Posted on 10/28/2002 4:20:03 PM PST by rohry
Market WrapUp for the Week Week in Graphs Storm Watch Geopolitical News Energy Precious Metals Raw Materials Monday, October 28, 2002 Making The Adjustment There is nothing new this last quarter that has altered the perception that Q4 is going to be a barnburner when it comes to earnings. In addition to earnings estimates being too high, economic reports indicate the economy is slowing down again. Unless a company is going through aggressive cost cutting, it is unlikely revenue growth is going to accelerate enough to cause earnings to improve significantly. At this point earnings estimates are still too high. Just because this is the time of year markets do well doesnt mean that markets will. There are always anomalies, and this bear market isnt your ordinary bear market. So despite the fact that Wall Street is bullish doesnt mean that they are right. They have been wrong for three years running, and I believe they will be wrong once again. Perceptions right now are for higher earnings going forward, but there is nothing right now that would justify that view. Even many of the companies that actually experienced real earnings growth this quarter said that they dont expect to see these improvements going forward. Microsoft had a good quarter, but it was an anomaly that had more to do with the way they do business and an accounting change than a marked improvement in the PC business. Before any sustainable rally can take place, you are going to need consumer spending to stay at high levels and for capital spending by business to turn around. There are no visible signs at this time that this is happening. What we are likely to get is tradable rallies which is what I believe this current rally. What is of concern is the fact that the latest Barrons poll finds most money managers are remarkably bullish and remain so even after three years of consecutive losses. The consensus seems to be that stocks have gone down for so long they have no where else to go but up. There is now talk of the Fed cutting interest rates again as another bullish factor for the financial markets. If the Fed cuts interest rates, it will be because of a crisis and that things are getting worse instead of better. If 11 interest rate cuts failed to stop stocks from falling or prevent a recession, what makes people believe another interest rate cut will do the trick? What will one or two more rate cuts do that 11 have failed to do so far? The simple fact is the stock market is grossly overvalued. It may not be the message most investors want to hear, but it is an irrefutable fact. Last week S&P published a better picture of real earnings to establish a reliable and accurate benchmark for investors to value equities. By adding back writedowns from ordinary business, adding pension losses and accounting for stock options reduced S&P 500 earnings by more than a third. Stocks are still selling at 37 times earnings and 54 times net income or real earnings. This is why the markets have trouble staying afloat after short-term rallies because stocks remain overvalued. As plain and simple as this is, it is still misunderstood by most investors and analysts on the Street. Contrary to popular opinion, bear markets can last for very, very long periods of time. Just because stocks have fallen for three years, doesnt mean they dont have much further to fall. Bear markets end when most people have sold their stocks, foreswear ever owning them again, and valuations are extremely low. That is not the case today. Does that mean that stocks cant rally? No. Stocks can still rally, but those rallies will be short-term and will be tradable rallies only. So what comes next? I spend some time each week visiting chat rooms and various gathering sites on the web. I use these visits as a gauge of investor sentiment to back up other technical indicators we follow. What I find is widespread complacency almost everywhere. I also see a lot of bravado that seems ill-placed. That bravado speaks of lack of confidence. When youre not confident, you dont brag or boast. Just when you think youre on top, the markets have a way of teaching you humility. This is a major bear market and you need to think in those terms. In bull markets everyone can become an investment genius. Real genius comes from having the ability to survive and then prosper from a bear market all the way through completion. What Im about to say cant be repeated too often. This is the time to be thinking of return of your capital rather than return on capital. There are too many external factors outside your control that arent readable on a chart, which could very quickly devastate your investment plans. I dont need to belabor the point. Just remember that the era of peace and stability is over. The world is heading towards war -- not peace. During war, people die, things get blown up or destroyed, and this time it includes the US. That is the message of 9-11. The United States is no longer immune from events that initiate elsewhere. Today's Market Based on the latest Q3 earnings reports, analysts are now busy chopping Q4 estimates. They have already dropped close to 30% in July, 22.9% in September, and 19.9% in October, to the latest estimate of 16.9% as of today. In addition to revising estimates for the major indexes, analysts are cutting estimates for companies as well. Morgan Stanley downgraded their rating of Cisco. Wal-Mart fell after the worlds largest merchant reported sales at its Sams Club warehouse chain fell for the second week. After the markets closed, Qwest announced that it would take a $10.8 billion charge to record asset writedowns. The government also reported it would need to borrow $76 billion this quarter due to rapidly falling tax revenues. This is the kind of news that awaits tomorrows open for the markets. Upgrades by analysts of three drug stocks werent able to resuscitate the major indexes which all sustained losses for the day. Over the past few weeks the financial markets have shrugged off a series of bad news to go on a rally. This was one of those days it didnt as market momentum begins to deteriorate. Most sectors fell with utility, energy, and gold stocks drawing in buyers as investors go defensive again. Volume came in at 1.37 billion on the NYSE, and 1.64 billion on the Nasdaq. Breadth was negative by 18 to 14 on the NYSE and by 18 to 15 on the Nasdaq. The VIX continues to fall ending the session down 0.60 at 35.67 while the VXN rose 1.13 to 51.52. Overseas Markets Japanese stocks fell after U.S. reports showed that consumer confidence dropped to a nine-year low in October and durable goods orders slumped. Companies that rely on U.S. sales, such as Honda Motor Co., declined. The Nikkei 225 Stock Average fell 0.5% to 8687.46, paring Friday's 1.3% gain. The Topix index dropped 0.8% to 864.72, with Honda accounting for 7% of the decline. Treasury Markets Copyright © Jim Puplava |
Cash is king and gold is better.
Richard W.
I wonder if the internet is getting whacked by hackers. It has been sort of screwy the last few days. I was trying to make a post to FR a few minutes ago and couldn't. I also couldn't get out to other web sites via my normally reliable ISP.
Definitelly something going on not only at FR. I have had several probems placing orders with my online brokerage account. Something to think about if you want to close out a position and can't get the order placed. Forget the phone lines, they would be locked tight in a panic.
Richard W.
I do hope it clears up soon because I enjoy catching this thread each day, rohry.
Ditto that thought. I wouldn't think your bricks and mortar broker would have the dumb terminal connected via the modem anymore either. I haven't been inside a brokers office in quite some time. I guess it is time for a field trip.
I guess that is why you have stop loss orders. I've heard when things get nasty, your lucky to get the price you wanted to sell at.
You have my consensus. I did that over two weeks ago.
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