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 |
NYSE Approves Measures By GASTON CERON
On Corporate Governance
DOW JONES NEWSWIRES
NEW YORK -- The New York Stock Exchange's board approved a set of measures aimed at strengthening corporate governance and restoring investor confidence, which has been battered by the recent corporate scandals.
Changes to the NYSE's listing standards had been recommended on June 6 by an NYSE committee on corporate accountability and listing standards, and will now be sent to the Securities and Exchange Commission for final approval. In general, the changes will require NYSE-listed companies to have a majority of independent directors on their boards and to submit all stock-option plans to shareholders for approval.
NYSE Chairman Richard Grasso said the exchange is taking another look at the practices of Wall Street research analysts, following a set of earlier rules on analysts that the Big Board had already passed.
Oh, great. We aren't bankrupt enough without subsidizing somebody else's bankruptcy?
Yeah.
The difference is, even the novices get to run full speed on them!
....and objects in mirror are larger than they appear. lol
And so the stock game continues. Oh, the humanity!
(I was only kiddin' ya' with the "objects in the mirror..." comment. Just thought it would fit well with your list...)
I second that, truthkeeper. I look forward to the market wrap up every evening.
I have been meaning to request a list of sources for doom and gloom-type economic outlooks. Not that I am of the baptized doom and gloom bunch - I am just convinced that doom and gloom will be the inevitable catch phrase of months future. I don't understand the talking heads and the "it's time to buy" rhetoric.
Thanks to everyone who shares his or her economic insight. It is a pleasure to read.
Yeah, it is always the same buy, buy and buy. From the financial shows that I saw today, I'd say 4 out of 5 are saying the bottom is in and we are going to rally. Sooner or later they will be right, but to go on TV and mislead investors week after week is irresponsible. All they want is your money in their pockets regardless of economic or market conditions. What a scam!
Richard W.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.