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In a message dated 2/26/00 10:05:52 AM Pacific Standard Time,
marlowec@xxxxxxx writes: << Some added comments:
MC: 1)- Another aspect that needs to be mention is the twenty some odd
year low
level of cash reserves in mutual funds. If we have mass exodus from mutual
funds the mutual funds will have to sell stocks to cover redemptions. This
can only make a bad situation worse.
JP: Interesting post,...I'd like to reply. Decling cash reserves in mutual
funds is a trend in force for years and is the result of factors
including...a.) Funds having style specific mandated charters and less
flexibility to asset allocate,...so an equity fund is invested in synch with
it's bogey,..etc. b.) Mutual funds having external lines of credit
established to handle periods of heavy redemptions,..etc. c.) More stable
and predictable inflows from 401-k, Pension Plan contributions,..etc.
Basically this has been a useless indicator for years. Of more importance is
money flow into equity funds. Currently there is a ton of cash on the
sidelines from people like yourself that think they are going to step in at
some substantially lower level. (Witness Consensus Weekly Survey 27% Bulls
this week...the lowest level since late October 1999,....a great time to be
buying). Look back over the past seven years and find a time when the market
accomodated such a perspective.
MC: 2)- Margin debt is out of sight. Since most of this margin is long,
margin
calls will cause forced sales like 1 above.
JP: Most margin today is used for individual equity purchases,..including
day traders and brokerage accounts. Margin for mutual fund investments has
actually declined (per Phil Roth of Dean Witter) as money has left mutual
funds in favor of
individual equity and day trading accounts. Again,..a trend in force for
many months,..to date has not been effective in predicting anything.
MC: 3)- The very high valuations cannot be rationally justified.
JP: What very high valuations,..the handful of high fliers or the bulk of
the NYSE issues which are likely seriously undervalued? This notion that
prices are too high,..or cannot go higher has burned the bears for years.
The market is a discounting mechanism,...the collective wisdom of all the
players. By what standards or measures can you say that these valuations
cannot be justified?
MC: 3)- continued.....About eight years ago when the Japan market was so
high, I believe 45,000, I recall all the experts justified high valuations
due to high growth and because Japanese companies were big holders of their
competitors stocks. Thus there was a big cushion supporting the market's PE
of 70. A year or two later
their market fell to 15,000! Today the justifications for the US high
valuations is that we have entered a "New Era" and a "New Paradigm Internet
Economy." That kind of talk is scary to me.
JP: Conditions here in the U.S. in no way resemble what happened
in Japan in 1989. Comparisons are simply not appropriate. Ask yourself if
major corporations in the US (GE, Walmart, Pfizer, etc) would sit by while
their
stocks declined by 66% from here,...not likely....they would step right in
with cash and buy back shares in the open market. We are in an globally
expanding economy,..it's very hard to be bearish from currently depressed
levels. Scary talk (new pradigm, new era) may be a positive. As long as
disbelief in the global technology revolution exists,...the markets will
likely work higher.
MC: With all this said, my own investment policy is capital preservation. I
stepped aside in early January and greatly reduced my US equity market
exposure. Later this year when the time is right, I can pick up the
bargains with my money market reserves.
JP: Good luck...not a bet I would be willing to take,...not from 1333.33
S&P500 cash level (key fibo retracement level of the Oct 1999 to Jan 2000 leg
up).
Regards, JIM Pilliod
PS: I got my first share of stock in 1943.
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