Posted on 10/16/2002 4:00:31 PM PDT by rohry
Market WrapUp for the Week The Week in Graphs Storm Watch Geopolitical News Energy Resource Page Precious Metals Raw Materials Wednesday, October 16, 2002 Are We At the Bottom Yet? How far will it go before a bottom is reached and how long will it take to get there? That is a question Wall Street has been wrong on for the last three years running. First it was a correction in 2001. Then it became a bear market after September 11th. This year it was supposed to be a recovery, which now looks impossible. It will take more than intervention to get this market going again. It will take a miracle. Chances are it may be more than a decade before stock prices ever approach their highs again which may be too hard for many investors to swallow. Historically, markets tend to swing to extremes in both directions. The mania of the 1990s took stock prices to unbelievable heights. The new century should see the markets fall to incredible new lows. There have been three major bull markets in the last century: the 1920s, the 1950-60s, and the 1980-90s. In each case, stock prices rose to extremes but none of these periods were as extreme as the 90s bull market. After markets reach these levels, they take decades to correct. The 1920s bull market took 25 years to surpass former levels and the 1950-60s took 16 years. We have only undergone three years of corrections. Despite the fluff taken out of the market, stocks still remain expensive by any measure of value. History would suggest we might have another 4 to 9 years before we reach bottom. How will investors know when a bottom is reached? When everyone is out of their mutual funds and when the industry has shrunk to a shadow of its former size, when dividend yields are at 6-7%, PE multiples are down to 7, and nobody you know will admit owning a stock or mutual fund will we have arrived at a bottom. In the meantime, all we are likely to see is tradable rallies that are brief and furious. Momentary excesses will punctuate the markets; violent upsurges followed by deeper plunges all the way down. In the end the market will have its way despite the best efforts to thwart its course. Valuations will become attractive and sound investment principles will be restored and become fashionable. Patience will one day become a virtue again. Quick fixes and momentary thrills will be unfashionable. When I got in the business in the late 70s, the investment business lived on Graham and Dodd. I remember reading a speech given by John Templeton. Templeton extolled the virtues of buying when markets were low and stocks were cheap, and then holding on to the stocks for 3-5 years until the markets recognized their value. This stands in sharp contrast to todays investment climate where 5 minutes, much less five days, can seem like eternity to most investors. Fashions come and go and it is no different in the financial markets. Todays fad to get rich quick will also fade as markets fall even further. As my mother-in-law is so fond of saying, this too shall pass. The Fate of the Investor For Wall Street and Main Street, it hasnt dawned yet that we are in a wartime economy. In war natural resources command a premium. Raw materials are used and expended in instruments of war. In war, things get blown up, broken, and destroyed. Ammunition is expended, bombs and rockets are exploded, and raw materials are commandeered for the production and prosecution of the war. In war faith in paper evaporates as governments inflate their budgets in order to pay for the cost of war. Wars in the past have always been inflationary. There is no reason this time to think that things will be different. We may see deflation in paper and the credit markets, but inflation will be the natural trend of raw materials. If you dont have a war portfolio you may find yourself out of sync with the markets. This can be viewed by looking at IBD and the strength of sectors that are doing well this year. The US will soon be at war, and the reality of this has not been fully factored into the markets. Most who work on Wall Street were in diapers during the last war. Only the old-timers remember what war can do to a portfolio. Today on Wall Street In addition to J.P. Morgans woes, S&P downgraded GMs debt as notch from BBB+ to BBB, one level above junk bond status. GM has $187 billion of total debt. S&P said it is also reviewing Fords debt, which has total debt of $162 billion. Both GM and Ford have been hit hard by losses in their pension plan. Those losses will require both companies to make additional contributions out of earnings next year. GMs pension shortfall is $28 billion, which is nearly double that of last year where it stood at $12 billion. Capital One Financial Corp shares fell as much as 26% today after the fifth biggest issuer of MasterCard and Visa said credit card losses would climb through the remainder of this year and next. Capital One wrote off 4.96% of its loans in the third quarter. The company said that figure may rise to as high as 6% in the fourth quarter. In July federal regulators who monitor Capital One closely made the company boost its loan loss reserves and increase risk controls. In other credit related matters, Brazil is drawing down its reserves to pay off debt that is maturing this month. Brazil has refinanced only about 20% of its loans coming due this month. A plunging currency and stock market, which has lost over 63% this year has made it difficult for the country to roll over its debt. Brazil must refinance another $20.8 billion by the end of the year. Raising money in the debt markets has become difficult because of a plunging currency and speculation that the Lula, the Socialist Workers Party candidate, has in the past advocated defaulting on the countrys massive ($250-$300 billion) debt. Brazil may become the next financial crisis as the dominoes continue to fall throughout Latin America heading their way North. Todays Market Overseas Markets Asian stocks rose as a rally in U.S. equities spurred by higher corporate profits boosted optimism that the region's largest overseas market is recovering. Honda Motor Co., Hyundai Motor Co. and other exporters gained. Japan's Nikkei 225 Stock Average added 0.5% to 8884.87, completing a three-day gain of 5.3%. Bond Markets © Copyright Jim Puplava, October 16, 2002 |
I would certainly wager we are not going anywhere near 5000 or even 6000. We may drop down close to 7000 again because the economy is not all that strong yet. I would bet that the DOW will not close below 6500 in the next 6 months.
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