January - oh so contrary, yet so familiar

By Duru

February 5, 2003

{Note that this email is split into two parts - missive and list of economic facts and figures. The entire thing together is looooong}


Well, well, well. Here we are again. Markets are looking ugly shortly after a rally that made it seem like the bear market would quickly become a fading memory. What made this latest false rally so much more painful is that it occurred right at the beginning of the year - right when hopes ride highest and desires strongest to put a less than stellar past deep into the cellar. But once again, this bear rally was predictable. It started with a rally of monster proportions: The Dow had its biggest year-opening ever I believe. And we should all know by now what follows such record-breaking rallies - they only serve to confirm that the bear market is alive and well. And again, the reason for this is that such rallies show that people remain too eager to buy, more afraid of risk to the upside than the downside. These same people are quick to sell once the tides turn, and thus, the rapid slides that follow the giddy rallies. Until prospects for the economy improve in actuality and not in theory or in fantasy, there will always be plenty of eager sellers ready to kill any bear rally.


Now, this litany must be a familiar refrain for most of you. And this is why it was difficult to write missives even as I watched the latest rally pop and fizzle. The patterns are broken records, and certainly you all know my stance pretty well. The even MORE interesting development is that I am finally hearing more and more pundits and analysts echo the same bearish thoughts that I espouse. This is a GOOD thing. The quicker the party-goers sober up, the quicker we can get about the business of fixing the aftermath of the bubble. And make no mistake about it, what truly ails this economy REMAINS the aftermath of the bubble. No war with Iraq, or even resolve to make peace with Iraq, will fix that.


So, before I continue and paint what I see as the current backdrop, let me dare to make a pretty complex prediction for the year. Since the October lows were made last year, I have been claiming that we would at least retest, if not break, those very same lows. At the time, I felt the inevitability of a retest because the rally was too easily and too quickly bought (not to mention my own sour grapes for not acting on my recognition of those temporary lows being set!). Regardless, the action that followed telegraphed that the excesses from the bubble had certainly NOT run their course yet. Now, with investors getting more and more nervous about the geopolitical environment, it seems I have to move up my timetable for this retest event to sometime soon! My previous prediction was for a retest and potential climactic low coming in the Spring once market players realized that a robust 2nd-half recovery would be a wicked fantasy for the third (even fourth depending on your perspective) year running. In other words, the recent market ugliness could be telling us that this re-test is imminent - sooner than later. This is something I had not considered enough. You may recall that I had claimed that the market was tired of worrying about Iraq last November or so because it was just listlessly bouncing around. This re-test would mark the final exit of those who are simply too nervous to wait out the final news on Iraq.


Once a resolution on Iraq happens, war or peace, we are then likely to see the biggest headfake of a rally yet in this entire bear market. The problem is that the bulls have an argument to buy regardless of the outcome. The logic reads something like this: 1) if we find a peaceful solution, the world becomes safe to operate businesses again and the weight on the economy's neck will be lifted. BUY! 2) if war breaks out, we should have a quick victory, and, regardless, the uncertainty that's been weighing on the market will be lifted. BUY! The false hopes that ride on that rally should set up a final climactic sell-off this Fall for all the typical reasons I have laid out in earlier missives why big sell-offs often happen in the Fall. The main problem I have is that I am relatively sure of where the highs of the subsequent trading range have been set (the December high), but I simply have no sense for just how low this market will go. I still have Nasdaq 1000 in my back pocket, but I see all sorts of reasonable arguments for final resting points all over the map. However, I do feel the next climactic sell-off will finally put in a bottom for this bear. Well, unless people proceed as business as usual...I hope to be able to justify this hypothesis in future missives.


I know, I know, it all sounds so dramatic and complicated, but it is really pretty simple. 1) the excesses from the bubble have not been purged, 2) the true burdens on the economy remain those excesses, 3) the economy will not experience robust growth until those excesses are purged, 4) the Fed and now the White House and Congress are doing what they can to prop up what is left after the bubble, 5) any intermediate events, even large geo-political ones, are most likely going to be distractions from the real storyline. As tragic as 9/11 was, it showed how ready people were to blame the economy's problems on anything but the bubble. The rally that ensued only set us up for an entire year of losses. The Iraq issue threatens to have the very same effect.


So what is the point of all this negativity anyway?!? Back when I started writing these in the Fall of 2000, I sought to counteract what I saw as the overly-optimistic, sometimes recklessly so, bubble-speak being fed through the mass media. As more people are finally catching on after three years of downside in the markets, true opportunity is closer than it has ever been (for example, investors for the most part have been withdrawing cash from their mutual funds - I hope it is not to service debt!). So, while I continue to wallow in the bearish story note how if my predictions even come close to being true, there will be lots of opportunities for intrepid investors who are seeking out investments that have ALREADY DISCOUNTED RISK. This has got to be your mantra if you are trying to go long-term, even intermediate-term. You do NOT want to pay a premium for anything when risk is everywhere around you. Why should you pay extra for the privilege of putting your hard-earned cash at risk? You shouldn't! The market owes YOU! J If done right you, we, can make decent returns even in a market trapped in a trading range. Time will sure tell. But it won't be easy because you will likely have to buy when all around you are selling, and you will have to give serious thought to selling when everyone is buying, happy, and giddy. And there will always be the risk that you will completely give up and sell at the bottom of one of these sell-offs and/or get swept up with dreams of miracles and sugarplums in the latest bear market rally. The ONE exception I am allowing for is a convincing, high-volume break and CLOSE above those December highs.


Also, the time is near upon us where there is no need to be blanket-negative against all things tech. I can finally see *potential* opportunities opening up, even in the semiconductor area, where stocks of good companies are finally getting discounted for hard economic times. I will write more on this in future missives. Earlier pieces I wrote on certain tech companies covered businesses that are doing well but most had expensive stocks. Those are not likely buy and holders.


Anyway, enough of the prognostication on the markets. Let's take a look at what is out there pressing against the market, and the economy's prospects.


First, an obligatory criticism of Greenie and his crew. Since Greenie continues to refuse to acknowledge a bubble ever existed, he feels OK issuing econo-babble like this after the latest Fed hub-bub: "Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses. However, the Committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time." What a bunch of you know what! First, note how the Fed members now refuse to take too much credit or responsibility for any outlook on the economy. Note the use of the words "reportedly" and "as most analysts expect." Come one, Fed! Has three years of being dead wrong FINALLY made you too gun-shy?!?! Well, just in case they did something correct, this statement allows them to conclude in the end that it was "accommodative" monetary policy that fixed almost everything (let's not even mention the Fed's role in getting us here in the first place). Needless to say, with interest rates at historic lows, and the Fed desperately pumping money into the system and blowing more and more hot air to support consumer debt (and spending), there is little more help we can expect from these fine people. This statement shows to what extent they need to grasp at straws to come up with some kind of plausible scenario in which the economy truly recovers. "Over time" could be "anytime in the future" as far as I am concerned. Amazing what you can do with a few choice words!


Now, here are some quotes and snippets I have been collecting to share with you all (sorry I have lost most of the references and sources). I have chosen this format rather than craft a witty mosaic because there are a LOT of stories and side-stories that need to be tracked, and frankly, I have been remiss in not writing about them in real-time. I don't even consider this list complete, but for those of you who have read some of the articles I have sent out from various publications, some of it will not be new news - or at least not surprising. Since I think you all understand my economic viewpoints and biases pretty well, future missives could take more of a political tone. I will also be spending a bit more time talking about global processes and longer-term developments.


Be careful out there!


--- Duru



(This is long, so if you do not care for some of the facts and figures supporting current economic and financial events, feel free to skip this!)

















Ó DrDuru, 2003