes

---

 Market WrapUp for the Week 
Monday  l  Tuesday  l  Wednesday  l  Thursday  l  Friday

The Week in Graphs Storm Watch Geopolitical News Energy Resource Page Precious Metals Raw Materials

---

^{Wednesday, September 25, 2002 Market WrapUp}

The Daily Drivel
The dictionary defines drivel by the following: to speak in a silly or stupid manner; talk childish nonsense, to let saliva flow from one’s mouth. This pretty much describes the daily utterances used for the question: Why did the markets go up? Today’s drivel was that stocks rallied on news that GE said it probably will meet its lower profit target this quarter. GE’s growth rate has slowed to less than 10%. Even after declining 31% this year, the stock still sells at 18 times earnings, hardly a bargain given its growth prospects and potential negatives in its GE Capital division. The GE announcement that it would meet its profit targets helped to allay fears that earnings for the S&P 500 was slowing. The simple fact is that they are slowing when you look at net income figures according to GAAP.

Most company earnings are suffering because of three factors:

1. Restructuring and goodwill impairment charges.

2. Accelerated depreciation charges due to short-lived technology investments.

3. Rising interest costs as a result of added debt.

If you leave out all of these factors, then you get down to the pro forma numbers, which are rising but at a slower pace than estimated. The reason pro forma numbers are going up is due to cost cutting, especially payroll cuts. Revenue growth at most companies has been sluggish. So for the markets to make a big deal out of GE’s numbers, it is really no big deal. It is simply noise and nothing more. Markets are driven in the short-term by news, and today’s announcement by GE doesn’t make a trend.

So, Why DID The Markets Rally?
The markets rallied because they were oversold. It is possible we could have a few days of rallying prices, or maybe this will turn out to be another 1-2 day wonder. After that, the primary bear trend should reemerge. The big money is out of this market, so you can discard most of the bullish talk that you hear, which is mostly for public consumption. The big boys are out of this market and are still short. That is one reason why volume has been absent in most rallies and it is also why they have been short-lived.

Wall Street is hoping to keep the little guy fully invested so you hear stories about the market being up 20% by the end of the year. That is not going to happen unless the government starts buying stocks like what is now happening in Japan. To go from a 27% deficit as we now have on the S&P 500, to a 20% gain by year-end is simply drivel. Most, if not all, analysts and strategists have been consistently wrong these past three years. I don’t see anything on the horizon that is going to give us our miracle recovery. Maybe we’ll start trading on pro forma sales numbers next. Forget the expenses. Why not go with sales and exclude everything else? The mantra that stocks are cheap will be addressed in the final installment of “Bubble Troubles.” If stocks were cheap, the big boys would be buying, and there is no evidence that this is happening at the moment. What is most evident with all that is said in print or the broadcast media is that investors are still bullish. Every word spoken reinforces the equity cult with standard clichés such as “stocks are cheap,” or, “you have to stay invested for the long-term,” or “the economy is in good shape,” and “we are oversold.”

Nobody talks about P/E ratios at historical levels or that dividend yields are extremely low. Everyone is carrying on as if these last few years have been a correction in an otherwise long-term bull market. I hate to tell these bubbleheads, but the bull market ended in the first quarter of 2000. If they want to maintain their customer base or their listening audience, they better start talking about the bear market and how they can keep their client portfolio losses to a minimum. Telling investors to buy tech stocks or to stay fully invested in stocks because they are a bargain is going to lose their clients' money. This is also going to cause them to lose their customer base.

This Bear Growls and He is Still on the Prowl
Judging by the e-mails I get from around the world, John Q is about ready to capitulate. John Q is still playing ostrich, but I get a sense it wouldn’t take much to get him panicked and out of stocks. A few 90% down days should do the trick. We’ve only had one this year. A few of these days will shake the trees and get rid of the complacency that is so widespread in this stock market. Don’t be fooled by these short-term rallies. All that happened today is a rally from oversold conditions in the market. If you are looking for an exit point and have remained fully invested, these kinds of mini-rallies should be used to get out and invest in defensive bear market investments. A bear market is what we are now in, and this bear has a long way to go before it will end. The second phase of this bear is going to produce more damage than the first phase.

In case anybody hasn’t noticed, the Dow has lost 13.4% since its August 22 high of 9053.64. We’ve lost over 1,200 points in the last month. A slowing economy, declining profits, a retrenching consumer, a Brazilian debt default, another default by Argentina, a derivative mishap, and an oncoming war is what awaits the financial markets in the months ahead. That is why September and October are usually foul weather months. The realities of forecasts made at the beginning of the year get adjusted in September and October. These readjustments to reality have an impact on the markets and there are still a lot of readjustments that need to be done to re-price stocks from a second-half recovery to a second-half economic and financial relapse. Three companies out of four have cut their third quarter estimates, according to a recent Bloomberg survey. If the profit recovery were going to take place, you wouldn’t be getting these kinds of warnings.

Fund managers could also contribute much of today’s rally to quarter-end window dressing. Institutions may be driving up stocks prior to a quarterly close. Usually at the end of each quarter, fund managers dress up their portfolios in order to look better to shareholders. This year has been the third year of negative returns for most mutual fund companies, so shareholders aren’t too happy right now.

The market remains weak technically with declining momentum, sentiment and other trend indicators showing no support for a sustainable rally. This is, in technical terms, simply a rally from oversold conditions and nothing more.

Volume came in at 1.64 billion on the NYSE and 1.68 billion on the Nasdaq. Market breadth was positive by 23 to 10 on the NYSE and by 22 to 12 on the Nasdaq.

Overseas Markets
European stocks rose as ASML Holding NV and Serono SA reiterated sales forecasts, helping the Dow Jones Stoxx 600 Index rebound from a 5 1/2-year low. The Stoxx 600 gained 1.6% to 195.43 after yesterday reaching the lowest level since April 1997. Of the index's 18 industry groups, only the energy group fell. The Dow Jones Stoxx 50 Index rose 1.7% to 2313.22.

Asian stocks fell after a U.S. industry report showed consumer confidence dropped, signaling weakening demand for exports from the region's largest overseas market. Japan's Nikkei 225 Stock Average shed 1.7% to 9165.41. South Korea's Kospi index fell to a nine-month low, and Taiwan's TWSE Index to a 10-month low.

Treasury Markets
Government bonds traded inversely to stocks, heading sharply lower after rallying for the past couple of sessions. The 10-year Treasury note slid 28/32 to yield 3.75% while the 30-year government bond plunged 1 14/32 to yield 4.72%.

Wednesday's sole economic report revealed an unexpected 1.7% drop in August existing home sales to a 5.28 million rate, less than expectations for a 5.40 million rate. Thursday will see several reports including weekly initial claims, August durable goods orders, expected to have decreased 2.7%, and August new home sales, seen coming in at 980,000.

© Copyright Jim Puplava, September 25, 2002

[STONEWALLS]

.."Old Lou always seemed smart and funny in a bull market -- much less so in a bear."

..yep, it's easy to be glib when things are going good...just like in poker: winners telling jokes; losers yelling "shut up and deal the cards"

Good luck to everybody! Stonewalls

[eastsider]

Many people only have heard "buy and hold" and they will continue with that strategy until the pain gets unbearable.

Memorable, bumpworthy line : )

[patent]

"Is there a reason to get personal about this?"

Nothing personal (towards LS) was intended.

You must be kidding. Asking him if he’s had a sex change operation and then stating that “not many changes [are] needed there” isn’t getting personal? If a sex change isn't personal, then what exactly would be? Look, that was a personal attack. I don’t agree with either of you all the time, and I’m hardly a LS cheerleader, and I’m not as well read on economics or the markets as either of you. Both of you make factual statements from time to time. Since I don’t the time to check every little fact each of you aver, I’m forced to evaluate your positions based on trust. If you deny that was intended as a personal attack then I appreciate your making it clear just how careful you are with your statements, or how much I can trust you. One or the other.

Are you a member of the FR thread police or are you just assuming that LS can't defend himself for some reason?

Neither. I enjoy reading well reasoned comments, and appreciate it when even those I disagree with provide comments, as it forces others to rebut them with substantive ideas. That helps me learn.

patent  +AMDG

[eastsider]

If you are looking for an exit point and have remained fully invested, these kinds of mini-rallies should be used to get out and invest in defensive bear market investments.

It was a comment from you similar to this one that I credit with having saved me thousands of dollars. Thanks again.

A bear market is what we are now in, and this bear has a long way to go before it will end. The second phase of this bear is going to produce more damage than the first phase.

I heard on the business news this morning (WCBS-AM, New York) that markets were also down prior to the Gulf War, but that they went up when the battle was actually joined. Clearly, the listeners were being asked to induce that a similar downturn is occurring now as rumors of war abound, but that the market will recover when we finally act to oust Saddam. How does this kind of "geopolitical" analysis fit into the Phase II theory?

[rohry]

"You must be kidding. Asking him if he’s had a sex change operation and then stating that “not many changes [are] needed there” isn’t getting personal?"

I think that you completely misunderstood my post. Let me try to explain what I meant.

1) Abbey Joseph Cohen is a well known shill for the stock market and has been saying that "stocks are going higher" for the last 30 months of a major bull market.
2) Abbey is a woman
3) LS is a man

I was making a crack that LS "was" Abbey because his pronouncements are parallel with hers. I tried to make the added joke (maybe in poor taste) that she had to have had a sex change operation to "become" him, however.

The added crack that "not many changes are needed there" was aimed at Abbey because she is VERY masculine looking. It was not intended to demean LS (who I respect even though we completely disagree on economics and the stock market).

Sorry if I ofended anyone...

[patent]

Thanks.

[Dick Bachert]

...and the deeply inbred British royals are so fond of f**king one another, they have great respect for someone like Sir Alan who can -- according to Sir Lawrence (Kudlow) of America -- f**k up an ENTIRE WORLD ECONOMY.

[LS]

You sure I was responding to the same post---you had two. But, specifically,

American history has shown, repeatedly, that our greatest economic expansion came in periods with high trade deficits. We did not even go into surplus until the mid-1890s, as I recall. The 1980s had steady trade deficits, despite incredibly real growth. "Prosperity" and trade deficits are not at all linked, as the Spanish learned under mercantilism, when they always had trade surpluses---yet steadily fell behind England and France.

Second, and I think I also have made this point to you before, foreign countries often "double count" their exports and we accept their numbers (as far as I know) of the value of their count. I have seen, for example, RAND studies that have shown trade deficits as virtually non-existent in real terms of trade.

As for debt, I have constantly said to you---and you know this---that debt is a function of GNP/income and/or assets, both personally and nationally. I don't have the latest debt to GNP figures for the U.S., but in the late 1980s it was falling even as all the Dems and Robert Reich were whining about the national debt.

Several studies have shown our national debt to be highly mis-estimated. Our national assets are vastly undercounted, due to FEDERAL REGULATIONS.

For example, our gold stocks are valued by the measure $35 an ounce. Naturally, gold makes up a tiny portion of our national assets, but it is a prime example of how we have assets with market values 10X and 20X and even more what they are actually listed as on the books. The most recent estimate I have seen . . . and I admit this is about 12 years old (but I don't think much has changed) . . . that we had a slight national surplus if all assets are accurately measured (land, buildings, federal holdings, etc.)

Now, is that better?

[evaporation-plus]

Social democracies will spend until they can't spend anymore. Then they go in debt. Then they print money.

It's not only the Fed... Read any paper, any day, all governments down to the smallest locality can't seem to find enough money. After stealing all the low fruit, ie. sin taxes, now they all going after the big moneymakers such as property, income and sales taxes. The poor tax paying slob will get crushed in the near future. With the economy as it is it seems like something will have to give!!!

[LS]

Rorhy, again, two years of "being wrong" is NOTHING in a stock market, where assessments are usually based on 25-30 year track record. That is why I keep bringing up gold, because Howard Ruff's 30 track record of "buy gold" is pathetic. Compare to him, I'm Nostradamus.

Second, the experts and the polls do not support your view on who is leaving the market. Most tend to agree that these are first time investors. The people who are HOLDING are people like me, in it for the long term.

[RightWhale]

What he said.

[rohry]

"It was a comment from you similar to this one that I credit with having saved me thousands of dollars. Thanks again."

Give yourself a pat on the back, it was you that swallowed the bullet and made a move contrary to most of the "experts."

"How does this kind of "geopolitical" analysis fit into the Phase II theory?"

The markets were clearly into full bear phase before 9/11. Since then the pundits have used it and any number of other "explanations" as to why the market is losing value despite unprecedented Fed rate reductions, loose credit and massive government spending increases. The coming Gulf war is another excuse for the market seeing further lows. But, they claim, it will proceed back up to Dow 36,000 soon after the war is concluded.

Needless to say, I don't buy it.

[rohry]

"Now, is that better?"

Yep...although I discussed gold in neither of my posts...

Although your historical details may be correct I think the amount of governmental, corporate and household debt held is unprecedented. Add in unfunded trust funds (Social Security, Medicare, etc), underfunded pesion funds and the fact that foreigners own about 40% of our bonds and you get a house of cards ready to fall.

[rohry]

"Rorhy, again, two years of "being wrong" is NOTHING in a stock market..."

I'm just being consistent. I laughed at the Bears throughout the '90s, I'm going to be laughing at the Bulls until the market gets to fair valuation.

Let's assume that you got in the market when I did (around 1990). We were both right for 10 years. I got out in 2000, so I've been right for an additional 2.5 years for a total of 12.5. Because you've been in the market while it's fallen 30% you're back to where you were in late 1997. While you were only wrong for 2 years it has cost you tree previous years of gains (for a total of 5).

I guess we disagree again, surprise, surprise...

[bvw]

"in it for the long term"

That's always and ever an excuse, not a wisdom. While it is true that for each investment, the term should be considered, and that there are wise long-term investments, and that "short-term" investment approaches tend to be mostly speculation and gambling, still folks make that kind of statement when they don't want to know from Adam, so to speak. It's wishful, not wise; ignorantly wishful.

Some great investor said, "In the long run we're all dead." -- yet that is not near enough of an adequate knock to the "in it for the long term" canard.

[rohry]

"The markets rallied because despite Algore and "Puff's" histrionics, it is now a pretty done deal that we are going after Saddam; and because suddenly the GOP's chances of taking the Senate by MORE than 1 vote look better due to this..."

See, now here's an example of a non-economic post of your that I completely agree with!

[rohry]

"That's always and ever an excuse, not a wisdom...Some great investor said, "In the long run we're all dead." -- yet that is not near enough of an adequate knock to the "in it for the long term" canard."

Well put, you wordsmith you...

[razorback-bert]

In my buy and hold investment world, a stock paying me a cash dividend is the one to hold. I am still making a return even if the stock price is down and I am better able to sit and await an increase in the stock price.

Non dividend growth stocks are speculation to me, just like gold is some.

[rohry]

"In my buy and hold investment world, a stock paying me a cash dividend is the one to hold."

How have those energy stocks turned out that you were researching in the Spring? I expect that their prices are down but they are paying some dividends (I don't follow them so I don't know)?

[LS]

Good. Except that it has everything to do with economics because politics drives economics, and vice versa.