Posted on 08/02/2002 10:30:08 PM PDT by Lazamataz
Market WrapUp for the Week
Friday, August 2, 2002 Market WrapUp Majoring in Dow Basics In addition to these three movements, Dow formulated trend confirmation indicators such as higher tops and bottoms to confirm a bull market, and lower tops and bottoms to confirm a bear market, to which he added the confirmation of the Industrial and Rail Averages. If a Bull Market was in place, a rise in the Rails (now the Transportation Index) would rise along with the Industrials. If a Bear Market was the primary trend, a fall of the Rails with the Industrials would confirm the Bear Market trend. The idea behind the confirmation of the Industrials and the Rails is that things being made and sold would have to be shipped. If sales fell, manufacturing would contract and there would be a decline in transportation of goods. Others would come along after Dow, putting his theories together and refining them such as S.A. Nelson, William P. Hamilton, who became editor of the Wall Street Journal after Dows death, and Robert Rhea, who became the Dows historian and record keeper to Richard Russell, todays leading Dow theorist. Even though Dows theories were formulated over a century ago, they are still relevant and followed to this day. Many of his theorems have been refined to form the central tenets of technical analysis. Technical analysis has been refined and improved over the last century and has advanced significantly with the aid of computers and the Internet. Even though these theories were formulated over a century ago, they have just as much meaning today as they did more than a century ago, especially Dows theories of primary trends. Distracted From Today's Primary Trend In the words of Charles H. Dow, "The best profits in the stock market are made by people who get long or short at extremes and stay for months or years before they take their profit." Dow went on to say, "The best way of reading the market is to read from the standpoint of values In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market." One of Dows contemporaries, Samuel A. Nelson, confirmed this by saying, "Value has little to do with temporary fluctuations in stock prices, but is the determining factor in the long run." What we can learn from studying Dow and many of his followers is that the primary trend in this market is down. We are in a bear market whose primary trend is down. It is that simple. You can forget all of the background noise. It's just clutter designed to keep you distracted and confused. Forget that stocks are cheap (with the one exception being natural resource). Moreover, at todays high prices, even after the declines of the last 28 months, stocks are hardly bargains. The S&P 500 is selling at 31 times trailing earnings with a dividend yield of less than 1.8%. The Dow is trading at 23 times trailing earnings and offers investors a dividend yield of 2.2%. At the bottom of bear markets, P/E multiples get as low as 7 and dividend yields get as high as 6-7%. We are still a long way off from stocks becoming cheap. If you want cheap, look at the energy sector, which is what Warren Buffett is doing. Today's Market We may be heading for more problems next week that will take a healthy dose of intervention to avoid. There is now a full-scale banking crisis emerging globally with systemic risks everywhere that could be amplified by the leverage in the financial system from derivatives. With bankruptcies and junk bond defaults at record highs, there are huge counterparty risks that lie waiting to erupt. Someone somewhere is on the wrong side of these trades. The following is a sample of the systemic risks that are starting to emerge. Friday, Societe Generale, Frances second largest bank, reported a 41% decline in second-quarter net income as a result of taking a $371 million hit for bad loans. The same day in London, Lloyds TSB said it has become the latest to be hurt by turmoil in the world financial markets. The bank said it was increasing its loan loss reserves by 50% to cover loans it made to Enron, WorldCom, and Argentina. There were rumors also circulating around that one of the nations largest airlines is close to going under. Business Week intimated that UAL may file for bankruptcy this year. A spokesman for the airline declined to comment on the Business Week story. Still Watching The Banks In fact, given the extent of their derivative book and considering that they are in all of the wrong places, it is hard not to imagine that one of these three banks are headed for trouble, if not all three. The banks are supposed to have risk control measures in place. Yet with derivative books this large, it doesnt seem possible they can avoid the occurrence of future problems. In the case of JPM, their derivative book of $23.4 trillion and equity base of $40 billion is all that covers $51 billion in potential credit risk, not mentioning the $68.8 billion in derivative risk exposure. These three banks are in all of the wrong places -- corporate loans, loans to emerging markets, and counterparties to a Titanic-size derivative book. Add to this the fact that most of the derivative books of these major banks are of the OTC variety -- which means they are far riskier and less liquid -- it isnt too imaginative to envision more problems occurring. A lot of the derivative business is based on blind faith and assumptions. These are the assumptions that are built into the derivative risk models that provide the theoretical pricing for much of these complex instruments.
It is the complexity of these instruments and the prevalence of problems in the international system that is now causing central bankers and investors to worry. As I said above, someone somewhere is going to come up on the wrong side of these trades. At this time we dont know who. We just have clues. Looking Like A Double-Dip Recession This week Trim Tabs reported that money flowed into equity funds in a delayed reaction to a jump in stock prices. Last week $20.5 billion flew out of stock funds. For the month of July nearly $48 billion flowed out of stock equity funds. This follows outflows last month that were close to a record $48 billion. What we have seen this week and this quarter is a number of clues on the economy and on earnings that call into question a second half recovery. The economy was much weaker than originally thought and shows signs of new weakness. Corporations continue to report weak sales and profits and there are new signs of retrenchment in spending on the consumer front. It is hard to make a case at this point for a second half recovery. In fact, it is much easier to predict the economy will lapse back into a recession instead of a strong recovery. In summary, the primary trend is for the bear market to continue and for the economy to head back into recession. In addition, there is even a greater risk that the Perfect Financial Storm is coming closer to fruition as barometric gauges in the financial system have taken a sudden drop. Overseas Market Asian stocks fell, led by exporters Sony Corp. and Samsung Electronics Co., after U.S. manufacturing and job reports indicated economic growth in the region's biggest overseas market is faltering. Japan's Nikkei 225 stock average dropped 0.9% to 9709.66, as of the 3:01 p.m. close in Tokyo. Treasury Market The 10-year Treasury note rallied 27/32 to yield 4.285% while the 30-year government bond soared 1 1/8 to yield 5.215%. © Copyright Jim Puplava, August 2, 2002 |
Time is compressing in this market, before it would have been five months. A day in this market is like a month ten years ago.
I am holding out for the day, when banks pay me to borrow money from them.
Contrary to what people say about the market, this stock market behaves like 2-person adversarial game. There are moves and countermoves, the force of long-term market trend and the force of intervention by big players to save their butts. That is why the transitions of market are so volatile. Adaptive organisms(big players) tend to make the orderly retreat into the stalemate followed by a total rout.
Thank you! Thank you very much!
I figured his stewardship of Market Wrapup was causing the bear market and that stocks would rally when he left.
Sure wish I hadn't cashed in my pension and bought all those out of the money NASDAQ calls last Tuesday.
Looks like I picked the wrong week to quit drinking.
This is what's so fascinating. Both the period (frequency) of changes and the amplitude (highs and lows) are just wild. Puplova's lines showing that the changes actually fall within some defineable boundaries are encouraging.
Everything moves so quickly, and then you get the echos of every major occurance. And add to that the artificial occurances...there are constant attempts to influence stockowner's and consumer's behavior. These are when the gods come off their mountains to assure us everything is ok, increases in money supply, and maybe there is something to this "plunge protection team" stuff.
Mathematically, when things swing this wildly, chaos (a complete breakdown) can happen. Then all of these factors get sorted out and something new emerges.
I would think no debt...for individuals, corporations, and countries would be a good thing right now. The ability to move quickly becomes more important. That's why I like small, focused corporations with no debt and some money in the bank.
I just wonder if maybe the government is trying to defend something that doesn't exist anymore. Maybe big corporations with a million things going on just can't move quickly enough for this environment. Maybe they get too wrapped up in defending their images and going through protocals.
Personally, I'd like that, if all of the Time-Warners of the world just broke up into a lot of parts that didn't contradict each other and actually cared about the individual consumer.
The whole financial system is tied together, linked and intertwined in ways that most of us don't realize or understand. Banks, brokerage houses, insurance companies, mutual and retirement funds are dependent on the stock and bond market and each other. It goes far beyond just the banks. Reserves at insurance companies are often invested in stocks, bonds and real estate for example. Most of these institutions weather normal contractions and downturns in the economy without many problems, but this bear market is taking its toll and is exposing just how vulnerable they are.
Richard W.
"AngloGold, the South Africa miner, said on Wednesday it would reduce its hedge book by 2.4m ounces to 10.5m ounces in the second quarter as it reported a 10 per cent rise in operating profit.
The miner attributed the "significant reduction" in the company's hedge book to more positive medium to long-term prospects for the gold price."
Go here for complete article:
AngloGold cuts hedge book in second quarter
Richard W.
Everybody is looking for the "real bottom" of this market. I can't tell you a number, but I can tell you what to look for. When the day comes that the average "guy on the street" would rather pull their own teeth out of their head with a pair of rusty pliers before they would buy a stock, that is when you will have "hit bottom". Not before then. We still have a long, long way to go.
My advice to everybody reading this? Get OUT of all equities, get OUT of all debt, get into cash. Don't carry any debt at all if you can avoid it. If you are a football fan think "DEFENSE". There is NO SANCTUARY in this market, all stocks are going to get pounded by the time this is all over.
Of course, this is all IMHO, your mileage may vary, contents may settle during shipping, etc.
ROTFL Bump!
If you look at long-term (all available data) for the three major US indeces, they essentially followed the same path over the past twenty years (working from memory here). Assuming that the charts are roughly identical, the Nasdaq has fallen through to a point that roughly correlates with 2000 on the Dow. Considering how closely they tracked each other on the way up, it makes sense that they might likewise track each other on the way down. 2000 Dow looks possible, if not likely, if this most rudimentary of TA is valid. And since the Naz is still apparently trending down, sub-2K Dow might be in order.
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