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-----Original Message-----
From: Gerrit Jacobsen <jrt@xxxxxxxxxx>
Subject: Speculators running for cover
>I have been bearish on this market for quite some time and have had
>numerous conversations on this list with bulls like Bruce and others
>I do not want to boast that I was right I just want to say that I was
>not really surprised about the downturn itself - I have been
>surprised about something else
<<Massive snip>>
>Hope to have some feedback on these issues in order to verify/
>falsify my thoughts.
Gerrit, your bearishness has proven valid so far, and I previously gave you
credit for that. A vacation and a major computer crash has given me two
weeks away from the markets and the financial news. I've used the past few
days to look at the global events and market news with an open mind, but
having done so, I'm even more long term bullish on the US stock market than
I've ever been.
In an earlier post Michael made it clear he thinks my "myths exposed"
messages have been myths themselves. He's certainly entitled to his
opinion, but the facts are beginning to fall on my side. About a month ago
in my Asian Crisis message I said the chaos overseas would actually benefit
the US in the long run because the gains realized by the housing and auto
sectors would more than offset the losses to the hi tech sector, but that it
would take longer for the good news to show up.
Since posting that message, both Chrysler and Ford have reported record
sales and profits, and they see no downturn in site (GM's numbers were down,
but that was because of the strike). Housing starts were up a "surprisingly
strong" (to quote the WSJ) 5.7% last month, and the 12 month average is at
record highs. Factory orders recently made an 8 month high, leading
economic indicators are strong, unemployment is still very low, and yet
there is still no sign of inflation. Consumer confidence has fallen
slightly, but that is from such incedibly high levels, I find it hard to get
very nervous about that. Unfortunately, the mainstream press continues to
harp on all the economic problems abroad and the political problems at home,
so the good economic news is going virtually un-noticed.
One thing Michael and I definitely do agree on is that the whole "global
economy" mantra is extremely exaggerated, especially as it pertains to the
US. There are some countries that are very dependent on foreign trade
(Japan), but the US isn't one of them. A better description of what is
happening is that we are living in the age of global capital flows, which
does has a profound effect on the US, but so far it has all been for the
better. The world's investment capital can flow from one market to the
other almost instantaneously, which has caused havoc in the third world, but
has been a boon to us.
The US is a high wage / high value added economy. Anything that lowers
commodity prices (but keeps them higher for other countries) and lowers
interest rates is of enormous benefit to us. This "subsidy" from global
capital flows goes well beyond just commodities and interest rates, however.
We all know we're in the middle of the information/communications
revolution. The countries that can harness and exploit such technology will
have the highest standard of living (and the highest stock markets) in the
future. US computer/technology companies have been hurt by the problems in
Asia, but in the long run it's going to help the US dramatically. Most of
the components in computers are made in Asia, and therefore the meltdown
there (and the strong dollar) has caused a collapse in computer prices.
Apple can't keep their new IMac machines on the shelves. The percentage of
US households which owned computers had been stuck at 44% for some time.
The lower computer prices have now driven that number to about 47%, and by
the time the Christmas shopping season is over, the figure will probably be
over 50%. No other country is even close.
Because of the easier access to information technology, US companies and
individuals will be better prepared in the hi tech world of the future. The
problems overseas are therefore essentially ensuring that the US will remain
the pre-eminent economic power well into the 21st century. Just a few years
ago we were all worried about how we would ever compete with Japan and Asia.
The lead we are currently accumulating from cheap information technology
makes me wonder if Asia will EVER catch up to us...
The problem is (once again) that the mainstream media has no incentive to
tell us the good news. Anything that scares, sells. The crisis du jour
seems to be the "negative wealth affect." The recent drop in the stock
market is supposedly going to send such a scare through US consumers that
they'll stop shopping, and that will send us into recession. Isn't it
interesting that no one is talking about the positive wealth effect about to
happen?
US interest rates are at record lows. This is going to allow consumers to
refinance their home and auto loans and significantly reduce their monthly
payments. This will result in a significant increase in the disposable
income for US consumers, and will more than offset any poverty people are
feeling from stock losses. These lower rates will also be fixed, or locked
in, so even when rates do turn back up, the higher disposable income will
remain.
So even though the long term never looked better, what about the short term?
I'll be the first to admit that the very short term still looks pretty
rocky. Any bounce the market gets from an anticipated interest rate cut
(which the currency markets seem to have already factored in) will be offset
by what I think is going to be a report from Ken Starr that is much more
damaging than the market is anticipating. I said in a previous post that I
saw no sustained up move until November, and I'll modify that only to the
extent that congress delays acting on the Starr report until after the
election.
The good news is this dark cloud has a very big silver lining. Even if the
economy does slow down in the short run (although I don't think it will),
this will only hurt the Democrats and help the Republicans even more in
November. Whether rightfully or wrongfully, the Clinton scandal (and by
association, Democrats) will be blamed for it. You combine that with the
fact that the Clinton scandal is undoubtedly going to increase the
Republican voter turnout, and we could be looking at a rout. Without
starting a political debate, 1994 clearly showed that Republican victories
are good for the market in the long run.
Furthermore, as I stated in my Bear Market message, history clearly shows it
is margined or leveraged money that panics and sells during times of
instability, and that's exactly what we're seeing in the US stock market.
It is the large hedge funds selling off their leveraged positions right now,
just as they did last fall. The small investor is hanging strong once
again, because very few of them are getting margin calls.
As TJ, Tony Haas, and I have already said, people are still getting up in
the morning, going to work, and pouring money into their 401ks and IRAs.
This money is temporarily being parked by fund managers (who think they can
time the market, even though their track record is terrible) in bond and
money market funds. This money is accumulating like a time bomb, getting
bigger and bigger by the day. Once the political situation is resolved,
that money is going to flow back into equities, and the "upside panic" will
begin.
You may still feel that the US market is overvalued, Gerrit, but this has
nothing to do with valuations, its simple supply and demand. A few weeks
ago you felt Russian stocks were undervalued because their market cap
combined was less than that of Yahoo's alone. Since then, Russain stocks
have fallen another 70% (when Ruble devaluations are taken into account).
Supply and demand will always win over anyone's definition of valuation.
If you're expecting a protracted bear market in US stocks, be afraid, be
very afraid.
Bruce
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