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-----Original Message-----
From: Ron Augustine <RonAug@xxxxxxxx>
Subject: Current Market TA - any interest?
>
>Don't mean to detract from the current bashing fest, but I was wondering if
>anyone might be interested in commenting on their perspective of the
current
>Market?
>
>1. Largest correction in quite some time -- over or not?
>
Yes, and even if it isn't, it's close enough to get fully invested with your
long term money and start shifting out of defensive stocks and into
aggressive ones. I have said in the past that I have trouble seeing a
sustained rally until after the November elections and I'll stick with it.
Aside from Greenspan not coming through, the other big potential curveball
still out there is still the Clinton scandal. Most people are under the
mistaken impression Ken Starr is done... he isn't. His grand jury is still
operating and there is a good chance he's going to start handing out
indictments in both the Lewinsky and various Whitewater scandals. I
personally think he almost HAS TO hand out a few indictments just to justify
all the time and money he spent on Whitewater. Those indictments could
include the First Couple (just think how much money Starr could make if he
bought a few OEX puts and then indicted Hillary...). This type of news
could take us to new lows, but not by much, and would just represent the
last great buying opportunity.
Fortunately, there's plenty of good news out there that the mainstream media
conveniently ignores. Hedge funds have been so decimated, I highly doubt
they're in the mood to launch a major attack against Brazil, and Brazil will
decide the fate of Latin America (which is the only part of the developing
world left to melt down). As for Japan, another big drop would cause some
short term damage in the market, but cannot stop the bull market from
resuming soon.
We've all been watching the stock and bond market move in opposite
directions because of a flight to quality for so long now, it's become easy
to forget this is not the historical norm. Lately, stocks have started to
once again rise as bond yields fall, which is what they're supposed to do in
a healthy market. Even yesterday, the Dow roared up over 250 points and
bonds only fell 7 ticks. On a flight to quality basis, bonds should have
dropped almost 2 full points. This shift is especially significant when you
consider it has happened while the dollar has FALLEN. Although the
expectation of falling short term interest rates is also important, I think
there's a lot more to it than that. This tells me the "smart money" thinks
the worst of the world turmoil is over, and it's time to start getting
bullish again.
More good news is the simple fact that the US economy is still rolling along
just fine. In spite of this, corporate earnings estimates have been lowered
so dramatically I have a hard time believing many companies won't make their
number. If the bad news has already been factored in, even moderate good
news will be very bullish.
>2. Dow theorists say the bear has arrived based on Daily and Weekly signals
>and they are waiting for the Quarterly Signal shoe to drop in 7 days --
>valid or not?
>
The Dow theory, nor any other theory, can alter the law of supply and
demand. Since March of this year, I've been claiming on this list that it
is leveraged money that fuels market downturns. Anybody who has been
reading the WSJ or BusinessWeek lately knows this is exactly what has
occured over the past few weeks. Hedge funds, which used massive amounts of
leverage to place bets on emerging markets, got hit with huge margin calls
on those market losses. In order to meet those margin calls, they were
forced to liquidate their US stock holdings.
In other words, it didn't matter whether the economic fundamentals
justified a 20+% correction, they had no choice but to sell. The bad news
for you bears is that most of the leveraged bets by hedge funds have now
been worked out of the system. This means, to put it simply, you're out of
fuel and the law of supply and demand will soon overwhelm you.
While the media has been trumpeting the fact that August saw a net outflow
of 9 billion dollars from the market, they've conveniently ignored the fact
that over 6 billion came in JUST LAST WEEK ALONE. Furthermore, the money
that is still out is sitting on the sidelines in money market funds just
waiting to pounce. Now, if the dollar is falling, this money most likely
is not coming from overseas, which means it's coming from DOMESTIC SAVIINGS
(yes Gerrit, savings). Of course, this is mathematically impossible if you
believe the government who says that the US savings rate is barely above
zero (it makes you think that just maybe their calculations are wrong, but
where have you heard that before...).
Once again, the baby booomers are pouring massive amounts of money into the
market for long term investment. This money is currently being diverted to
money market funds by mutual fund managers who think they can time the
market. They will fail. The longer the market goes down or sideways, the
more this money builds up, and the more these managers will panic and hit
the market with a wave of buying in a vain attempt to not fall too far
behind the S&P benchmark. When this happens, people will forget this
current correction very quickly.
Bruce
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