Another cusp, another missive

By Duru

June 3, 2001


I can't believe it has almost been a month since I last wrote a financial missive, but I haven't had much to complain about and certainly nothing to say that you all haven't already heard me complain about. In fact, making money in the stock market in the past two months has been even easier than back when we were partying in 1999. Things have been pretty good, in fact too good...

I will begin by suggesting again that only the most aggressive investors should be playing around with the wildfires burning in the market right now. If this is not you, you are best off making regular investments in index funds or similar investment vehicles. Since the bullish indicators I mentioned before have been breached, you can rest easier that you won't turn around and lose 50%. While the market's overall downward trend has FINALLY been broken, the pain ain't over yet! (If you are not worried about investing, no need to read any further unless you are just curious!).

I am writing this time because we are riding on another one of those cusps, and what you do over the next 2-3 months will make or break your year. What you do over the next 3-5 months could easily determine your success over the next few years. The Fed's aggressive interest cuts have now practically turned "cash into trash." That is, your inflation-adjusted return on savings, CDs, money markets, etc... will be close to zero, if not negative, for the near-term. This is partially why so much cash has been chasing stocks these past two months: people are desperate to get some type of decent return.

In the foreground, yet another earnings & earnings warnings season is upon us, and this one will be the moment of truth for whether the economy is really on the mend. From what I have been seeing, the economy will not live up to the blindly optimistic second-half recovery scenario. The key thing to watch is whether companies start reassuring us that they now have earnings visibility in the near-term future AND that visibility doesn't just show flat performance, but improving performance. The market has made a HUGE, and frankly, speculative, bet that the news in June and July will be very good. Amazingly enough, earnings expectations have never been significantly cut for 2002 either. Thus, many stocks, especially high-tech ones, have often bounced UP on bad news as people assume bad news means the worst is over. Overall, we have the perfect recipe for another significant correction in stock prices, especially in high technology companies, sometime this year before the end of October.

However, what will be different about this next correction is that I feel it will mark the last time for a good while that you will be able to snatch bargains in your favorite names. Some bargains in non-tech companies have already past (especially in "cyclical" stocks). Always remember, the best time to buy good companies is when times are darkest. The challenge for the intrepid investor is recognizing which companies are still solid amidst all the gloom. If you are more conservative, you can still wait for better economic news and do OK because the rapid and sustained speculation of the 90s is over for the foreseeable future. If we do NOT get a beginning of summer correction, then we will most likely see one in the beginning of fall as we lose the aggressive stimulus of the Fed, face continued weak corporate profits, and the looming prospect of higher bond yields (interest rates), and perhaps even inflation. Thus, it is extremely important for the market's health that we get this correction NOW and recover SLOWLY.

As always, be careful out there! Looking beyond high-tech companies, consider index-type investment vehicles, diversify, and don't forget stocks with high yields!