Posted on 10/25/2003 1:06:46 PM PDT by sourcery
Rumors of the 2003 market rally's imminent death have been greatly exaggerated in recent months. But according to one analyst with an enviable track record, the end days are finally here, and it's time to prepare for a sickening plunge into December and beyond.
The doomsayer is Michael Belkin, one of the few investment analysts who has emerged from the recent boom, bust and reboom with his reputation not just intact, but aglow.
Most independent researchers build careers as all-bull or all-bear, but not this guy. Operating out of a home office on Bainbridge Island in the Puget Sound near Seattle, Belkin writes a $36,000-per-year weekly report on equities, bonds and commodities for leading managers of mutual funds, pension funds and hedge funds worldwide. The report rises above the straitjacket of specialization to treat the global landscape holistically as an interlocking economic, political and social system.
Two weeks ago, Belkin abandoned his yearlong (and initially very lonely) bullish posture and put on the fur. He expects the broad market indices to sink significantly through the end of the year, led by cyclical industrial stocks, and does not see much of a recovery on the horizon for 2004.
Why take him seriously? He's been right about the last few major swings.
In an interview last week, Belkin said everything that made him bullish last November now makes him bearish. His forecasting model, which consists of a nonlinear set of probability distributions, shows equity markets in every developed country around the world "wanting to turn down." At the same time, he sees emerging markets such as Brazil, Chile and China "turning up in parabolic fashion."
The way Belkin sees it, we're "at the end of a liquidity bubble." Liquidity is analyst-speak for money, particularly dollars that the Federal Reserve prints and pushes into banks in a variety of ways for a variety of economic, political and social purposes. ("When the Fed makes new money, it's like counterfeiting, only it's legal," he quips.) He learned long ago that it made sense to buy into a liquidity bubble while it's happening, but that you needed to be able to identify its final days and get out a little early.
He defines major bubbles as excessive deviations from stocks' 200-week trend, while major crashes entail reversion to their 200-month trend. That's not information you can use to daytrade, but it helps with the big picture. And the big picture, in his view, amounts to this:
What's with the number 200? Nothing magical, he says, except that it has worked to define levels of support and resistance in every major bubble and crash he has studied over the last 100 years. A bear market bounce in a stock index or commodity from its 200-month average to its 200-week average, he says, is relentless, takes about a year and ends with low volatility -- all characteristic of the recent U.S. rally.
Belkin abandoned his Nasdaq 2280 target because he noticed that money-supply growth had begun to contract as credit markets froze up -- an event that, in his words, has "drained the economy of bubble fuel."
Commercial lending has gone nowhere since July, and real estate lending has slowed dramatically. (A newsworthy example of the latter was a report last week that The New York Times had put off building its new headquarters tower in Manhattan for a couple of years because its development partner was unable to obtain financing.)
Belkin believes that the Bush administration essentially "rented the 2003 recovery from Wal-Mart" by cutting taxes and mailing out rebate checks, and now faces an "involuntary deleveraging process" that will feed into weaker corporate results, softer economic statistics, worsening unemployment and, eventually, a sharp decline in real estate values.
In his Oct. 12 report to clients, he warned that "deleveragings are not low-volatility events -- a financial market dislocation in the fourth quarter is likely." And in his Oct. 19 report he upped the ante, saying that "the contrast between bullish equity-market psychology and deteriorating private-sector credit conditions is bizarre," concluding: "The point of a bear-market rally is to make everyone bullish again just before the market does its next swan dive."
How will you know if he's right and not just another dour crank? Until now, every 5% decline in the broad averages this year has been met with buying at some identifiable level of support.
Back in August, it was the 960 area for the S&P 500, while in September it was the 1000 area. The next time the market sinks below an area of supposed support -- e.g., the 1015 area for the S&P 500 -- and stays below it for more than a couple of days, it could be lights out for the buy-the-dips crowd. And then a real liquidation could ensue.
It's worth noting for the record that while the Nasdaq hasn't reached its 200-week moving average quite yet, other indices and stocks are very close: For the Dow Jones Industrial Average, the 200-week moving average is at 9789; for chip giant Intel (INTC:Nasdaq) it's at $32.81; for ExxonMobil (XOM:NYSE) it's at $38.44.
Meanwhile, stocks that are the most extended above their 200-week moving averages after a year of rally -- and thus most ripe for a reversion to the mean -- are all the major homebuilders, such as Centex (CTX:NYSE) , Toll Brothers (TOL:NYSE) and Pulte Homes (PHM:NYSE) ; gold miners such as Newmont Mining (NEM:NYSE) ; casino supplier International Game Tech (IGT:NYSE) ; and security-software maker Symantec (SYMC:Nasdaq) .
In his latest report, Belkin told clients to shift from buying dips to selling strength to "avoid having egg on their faces during a fourth-quarter downturn." For mutual fund managers obligated to be long, he recommended they overweight defensive consumer stocks such as Colgate-Palmolive (CL:NYSE) and Procter & Gamble
(PG:NYSE) . He calls these "chicken longs" because he believes they will fall less than market benchmarks in a broad downturn -- although they probably won't provide positive returns.
| Belkin's Long Picks for Damage Control* These names shouldn't fall as far as market benchmarks in a broad downturn |
|||
| Stocks | Oct. 20 Price | Volume |
|
| Procter & Gamble (PG:NYSE) | $95.98 | 2,973,000 | |
| Colgate-Palmolive (CL:NYSE) | 57.37 | 1,900,100 |
|
| Church & Dwight (CHD:NYSE) | 35.20 | 65,700 | |
| Dial (DL:NYSE) | 22.00 | 501,100 |
|
| PepsiCo (PEP:NYSE) | 48.15 | 2,759,700 | |
| Coca-Cola (KO:NYSE) | 45.61 | 4,271,800 | |
| Nike (NKE:NYSE) | 63.85 | 1,386,200 | |
| Ashland (ASH:NYSE) | 36.74 | 212,000 | |
|
|
Amerada Hess (AHC:NYSE) | 52.78 | 353,200 |
| Wrigley (WWY:NYSE) | 55.97 | 423,300 | |
| Unilever (UN:NYSE) | 57.25 | 3,763,700 |
|
| Hershey Foods (HSY:NYSE) | 75.84 | 305,400 | |
| ConAgra Foods (CAG:NYSE) | 23.49 | 2,404,700 | |
| McDermott (MDR:NYSE) | 7.00 | 769,600 | |
| Hospitality Properties (HPT:NYSE) | 37.01 | 191,000 | |
|
|
Teco Energy (TE:NYSE) | 14.05 | 948,900 |
| AES Corp. (AES:NYSE) | 8.25 | 1,103,900 | |
| FedEx (FDX:NYSE) | 72.59 | 1,415,400 |
|
| United Parcel Service (UPS:NYSE) | 68.75 | 2,470,400 | |
| *Longs are expected to outperform the S&P 500 over the next one to three months, but are not expected to generate absolute positive returns. Source: MSN Money |
|||
Among his top shorts are the homebuilders, which he called "so overowned, overvalued and undershorted they're like Yahoo! at the top, but with fundamentals that are deteriorating every second under your eyes." Others on his list for short-sellers are cyclicals such as machinery makers Ingersoll Rand (IR:NYSE) , Cummins (CUM:NYSE) ; chemical makers Eastman Chemical (EMN:NYSE) and Hercules (HPC:NYSE) ; Internet service or hardware providers such as eBay (EBAY:Nasdaq) and Cisco Systems (CSCO:Nasdaq) ; and retailers such as Kohl's (KSS:NYSE) and Sears (S:NYSE) .
| Belkin's Short Picks Homebuilders figure prominently on this list |
|||
| Stocks | Oct. 20 Price | Volume | |
|
|
Kohl's (KSS:NYSE) | $51.58 | 6,431,400 |
| General Electric (GE:NYSE) | 28.78 | 16,078,700 | |
| Amgen (AMGN:Nasdaq) | 61.89 | 18,340,112 |
|
| MedImmune (MEDI:Nasdaq) | 28.64 | 9,029,221 | |
| W.W. Grainger (GWW:NYSE) | 45.75 | 903,400 | |
| Weyerhaeuser (WY:NYSE) | 59.32 | 540,400 | |
| International Paper (IP:NYSE) | 39.65 | 1,585,600 | |
|
|
Millipore (MIL:NYSE) | 40.45 | 878,400 |
| Waters (WAT:NYSE) | 28.14 | 1,221,800 | |
| Computer Sciences (CSC:NYSE) | 39.69 | 646,100 |
|
| Electronic Data Systems (EDS:NYSE) | 21.33 | 1,970,300 | |
| Paccar (PCAR:Nasdaq) | 78.30 | 712,500 | |
| Navistar International (NAV:NYSE) | 41.30 | 748,000 | |
| Eastman Chemical (EMN:NYSE) | 32.86 | 399,800 | |
|
|
Hercules (HPC:NYSE) | 10.23 | 588,500 |
| Power-One (PWER:Nasdaq) | 10.95 | 809,826 | |
| Toll Brothers (TOL:NYSE) | 34.44 | 512,800 |
|
| Omnicom (OMC:NYSE) | 75.14 | 1,340,400 | |
| Monster Worldwide (MNST:Nasdaq) | 25.28 | 1,195,286 | |
| Baxter (BAX:NYSE) | 29.43 | 1,890,000 | |
| Medtronic (MDT:NYSE) | 46.17 | 3,740,200 | |
|
|
Raytheon (RTN:NYSE) | 28.15 | 1,719,000 |
| Micron Technology (MU:NYSE) | 12.85 | 11,466,100 | |
| LSI Logic (LSI:NYSE) | 9.41 | 3,603,300 |
|
| Cisco Systems (CSCO:Nasdaq) | 21.08 | 31,688,559 | |
| eBay (EBAY:Nasdaq) | 56.60 | 12,423,137 | |
| Source: MSN Money | |||
Naturally, one hopes Belkin has it wrong this time. But you have to admit that he does have the hot hand. I'll check in with him later this year as we learn whether his guidance was right, wrong or perhaps just early.
I couldn't figure out why the authorities decided to kick off the "recovery" campaign so early. Unless they have something else up their sleeve, it could prove to be a major miscalcution in '04.
Richard W.
I couldn't figure out why the authorities decided to kick off the "recovery" campaign so early. Unless they have something else up their sleeve, it could prove to be a major miscalculation in '04.
Richard W.
I don't write a newslettter but my prediction is for 10,000 Dow by Christmas and 11,500 by election day next year.
The price of oil will drop to $22 a barrel by March, 2004, spurring on a stronger economy for the next 2 years.
Many so-called experts sat on their money last fall and this spring when the market zoomed ahead.
Major corporate leaders have hesitated to invest in new IT.
That is beginning to change.
There are only two problems looming that could cause the market to dive........another terror attack or indications that Bush might lose the election.
If Bush looks strong going into next fall, the market might rally better than it did this year.
If he gets elected and drags in new conservative tax-cutters on his coattails, the markets and the economy will be in bliss for four more years!
Worth reading!
FWIW, I thoroughly agree with everything Belkin writes. Not that this means much. I'm just a tiny minnow in the vast ocean of sharks!
"another terror attack" = almost a certainty
"indications that Bush might lose the election" = high probability
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