Posted on 11/27/2002 4:52:06 PM PST by rohry
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Oh, The Weather Outside is Frightful... All right, I realize that this is the beginning of the holiday season and we all are badly in need of some good news. In deference to the upcoming holidays, I will try to end this missive with some positive holiday cheer. But first, you and I must wade through the fog of balderdash, hype, hyperbole, and what is otherwise known as spin coming from Wall Street and the financial media. Suffice to say that the balderdash coming out of the financial sector is thicker that any fog Ive encountered in more than 15 years of sailing. Ill begin my discourse with a review of some of todays relevant economic news. Economic News Roundup Consumers Commercial Banks Corporate Credit Downgrades Corporate Profits Since profits are dependent on an economic recovery and economic growth is expected to contract to an annual rate of 1% in Q4, it stands to reason that profits will also contract. Q4 will be the fourth consecutive contraction in profits this year, a fact that hasnt been fully discounted by the markets so far. Wall Street is still predicating pro forma (make believe) profits of 14.9%. The good news is that year-over-year profits, although down this year, are up 6% from last year. Last years decline in profits was worse than this year. When you hear that profits are up this year, just remember that they arent talking about real profits, but only make believe numbers. The real picture is that profits will fall for the fourth consecutive quarter in Q4. In other words, the loss in profits will be less this year than last year. That is as far as the positive news goes. The drop in profits and the way it is reported by analysts and anchors is one reason Standard & Poors has had to resort to defining core profits recently. The credit rating firm has added back expenses such as stock options, pension losses, and restructuring charges that most companies analysts, and anchors exclude in their reporting of earnings each quarter. According to the rating agency, profits are much lower than reported, which is collaborated by the graph up above. Therefore the stock market is more overvalued than reported. The current market is selling at close to 50 times earnings instead of the widely reported multiple of 15-20, which is based on bogus expected profits. The fact that this market is reported as undervalued due to interest rate comparisons or expected earnings is as much fiction as the profit numbers themselves. Our Current Bear Rally The current rally is being compared to the surge in stocks in 1933 after the Dow had lost 90% of its value. The comparison is made because of the four-day spikes in the run up in stocks. (More to say about that in a moment.) However, as Bob Prechter has pointed out in the recent issue of Elliott Wave Theorist, stocks were at their cheapest level in history at the time of that rally. Furthermore, the advance/decline ratio was over 9 to 1. By comparison, in this rally the ratio has been 3.5 to 1, even weaker than the rally of this summer, which was 4 to 1. The next graph shows the Dow from April of 1930 to July of 1932. During this period the Dow rallied seven times ranging from 20-40%. Each new rally was followed by an even greater plunge in the index until 1933 when stocks were priced to sell at some the greatest bargain prices in market history. Time for a Reality Check The only thing driving this rally is the optimistic social mood, which wavers at each new trough in the market. Just compare todays feeling to last July when I was calling for a summer rally. Just as pessimism was supreme, this gave me more confidence to forecast a rebound. The current bullish sentiment, the drop in the VIX, VXN and other sentiment indicators gives me the confidence to be bold enough to say that another drop is close by that should retest the October lows, then rally into the end of the year before the big drop of next year. The markets should head sharply down beginning sometime in January as the news of profits, a dismal Christmas retailing season, slower economic growth and war weighs in on the market. On the positive side, after a sharp drop down to the 4,000-6,000 level should then give us another intermediate rally that will be replete with bargains. Let's Clear the Air of Half-Truths It is absolutely ludicrous that Wall Street is telling investors that stocks are cheap or that profits are rising. These are only half-truths. It is true that profits have fallen less than last year. However, please refer to the graph above of quarterly profits. That is not the story you have been told about profits. The fact of the matter is that we have only gone through the first stage of this bear market. The next graph shows you where we are now and where we are headed. To trade this market is one thing, but to believe in it is another. The return of the bullishness of the herd, the stocks that investors are bidding up again and the explosiveness of their rise, tells me that people have once again taken collective leave of their senses. Flagpole Rallies What makes me somewhat suspicious of this rally is the four gap days and the pattern of what I call flagpole rallies. This can be best illustrated by todays graph of the NASDAQ. Notice the sharp straight up-rise in the session, followed by a meandering waving flag pattern the rest of the day. The rallies are being jump-started in the futures and the options market. When the futures markets rise sharply, this creates an arbitrage situation in the cash market and buyers come into the cash market. This can be viewed in the second graph below of the NASDAQ since the rally began in October. The Triple Play Well, enough of the reality check. Now for a bit of good news. For a market that has been yield-starved, a safer way to play this downtrend is to buy issues that are rising and in a bullish trend. Many of the defensive issues have been sold off in this more recent collective-leave-of-the-senses rally. You can find many dividend-paying stocks that are yielding between 4-6%. In addition to the yield, you can write covered call options on these stocks that can produce anywhere from up to 3-6 percent option premiums per quarter. These calls can be written at prices that are 15-20 percent above the current spot price of the stock. On a worse case basis, the stock till may decline or it could rise above the call price. However, if investors are looking for income, especially pension plans or IRAs, or investors looking for income, this strategy can produce income returns of 8-12 percent with the possibility for some potential appreciation. At a time when interest rates are at 1 percent, and the major indexes are down double-digits for the third consecutive year, this strategy can help you survive the volatility of the markets and reward you for your patience. Areas that you can find these gems Ill give you a hint: look at things. Look at companies who provide a product or service that people need regardless of where the economy is going. Look at the geopolitical situation and that will lead you to another promising area. Look at what people need as compared to the idiocy that is going on in techs, telecomms and financials. Income returns of 8-12% may not sound like much at a time when the SOX goes up 8% in a single day. However, which return do you think is more dependable -- a dividend paid in cash or a rise in the value of the stock based on the idiot theory of higher prices? Let it Snow, Let it Snow, Let it Snow. Finally, as we head into this holiday season, all of us at Financial Sense wish you safe passage to wherever you are traveling. The very best to you, your family, and loved ones, and that special person in your life this holiday season. Remember, always look at the positive -- one mans winter is another mans summer. We may be in a continuing bear market in paper, but a new bull market in things has just begun. God bless and have a happy Thanksgiving. |
Volume was on the low side, of course, but on the day before a holiday, a semi-holiday and an adjacent weekend, I don't see how it could have been anything else. So if the question is whether the volume contraction on the rise is forgivable, the answer is, Yes, but don't make a habit of it.
It wasn't just an advance; it was a breakout. Definately feel good about it; and we certainly have a right to feel optimistic about this kind of action.
Seriously, this rally does look to have some legs, even though they're diseased chicken legs. I get a sense that the overspending consumers have one last splurge left in them, and they're bound and determined to take that splurge.
.....I agree and I think it will come over Christmas...a buddy of mine Smokey; was a child in the 1930s in rural North Carolina.....one year his father didn't know what he was going to do because Christmas was coming on and he had ended up in the hole sharecropping cotton that year....but his dad had a team of mules and a wagon so he loaded and hauled sawmill slabs for a local sawyer for two days from dawn til dark.....in the end the sawyer cheated him, but he made enough for Smokey and his sister to get a present from Santa...they each got a little rubber ball. Moral of the story: parents will go to great lengths to made sure their kids have the best Christmas they can give them.
As always, thanks Rohry and Happy Thanksgiving to all!
Stonewalls
Wow, no one wants to say straight out, OIL is going up.
I'd hate to be exposed in the market come December 26.
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