Off and Poppin

By Duru

January 8, 2004


After whining and complaining during December's mild corrections, the markets are doing what I thought they would eventually do: make a mockery of the previous milestones of Nazz 2K and Dow 10K. Those levels are quickly being left in the dustbin of history now. I must say, however, that I am quite taken aback by the manner in which this has happened. The Dow has been going up in a near straight line for 5 weeks or more, during which time the Nazz lagged a lot. The Nazz is finally catching up, and the huge pops in speculative tech stocks (and other small caps) are indicative of the fury and passion of the money chasing ghosts, fairies, and other apparitions promising fame and fortune.

As the froth hits mega-pitch levels, the bears are pitching fits all over again. They have been getting it wrong for almost a year now and will not give up until they finally catch (short) the top of this market. Of course, as one of the long-term bears, I must admire these efforts, but they seem to constantly miss the point of this liquidity-driven rally. It is OK not to like the animal spirits raising this market from the dead, but do not let that get in the way of taking it for what it is for now!

Anyway, I have been quite impressed by the number of upside surprises and raised earnings and revenues guidance I have been seeing so far in 2004. A good number of companies are essentially blowing past their earlier guidance and are off and popping. Even more amazing, stocks that were already expensive are showing they are still capable of explosive moves of 10% and more in one day. The bear in me wants to say that this sure must be the sign of some kind of top. The market feels extremely over-extended right now, and I have to believe there are a gang of sellers itching to convert their profits into cold hard cash - taken straight out of the hands of all the fresh money pouring in right now from retirement funds and the like.

I see little to like about investing in this kind of environment, but a lot to like for trading. I never bought into this rally beyond it representing a continuous series of trading opportunities. That lunacy of course turned out to be the wrong strategy. As I have admitted earlier, sellers have been punished and buying-and-holding in 2003 was the big winner. I doubt this will work again in 2004 as we should FINALLY see some kind of real correction SOMETIME this year. I have no idea when, and I am ready to admit that I may still be under-estimating the amount of liquidity the Fed and the White House are able to pump into this bad boy. After all, I continue to be amazed at this country's ability to absorb higher and higher debt levels and seemingly avoid paying the piper. The rest of the world is saving their pennies and willingly lending a lot of them to us. We use the borrowings to buy more of their products, and they reinvest their money right back here. As long as this virtuous cycle continues, I suppose we can borrow ourselves blind. Again, I imagine this self-reinforcing, self-perpetuating debt machine gets more and more vulnerable the bigger it grows. Right now, the Bushies and the Fed are expecting, hoping, probably praying that the economy can grow its way out of debt, that is, we can recover robustly and strongly - make so much more money to pay off our debts and then some. The way this debt has grown, we better see a few more quarters of 8% GDP growth and soon!

One interesting divergence in the market is the continued lackluster performance of retail stocks. They are generally lagging but if you look deeper you find an interesting tale of woe and success. The discounters seem to be doing pretty poorly, while the high-end retail stocks have held their own and better. Could it be that the Bushie tax cuts have done their job in empowering the rich to wield ever-stronger purchasing power? Or has the money truly trickled down to the rest of us making us feel "too good" to keep shopping for bargains? I sure dare not declare that the consumer is finally rolling over as time-after-time the shoppers hit the stores with the same enthusiasm they always do. Time will tell, but given the slow to non-existent job growth in this recovery, my money is on the rich folk. See, if companies are making ever-fatter profits while they keep lids on wage growth and keep hiring flat, then you can bet that the tax cuts that are stimulating the economy are going to the owners of capital not the hands of labor. And the owners of capital shop more at Nordstrom's and Saks than they do at Wal-Mart and Family Dollar!

My main prediction for 2004 is that I will make few timely predictions and just call things as I see them unfolding. So far, we are "off and poppin" and speculation is running rampant. The seasonal January effect play has worked like a charm. It also seems institutions have loaded up on puts and shorts, particularly in tech, so I suspect this froth will not run its course until AFTER the January puts expire. After that, people will feel a lot less protected (thus less bold) and seek to lock in profits and/or protect themselves from any earnings surprises for the rest of the month. Given the general lack of big earnings warnings (so far), and the increasing number of GOOD tales, I suspect that earnings this season will be relatively good. The only wildcard left is whether the market will interpret good earnings as a sign of more to come or as some sort of peak (sell the news).

Regardless of how things play out, the best strategy for those of you bold enough to kick the tires on this limo is to buy on dips and to avoid chasing the dogs straight into the junkyard.

As always, be careful out there, and let's all have a Happy New Year!


Ó DrDuru, 2004