Weekday Commentary from Jim Puplava
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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:
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Restructuring and goodwill impairment charges.
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Accelerated depreciation charges due to short-lived technology investments.
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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