Reflection on another day of slaughter

By Duru

July 24, 2001


Hello everyone,

This quick note is for those of you who insist on playing with dynamite, I mean, uh, the financial markets. NO need to read further if you aren't!


Today's decline in almost every major stock group reflects the behavior I have been predicting and have been warning you to look for as earnings season kicks off in high gear. Investors (and speculators) are finally giving up on the idea that a second half recovery in the economy is coming and are now even starting to doubt whether any 2002 recovery will be robust. While the current sell-off is predictable, it may not be the end. Optimism in the markets is still pretty high because we have the Fed out there still cutting interest rates, and there are a few rays of hope from the few companies that still claim to see either a bottoming or a slowing down in the deterioration of their businesses. We have also had a strong, swift and powerful rally in April/May that is still too recent to forget, and no one wants to miss the next rally off the market lows.

However, if you believe, as I do, in a early 2002 economic recovery, and you don't have to believe in a robust one, the weakness in stocks now, and probably into next week, provides you a *GREAT* opportunity to start buying the quality names (meaning companies that will still be standing in 2005) you have had your eyes on. If you are in good mutual funds or investing in the market indexes, you would be well-advised to pick up some "cheap" shares (if you are just getting started, AVOID the mutual funds, and go for the index funds/stocks).

If the markets rally powerfully from here like in April/May, you would do well to sell and take your profits as such behavior would mean the excesses have not quite been shaken off the market (however, don't expect as many speculative plays to work as they did the last time --- those things are slowly being killed off). If we get a powerful mid to end of the summer rally, we will certainly see the climax and final thud of this bear market in October when corporate earnings are still lackluster, and the Fed is done slashing rates (and then worrying about when they might have to raise them once the economy picks back up). The sell-off might look like last year's September/October crush, but more likely this September will lull us to sleep, and October will deliver swift and merciless punishment for the over-optimistic.

The final rationale for beginning your accumulation now is the contrarian one. Supposedly, the steps to making the contrarian play are to first understand what everyone believes. Next, wait for them to be wrong (which will be the case if these beliefs are not rooted in facts or some kind of acceptable logic). Then, wait for them to act on being wrong, and then make the opposite move. In this case, people are getting so disheartened that they called the 2001 economic recovery wrong, they are forgetting that this same recovery may just be delayed another 3 or 6 months --- thus providing the opportunity to take advantage of something akin to capitulation. If the economic recovery is not starting in early 2002, you can bet we are in for a prolonged period of economic stagnation, and then ALL bets are off!

As always, be careful out there!