By Duru

August 3, 2001


Hello everyone!

Well, our brilliant analysts have finally concluded that an economic recovery is not coming until 2002 (this is according to this article that summarizes the aggregate opinion of First Call: Brilliant, simply brilliant, I tell you! These seers now are forecasting zero profit growth in the 4th quarter. Mind you, just 4 months ago these same sages were forecasting 12+% in profit growth for the companies in the S&P 500. The problem with these forecasts is that they are rarely based on real data, and they can never get it right until it is too late. Note that the fourth quarter begins in 2 months now! My own forecasts have been based on looking at how companies are really doing and giving some buffer of realism rather than over-optimism.

This continued revision down in earnings is both good and bad for us. It is good because expectations are finally being lowered enough so that companies can actually meet and beat them and perhaps then get their stock prices moving up. The lower the consensus expectations, the less likely we will get the big crash I am expecting in October. The bad part is that it is also harder to profit from the masses being dead wrong! It is very difficult to tell how the market will react now to this latest news. My best guess is that we stay in a trading range with a slight downward bias for the near-term. In the meantime, try to ignore all these people who keep trying to call the bottom or reassure you that things can't get any worse. These calls are always built on faith rather than facts. While there is nothing wrong with trying to buy ahead of the recovery, know why you are doing it! Oh yeah, also ignore most of the cheerleading from the Fed!

Finally, the one thing that can still get us an October crash is that too many people are already trying to buy ahead of the imminent recovery. It has produced an odd situation where earnings and the economy continue to stink, yet most quality stocks are already priced for a decent recovery. Very dangerous indeed! Once these people finally give up (capitulation), the time to really buy will be upon us. Again, there is no guarantee we will see (or notice) this final capitulation.

To end this latest missive, I must acknowledge where I have been wrong in the past because I have spent a lot of time re-iterating where I have been correct! The main point I missed earlier this year is over-emphasizing the impact of the energy crisis. In perfect contrarian form, our energy problems now seem manageable, in the near-term anyway. That is, once everyone acknowledged a crisis was underway, the market went into action to correct the problem by increasing supplies and increasing conservation. For example, California is now actually SELLING excess power at a discount to what it purchased on hard fought long-term contracts!!! Simply amazing! I should have seen that one coming. The true "boiling frog" may be in the international scene. More on this one later, but I have spoken some on this in past....

As always, be careful out there!