Weekday Commentary from Jim Puplava
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Market WrapUp for the Week
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Monday, September 30, 2002 Market WrapUp
The Third Quarter End
The Dow Jones Industrials ended the month of September on another down note. For the venerable Dow it is the sixth month in a row it has finished in negative territory. Stock markets have been falling for three straight years and people still aren’t worried. You would think with almost $8 trillion in stock market value wiped out over these last three years people would be concerned, but they aren’t, or if they are they still haven’t shown it. I believe most people are waiting for the bottom. That is what the financial media and Wall Street have been telling them for over three years. The reason they haven’t been concerned, in my opinion, is that the price of their homes has been going up. The loss in stocks has been partially offset by the rise in housing values, so they figure they’ll just stick it out. Wait for stock prices to bottom and then cash out when prices rebound. The bubble in housing has helped to ease some of the pain in the stock market so most investors have remained complacent.
This recession and bear market has been unusual compared to times past. Instead of leading the economy into decline, housing has remained strong throughout the business downturn. This recession has been mainly a business-led recession and the consumer has acted remarkably different. Instead of cutting back on spending, building up savings and paring down debt, the consumer has done just the opposite by reacting to lower interest rates by raiding the equity of their homes to go on a borrowing and spending spree. Savings have been depleted and debt has expanded to record levels. It is not just the spending habits that have changed in this recession and bear market, but it is also the investment habits that are also different. Instead of bailing out of stocks after two negative years, investors have held on. I can’t remember anything like this in my 23 years in the business. I met with a couple today that had a million dollar investment portfolio over four years ago. They are now down to around $250,000 if the equity of their rental is included. They went from tech and Internet stocks to junk bonds. They are now ready to say uncle.
It is sad to see is how complacency has destroyed so many portfolios and retirement dreams. Even sadder is to think the worst is not over. This bear market will unfold in stages until stocks once again return to bargain values. It is going to take more downward bouts of selling before this bear market ends. When it does, stocks will be at bargain levels again, but nobody will want to own them. They will be chasing gold, silver, and other commodities as the bull market in raw materials will be entering its final phase as the stock market enters its final phase of a bear market. That has been the way things have worked out throughout much of history. When things become cheap, and I mean dirt-cheap, nobody wants to buy them. When assets become extremely expensive, everyone wants to own them.
This next leg of the bear market should produce a few good bargains. We could end up getting another relief rally that will have legs as central banks and governments pull out all stops in an effort to avoid asset deflation. It will be a real opportunity to ride the wave of a temporary pause in a developing series of storms. When this rally arrives it will come at a time when stock prices have gone through several gut wrenching, puke-filled, nausea trying weeks of heavy selling. Your neighbor will be forsaking stocks, vowing never to own them again. That will be the time to buy, but very few people will want to. Only after a sustained rally will a few intrepid investors venture back into the markets. This rally may last 3 to 9 months, depending on what fiscal and monetary stimulus is applied. Yet in the end, the rally will be short-lived, and Government efforts will be overwhelmed by the markets. Markets will have their way and in the end, they always win despite efforts by governments to thwart them. After the next relief rallies, the final phase of the bear market will begin. That’s when stocks will sell at real bargain prices because nobody will want to own them. Most investors will be off chasing the bull market in real assets.
But first we need to get through this next phase of the bear market. This next phase will need a catalyst to move investors out of their lethargy. I suspect as I always have that this catalyst will come from either the financial sector or some geo-political event. We’ve already experienced a record $140 billion in corporate bond defaults as of last week. Things are getting desperate in Japan and in Latin America, and financial conditions are worsening for our money center banks, especially J.P. Morgan Chase. Today’s graph of the Philadelphia Banking Index shows that financial stress is growing. And there is always the geo-political side. The Washington Post ran a story this weekend about two men in Turkey that were bound for Iraq with 34 pounds of uranium. Buried in the report was the fact that the uranium may have come from Russia. One can only assume the uranium wasn’t for chemistry labs at Iraqi schools. As Jeff Nyquist and I have written, Saddam is a man hankering to do big things. The Bush Administration is attempting to stop him from realizing that goal. The “Great Game” in the Middle East is entering a new chapter as Russian troops invade the Pankisi Gorge in Georgia. There may be a quid pro quo between the US and Russia trading Iraq for Georgia. We will certainly know shortly. US troops are already in position to cross the Euphrates River as a prelude to invasion. American and British warplanes are stepping up their sorties over the no-fly zone in Iraq taking out radar and missile sites. Pre invasion plans are already in place waiting to be executed once the signal is given.
Today in the Markets
Meanwhile in our markets, the Dow and the S&P 500 suffered their largest losses since the 1987 stock market crash. Both the Dow and the S&P 500 lost 18% in the third quarter that ended today. The S&P 500 lost 11% in the month of September, its worst decline since August 1998 with the LTCM and Russian debt crisis. It was one of the worst quarters on record in over 50 years. September lived up to its reputation as being one of the worst months of the year for stocks. All three major indexes were down double-digits this month, and October is traditionally another bad month. Both the Dow and the Nasdaq are down below their July 24th lows.
Signs of renewed economic weakness helped spur today’s decline with the Chicago Purchasing Management Index falling back into recession. Companies are alerting Wall Street that the sales and profits aren’t going to be as expected. Wal-Mart warned the Street that its sales for September would be less than anticipated. Profit forecasts have been slashed again this week. Analysts now expect pro forma profits to rise only 7.3% this quarter, down from 17% in July and over 30% in January.
Third-Quarter Declines
| Nasdaq |  |
20% |
| Dow | |
18% |
| Airlines | |
54% |
| Computer Chips | |
39% |
| Telecom | |
25% |
| Entertainment | |
23% |
| Retail | |
18% |
Funds: The 25 largest mutual funds
fell again -- and are down 19% in 2002.
Metals: Gold and other metal-related
stocks bolstered by skittishness.
Overseas: U.K.'s FTSE fell 20%; France's
CAC 40, 29%; Germany's Dax, 36%.
This month is the end of the fiscal year for most mutual funds so you are going to see a lot of volatility as mutual funds take their losses and dress up their portfolios.
Volume came in at 1.73 billion shares on the NYSE and by 1.64 billion on the Nasdaq. Volume has been a key indicator of this bear market. It was noticeably absent in all of the rallies this year, which gave the rallies no staying power. It has picked up during periods of decline giving them more strength. The advance/decline ratio continues to fall with more stocks reaching new record lows than those that are hitting new highs. Today was no different. Declining issues outdid advancing issues by 18 to 15 margin on the NYSE and by 19 to 15 on the Nasdaq.
Overseas Markets
European stocks tumbled as the Dow Jones Stoxx 50 Index ended its worst quarter since 1987 with the biggest one-day percentage slide in 2 1/2 months. Axa and ING Groep tumbled after Scor, a French reinsurer, became the latest insurer to ask shareholders for cash. Ericsson, the world's largest maker of cellular networks, slumped after cutting its third-quarter sales forecast. The Stoxx 50 Index sank 5.2% to 2314.96. The index has fallen 24% this quarter. All eight major European markets were down during today’s trading.
Asian stocks fell as reports in Japan, South Korea and Taiwan indicated a slump in U.S. demand is slowing regional economies and reducing sales at Sony Corp., Samsung Electronics Co. and other exporters. Japan's Nikkei 225 Stock Average fell 1.5%, extending its decline in the past three months to 12%, the worst quarterly drop in a year.
Treasury Markets
More grueling losses in stocks sparked a hearty bid in the fixed-income market. The 10-year Treasury note added 17/32 to yield 3.60% while the 30-year government bond gained 7/32 to yield 4.665%.
© Copyright Jim Puplava, September 30, 2002