Weekday Commentary from Jim Puplava
Home
|
A Matter of Perspective
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2.78|
|
Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Friday's Stock Market WrapUp
And When The Dow Breaks...
This week’s key words are the Dow, real estate, blame-shifting, and short selling. What got everybody’s attention this week was the breakdown in the Dow. Up until the last two weeks, the Dow seemed to be the one index that has held up in comparison to the other key indexes. In times of uncertainty, investors preferred to put their money in the big blue chips figuring they would be safe in owning the shares of America’s biggest companies. The venerable Dow, it was thought, would keep investors safe in a financial storm. This belief was reinforced throughout the last two-and-half years as the other indexes broke down, the Dow held up reasonably well. Since the equity cult was still live and well, money simply shifted over into the large cap blue chips, keeping the Dow from falling in a similar fashion as the S&P 500 and the Nasdaq.
The fact that the Dow held up well went a long way to reinforcing the equity cult and the belief in owning stocks for the long-term. Talk to anyone on the Street about the market and chances are they can tell you at least something about the Dow. John Q. Public may not know much about the S&P 500, the Nasdaq, or the difference between large cap or small caps, but he is aware of the Dow. Every evening newscast, as well as news reports covered on the radio, and the daily business section of most hometown newspapers, cover the blue chip average. When investors or the public think of the stock market, they are thinking in terms of the Dow Industrials. As long as the Dow is okay, the stock market is okay, and so is the country.
I attended a wedding a year ago in May where I was seated with a wealthy group of individuals. The financial markets came up as the topic du jour of the evening. Most of the wealthy people seated around my table were of the opinion that you couldn’t go wrong in owning shares of solid companies. The fact that the markets were going down didn’t seem to concern anyone at my table. "It always comes back," was the mantra repeated throughout much of the evening. The scion of a wealthy family and several successful entrepreneurs all echoed this same sentiment. They were sticking with their blue chip stocks. You can’t go wrong owning IBM, GE, Intel, Microsoft or ExxonMobil. When it came around to what I did for a living, I was asked to give my opinion. Naturally, being a member of the financial establishment, my new acquaintances expected me to chime in agreement. After all, that is all they heard from the financial cable channels, read in the newspapers, or saw on the cover of most financial magazines.
Being passionate about my beliefs I went into a short version of my "Perfect Storm Scenario." They all looked aghast at my comments. It was as if I was suffering from flatulence or halitosis. One individual was brave enough to ask what I owned if I didn’t believe in the markets. I told him precious metals, water, oil & gas, and defense stocks. Of course this was the summer of 2001 before the tragedy of 9/11. There was a long moment of silence before one individual commented, "Oh you’re one of them." in reference to the fact that I owned gold.
That was the summer of 2001. I went back this year for another wedding also in May and sat at a table with one of the same individuals from the previous year. He was lamenting over the fact that he should have followed my advice and gotten out of blue chips much earlier. He had hired an advisor and was invested in small cap funds, which were doing nicely at the time. I told him he should talk to his advisor about investing some of his assets in gold. The standard response was that his advisor thought the rise in gold was a fluke and it wouldn’t last long. I wonder what he will tell me next year.
I believe the sentiments reflected at the two weddings reflect the attitude of most investors. That may be changing now that the Dow is breaking down along with small and mid-cap indexes. The S&P 400 Midcap Index is down 17.07% YTD and the S&P 600 Smallcap Index has lost 17.07%. The Wilshire 5000 Total Market Index, a much broader measure of the markets, is down 24.51%. It doesn’t matter where you’ve been because you have been hurt this year in the markets. All sectors are starting to break down and this is now creating a real sense of fear with investors.
This Is No Ordinary Market
The media is talking about the markets’ breakdown every day. Democrats are trying to blame it on the Bush Administration; while most investors aren’t sure what to think. The technical indicators are all showing oversold conditions for the stock market from the VIX, which ended at 43.45 on Friday, to the McClellan Oscillator, the number of newsletter writers who are now bearish, to the disparity of the NYSE Composite and its 200-day moving average. All of the indicators are flashing oversold conditions from which rallies are spawned. But this is no ordinary bear market. Technical and fundamental factors haven’t been helpful in guiding investors through the storm. Nothing is working out as it is supposed to.
There is one indicator I have noted that may point to a turning point. It is the Rydex mutual fund flow index developed by Price Headley. This indicator shows how the crowd is thinking. It measures bullishness and bearishness between fund switchers. When everyone is going short, and it becomes common knowledge that you can make money shorting stocks, it is time to think as a contrarian. As hard as that may sound, the possibility of a rally starting at this point seems plausible given the degree of pessimism in the markets. When politicians and the media start making it the evening headlines and it appears on the front cover of weekly news magazines, it can become a major inflexion point for change in the opposite direction.
It's Time To Think About Some Things
At a time of extreme pessimism, it may be hard to think about buying, but there are many shares of companies that are in the business of providing essential services or making "things" that have become grossly oversold because of short selling. Several of the key power producers are now selling at 3-4 times earnings. If you believe we will still need to turn on the lights, some of these companies are now screaming bargains. Several of the best oil companies are selling at the same multiples, and I hate to say it, but our energy situation is going to get a lot worse over the next few years. According to an analyst at Standard & Poor’s, the depletion of U.S. oil and gas wells, limited access to known low cost producers, trade restrictions, environmental regulations and political unrest in the Middle East and Latin America, are moving the U.S. towards a major energy crisis. In the words of Tina Vital, an energy analyst at S&P, "One has to ask, where are we going to get our oil from… It just seems that America has its head in the sand."
S&P estimates a $4 war premium in the price of oil. If war breaks out with Iraq, which is looking more likely, the price of crude could head to $40-50 a barrel. In case anybody hasn’t noticed, the price of oil has gone from under $19 a barrel in January to today’s closing price of $27.84. If there is going to be surprise earnings in the second half of the year, it is going to come from the energy and precious metals sector and other natural resources if paper company profits are rising.
Meanwhile, while the nation heads towards one crisis after another as a result of the imbalances of the 90’s economy, our faithful lawmakers can think of nothing more than playing politics. Politics has turned into a blood sport, much to this nation’s detriment. Lawmakers continue to demagogue accounting scandals and shift blame -- excluding themselves -- from the debate. They denigrate business; while at the same time they get on corporate jets and fly to fund raisers. They chastise corporate executives for their high pay; while they have voted themselves an automatic pay increase. The average Congressman has received a $20,000 a year pay increase over the last few years, not to mention special pensions and other perks. This political posturing and blame shifting keeps the more serious issues of social security, the national debt, and the trade deficit -- which hit another record deficit in May -- from being discussed. Instead they play politics; while the country heads closer towards depression. The 1990’s debt and consumption binge is going to unravel, and when it does, we are going to need more than demagoguery to help the nation get through it.
The Dangers of Debt
This problem is serious and what is lacking is a serious discussion of the issues. I can’t over emphasize enough the dangers of debt. It seems nobody in Washington or Wall Street is paying attention to this issue. Alan Greenspan points with pride to the housing boom in this country. He should be worried instead. He has just helped to create another bubble that is going to unravel with even greater consequences for our economy. Instead of worry, politicians, analysts, economists, and central bankers keep urging the consumer to spend and go deeper into debt. I have never seen such shallow thinking or such a misunderstanding of macroeconomics as I see today. Can you think of any individual, family, business, or nation that has been able to borrow its way to prosperity? The country is going to start hemorrhaging from all of this debt. Debt has become the hallmark of the American economy and our financial markets. The consumer is up to his eyeballs in debt and corporate debt at record levels; while the national debt figure stands $6,134,560,936,445.31 as of the close of business on Friday.
The Markets This Week
Speaking of hemorrhaging, that pretty much sums up this week’s market action. The Dow Industrials lost 4.6% on Friday, taking the Dow back to levels not seen since October of 1998. The Dow has become the last of the three major averages to breach its September lows following the terrorist attacks on 9/11. The Dow has now dropped 15% in the last two weeks. For the week the Dow lost 7.7%, bringing its YTD losses close to 20%. The S&P 500 lost 8% and is down over 26% for the year. The Nasdaq declined the least, losing 4% for the week with losses greater than 32% for the year. This week and last week’s drop in the Dow has certainly gotten investors’ attention. This is reflected in money flow, which shows that $18.4 billion flew out of stock funds this week. That is up from outflows of $5.9 billion the previous week. July is tracking at outflows of $60-75 billion, depending on what investors do over the next few weeks. Are we at the capitulation phase yet? It is still too early to tell. Watch the magazine covers and that should tell you when we a near a short-term bottom.
Overseas Markets
European stocks tumbled, sending the Dow Jones Stoxx 50 Index to its 10th weekly drop in 13, on concern the dollar’s slump may hurt profit at exporters such as Infineon Technologies and as companies, including Ericsson turned to shareholders for more money. The Stoxx 50 tumbled 5.6% to 2635.29, erasing three days of gains. The Stoxx 600 Index shed 4.6% to 222.54, led by banks including Barclays.
Asian stocks fell, led by Sony Corp. and Samsung Electronics on concern demand for personal computers won’t recover soon after Microsoft Corp. cut its annual sales and profit forecasts. Japan’s Nikkei 225 stock average had its biggest drop in almost a month, losing 2.8% to 10,202.36. South Korea’s Kospi Index slumped 2.5% to more than a two-week low. Taiwan Semiconductor Manufacturing Co. fell to an eight month low while Singapore’s Chartered Semiconductor Manufacturing Ltd. paced the Straits Times Index’s 1.3% decline.
Treasury Markets
Government bonds gained considerable ground for a second session as safe-haven seekers bid up the fixed-income sector. The 10-year Treasury note put on 20/32 to yield 4.53% while the 30-year government bond piled on 1 6/32 to yield 5.33%.
© Copyright Jim Puplava, July 19,