The bulls are running out of bullets

By Duru

August 6, 2003


Are the BULLS running out of BULL-ets?

Are the BULLS running out of CATTLE-lists?


Sorry - I couldn't help the puns. I am trying to find some humor in the growing carnage in the markets. Amazingly enough, we are now selling off as the economic news FINALLY starts to sound decent. You may be wondering why stocks are not launching that next leg up that looked so close at hand just a little while ago. (For example, see my earlier excitement about key technical levels that almost lured me over into the camp de bulls). If you will excuse my over-simplification here, the rally up to June was all about expectations for a robust economic recovery and sooner than soon. Nothing in the "good" news we have been getting even comes close to justifying a lot of the valuations in stocks right now.


Let's just say the market is giving you what I see as its final warning call. People who have had big gains in this rally have spent the last few months of market churn distributing stock to the latecomers. Now, even some of the latecomers are clueing in that things just don't seem right anymore....and THIS selling is starting to break down the market.


This time around, I hesitated in sending this clarion call out because typically it comes too late to help you - that is, I am usually moved to write these kinds of "sky is falling!" pieces just as the market finally makes a short-term bottom. Hopefully, you have heeded my earlier words and already protected some gains. I even feel that this current correction will be buyable for some decent gains until an even deeper correction in the Fall - obviously only the kind of move I would recommend for the speculators out there.


Regardless, I feel compelled to send out this last warning for several reasons:


1) I plan on doing a massive liquidation of MOST of the rest of my own holdings. I had intended to do this at the end of last week, but was too slow and even full of some hubris (ugh!). I am NOW alert and awake, and I feel it is at least fair to reveal what I am actually DOING rather than just saying. Whereas in the past few months I would couch my warnings in bullish language urging speculators to ride the rally for what it is worth, this time around I see few reasons left for the optimists to use as excuses to keep buying the market up.


2) The continued rise in bond yields seems to me will greatly complicate the government's desperate need to raise money to fund the massive debt incurred by the Bushies' brilliant economic recovery plan. I do NOT think yields are rising in anticipation of the economy taking a rocket shot to the moon. I have seen NO data suggesting such a thing. (In fact, there are other technical factors involved that are exacerbating the yield rise involving the market for mortgages - a disaster triggered by a major goof-up by Greenie. If you are interested in such things, the detailed drama should fascinate you). The Bushies will soon learn that, in the end, there is no such thing as free money. Even Greenie must be breaking out in cold sweats now because there is almost NOTHING he and the Fed can do to stop this freight train! It is amazing how quickly things turn around. The rout in the bond market has slowed down, although not yet killed, my earlier enthusiasm for buying a house (and thousands of others must also be trying to figure out whether these higher rates are here to stay or not).


3) If bonds continue to rise, the smart money will evacuate their stocks in textbook fashion for the safer haven of debt. The yields on stocks and their earnings potential will pale in comparison to the risk/rewards of higher-yielding bonds. I think you know what will happen then. We are surely being set up for a major decline here, and you would be wise to get AHEAD of this massive upheaval. Do not sell into the panic that will ensue in such a decline - sell BEFORE. Heck, be prepared to BUY into such a move with the profits you saved ahead of time. ;)


4) Even if a rally ensues from here, it looks to me it will be the classic set-up for a Fall let-down. I know, I know. As a friend so astutely pointed out, I have predicted a major decline every Fall of this bear market. But let it duly be noted that this bear market HAS brought pain every single Fall. Given that I think this is still a bear market, I see no reason why 2003 will be any different. If the decline has not already started, consider yourself lucky - like a major extension on a term paper.


Please note I am NOT predicting economic disaster. In fact, I think somehow the economy will continue to muddle through this and trudge along. The Fed predicted a robust start to early 2004, but I am once again skeptical. The Fed exposed its excellent sense of timing again when earlier Greenie was running around whining that high gas prices threatened to stall out the recovery. Instead, that moment turned out to be a TOP in the market, and there went another convenient excuse Greenie could have used to direct blame away from himself for our economic problems.


What IS vulnerable is the stock market. The Fed, the Bushies, all of the powers that be have done their best to keep the goose cooking. They are almost out of fuel though. The government is just about out of cash to hand out, the Feds are just about out of interest rate cuts (like they have helped much anyway), and I don't think another war victory, showboating on an aircraft carrier, or the slaughter of more Iraqi evil-doers can goose things. (Hmmm...maybe a NEW war would be a nice change of pace? It would be hard to find the money though. And just so you don't think I am just some tree-hugging, anti-war cynic and dove --- for example, I would be in FULL support of taking out what I see as a REAL danger in North Korea).


NOTHING is guaranteed when it comes to the market, and no one has a crystal ball. But if you dare to invest or trade in this market, you MUST be active, alert, and prepared. You cannot just assume that time is on your side in a market that looks to want to move sideways for years on end...You cannot impose your own beliefs of how the market SHOULD act. Heck, I am prepared to be proven as wrong as Federal Reserve Chairman and will buy the market on some convincing sign of strength from here. But you can only choose to be passive if your cushion is so large that there is little chance that the market will swipe away your holdings just at the time you are counting on liquidating some of it for some major purchase or life event. You will never be able to catch consistently absolute tops or dip at the deepest bottom. Only luck will get you THAT. But somewhere in the middle you have to be about protecting your capital. That is the nature of managing money in a bear market, and the need is made even more imperative in a post-bubble market.

Be careful out there!

Ó DrDuru, 2003