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I'd say he's got it about right - market can go a good deal higher but the
underpinnings are weaker than they were in mid-July. Few of the talking
heads blink an eye at paying 30 times earnings for companies growing
earnings at only 10%-15%. Why, because others don't blink an eye at paying
even more astronomical prices for companies which don't have any earnings.
See attached GIF for S&P TBill/EarningsYield Ratio which I consider to be
one of the best valuation barometers available - it's nearly back at the
July highs.
And oh, yes - the NYSE specialist short ratio (2 week reporting lag) has
remained for two consecutive weeks at extreme high levels not seen in a
decade. The reporting lag gives these guys an edge but if they go wrong they
lose their seats and that's pretty rare.
IMHO this is a good time to cover any long position trades and stick to day
trading. This rally from the lows has been amazing for the lack of sellers
and the absence of any steep corrections. Maybe AG knocked off most of the
short-sellers with his surprise rate cut but I intend to be very careful
about shorting this thing until I see some fear.
Earl
-----Original Message-----
From: JW <abprosys@xxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Sunday, November 08, 1998 3:56 PM
Subject: Is it all an illusion?
Interesting column in today's SF Examiner. Rick is an admitted bear...
JW
abprosys@xxxxxxx <mailto:abprosys@xxxxxxx>
__________________________________
Rally little more than cruel hoax
RICK ACKERMAN Nov. 8, 1998
BEARS WILL have some explaining to do if the current stock market rally
achieves record highs.
As of Friday, the Dow Jones industrial average had recovered four-fifths of
the nearly 1,900 points it lost during its hellish slide between July 20 and
Oct. 8.
Some gloomy seers, including this one, saw the Oct. 8 turnaround coming, but
most of us expected stocks to plummet anew shortly thereafter.
Instead, the Dow industrials and other widely followed indexes trampolined
off the Oct. 8 bottom and just kept on going.
Now the blue-chip average sits within 400 points of its all-time high,
having achieved gains in 17 of the last 21 trading sessions - one of them a
331-point stunner a few weeks ago.
Even more impressive has been the performance of the tech-heavy Nasdaq 100
index, which includes such bellwethers as Microsoft, Intel, Cisco, Dell and
Yahoo. It is currently around 1,445, a mere 40 points, or 2.75 percent,
below July's all-time peak.
Not surprisingly, bear-baiting has been reinstated as the favorite pastime
on CNBC, and the hubris surrounding a prospective Dow 10,000 is once again
becoming clamorous.
As a case-hardened bear, I'll be the first to admit that it is not
altogether unreasonable for bulls to think the worst is over and that
October's lows may have been the juiciest buying opportunity investors will
see for a long time.
For one, the largest central banks have been acting cohesively to ensure
that there is plenty of liquidity in the global financial system.
They have been not only pushing down short-term rates here and abroad but
also have strong-armed private-sector lenders into offering generous lines
of credit to such crucial borrowers as Brazil.
Because that country is viewed as the most salvageable of the world's
financial war zones, its economic vital signs are being monitored closely by
anxious lenders around the world, who could topple like dominoes if crisis
befalls the new Brazilian government. For the time being, it looks as though
the patches will hold.
The news has ebbed toward eerie quiescence elsewhere. Boris Yeltsin's health
problems have somehow pushed Russia's economic health problems off the front
page. And back-room haggling over the terms of a truce have muffled Benjamin
Netanyahu and Yasser Arafat.
Meanwhile, Tokyo's Nikkei Stock Average has rallied recently toward 15,000
as banks whose fortunes are tied to the rise and fall of Japanese stocks
begin to take on the appearance of solvency.
At the same time, business in the United States appears to be plodding
along, if not quite humming like the dynamo of recent memory. Third-quarter
GDP was up 3.3 percent and corporate profits rose by 3.0 percent -
unexciting, but still better than some estimates.
Moreover, even as consumers were telling pollsters their confidence in the
economy was falling, they continued to spend like crazy. October vehicle
sales were up an impressive 9.8 percent, lifting the spirits of U.S.
retailers, who, as always, will be praying for a green Christmas.
So why, even if the Dow actually reaches new highs, will my suspicions only
increase that the stock market's month-long rally has been little more than
a cruel hoax?
First, the lull in the news is the eye of the hurricane, not a harbinger of
happy days ahead for Russia, Japan, Brazil and other global sinkholes. Their
fundamental problems have not abated even if some of the ugliest cracks have
been spackled over by the G-7 bankers.
Brazil, in particular, is all too precariously balanced for comfort. Its
interest rates are being kept burdensomely high to discourage investors from
fleeing to other markets, such as U.S. Treasuries. The government can't risk
cutting them for fear of creating a stampede out of Brazilian currency and
debt paper.
Meanwhile, although Japan is having some success in pumping up the economy
with fiscal and monetary stimulus, these actions probably won't trigger the
consumer spending boom needed to pull all of Asia out of its deep rut.
As for Russia, the country is probably too far gone to save. Expect its
money problems to resurface with a vengeance, regardless of whether Yeltsin
lives or dies.
Signs of firmness in the U.S. economy are no less illusory. Car sales may be
strong, but they are being pumped up artificially by fierce year-end
discounting in the showrooms.
Most ominously, consumer spending has been stoked by levels of borrowing
that should strike fear in the hearts of all but the most zealous bulls.
Household liquidity is as low as it has been in the postwar period, and last
month personal savings actually went negative for the first time since 1933.
More than ever, we are spending money we don't have. That is surely no way
to nurse a shaky economy back to health or to rescue failing exporters
around the word.
CONCERNING THE stock market's powerful ascent of late, so far it has been
fueled more by bears than bulls. In betting increasingly against the
market's continued rise since Oct. 8, die-hard pessimists have created ideal
conditions for a short squeeze, a phenomenon which I have explained here
before in some detail.
In brief, they have sold borrowed shares "short" in the hope of replacing
them at lower prices. But with stocks surging higher each day the "shorts"
have been losing money. If and when they throw in the towel, watch out,
stock averages could easily get driven to new highs.
But it will not mitigate the perceived problems in the economy that caused
share prices to fall in the first place. The July-August minicrash was
viewed by bulls as a correction, a way of bringing stocks down to more
reasonable levels.
By that logic, with corporate earnings starting to slacken, the bulls should
be squirming as stocks approach old highs. Based on their own postmortem of
the summer collapse, share prices are presently in even greater need of
correction than they were then.
If and when some of the major indexes reach new highs, don't expect bulls to
submit amiably. But neither should you expect bears to capitulate in
contrition merely because stocks have one-upped July's exuberant highs.
Rick Ackerman forecasts stock, index and commodity futures prices for market
professionals in his daily newsletter, Little Black Box Forecasts. His
e-mail address is rick@xxxxxxxxx
©1998 San Francisco Examiner Page C 2
http://www.sfgate.com/cgi-bin/article.cgi?file=/examiner/archive/1998/11/08/
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