Crosscurrents January 12/05
January 10/05
by Alan M. Newman
The bear market in Japan was long lived, but there have been more enduring bears, including the secular bear markets in the U.S. from 1929-1955 and 1966-1982. Gold's bear market commenced with an unbelievable 8.5-fold move from August 1976 to the $875 peak in February 1980. An equivalent move would have taken Nasdaq to 6000. It took fully 19-1/2 years before gold registered a major bottom at $252 in August 1999. Then a successful test and picture perfect double bottom was completed more than two years later, as April 2001 closed at $257.70. Gold has now been in an inclined trend for nearly three years after building a base for well over two years and has risen 78.6% from the bottom. Judging by the slow and steady pace of the advance, we believe it is very early in the bull market. Hedge fund manager Trey Reik recently emailed us that "There is a sea change occurring with respect to central bank attitudes toward gold." He cited Germany's recent decision to sell only 8 tonnes versus the 120 tonnes permitted by the Central Bank Gold Agreement of March 8, 2004. Reik claims, "Others will be loathe to reduce holdings because Germany sets the tone." and quoted Peter Zollner, the Executive Director of Austria's central bank (a large seller in recent years), who said, "We will sell less than [the bank's full quota] this time around....Right now, our gold reserves are worth more than our dollar reserves." So, yet another dimension of the supply/demand equation appears to favor gold in its new bull market. As we’ve said for some time, the bull market in paper is over. The bull market in hard assets is just beginning.
CNBC's Ted David recently interviewed Louis P. Friedman of Bear Stearns, who spoke about the huge merger and acquisition phase currently underway. Deals hit a record in 2000, $1.72 trillion worth. You remember that year, right? That's when every entity on the face of the earth thought stocks were great buys - no matter what the price level was. The mania wasn't limited to just the public. Everyone bought. Mutual funds, pension funds and even the very corporations whose stock was being highly promoted in the first place. The total value of deals fell to $765 billion in 2001, $440 billion in 2002, then rose to $567 billion in 2003 and surged to $835 billion in 2004. At December's pace of $147 billion, 2005 will see a brand new record. According to Friedman, the dramatic pick up "....shows the pent up demand for growth by CEOs." Gulp. Heaven help us. The mania strikes again. If CEOs believe that M&A is the way that earnings are supposed to grow, then stocks are not just overvalued but are laughably overvalued. The trick in the latter part of the mania was simply to buy a company with a lower P/E than yours, with your own astoundingly overvalued stock. Given a 60 P/E, a company that takes over another company with a 40 P/E will likely wind up with higher earnings per share, igniting more interest in the stock and resulting in an even higher P/E. Then the cycle begins anew. We saw this pattern with Commonwealth United and other "conglomerates" in the 1960's and 1970's. We saw it with high tech giants in the mania. And it is happening again. It was one thing when the great M&A spree began in 1981, with Tobin's Q ratio at .55. It is quite another now. As Tobin's Q clearly shows (see www.cross-currents.net/charts.htm), stocks are overvalued by a factor of at least two!
One of the very few newsletters we always look forward to reading each month is Peter Eliades' Stockmarket Cycles (www.stockmarketcycles.com). Peter is a veteran surveyor of the market's inner workings and is as savvy as they come. As in our last issue, his January 7th missive began with an eye opening analysis of how sentiment is playing out, featuring a chart of the Dow back to 1968, highlighted by seven arrows placed at junctures when a full calendar year had elapsed without even one weekly reading where the Investor's Intelligence measure of newsletter writer bears predominated over bulls. The instances were December 1972, December 1976, December 1983, December 1999, December 2000, December 2003 and now. The first two instances were the cusp of collapses. The third was the beginning of a near 14% slide that endured for an entire year. December 1999 and 2000 need no introduction. Although the Dow never surrendered more than 6.1% after December 2003, it was mid-November before investors were once again smiling. At the very least, this record should give the bulls pause to reconsider, but they have not and once again as of year end, we have a full year in which newsletter writers are exclusively bullish. While we are maintaining that the calendar year has slightly better odds to finish up modestly rather than down, this is another factor that points to a significant correction along the way of at least 10%, and another reason why we are retaining our bear market low target of Dow 6400 (probably in 2006).
Peter’s one year perspective of sentiment sent
us on a quest to take a similar pulse of mutual fund managers. The
result was today’s featured chart, dating all the way back to 1985 and
clearly illustrating a record in complacency, if nothing else. Clearly,
a considerable portion of the downside trend in cash levels from 1990
has to do with indexing, but it also implies beyond a shadow of doubt
that fund managers are totally unprepared for a significant price decline.
Their lack of preparation will eventually cause prices to be even more
vulnerable, a cascade effect if you will. Cash levels of over 9%
could not prevent a crash in 1987. Cash levels surged from 4% in
March 2000 to 6.5% in November 2000 but the Dow still gave up 27.7% over
the next 22 months. We may muddle through for awhile, but this is
not a bullish chart. Too little cash for too long says folks are
just way too bullish.
PLEASE NOTE: OUR BREAKING COVERAGE
OF A POTENTIAL SHORT SQUEEZE OF NOVASTAR FINANCIAL STOCK HAS FORCED US
TO TEMPORARILY DISCONTINUE FREE TRIALS. IF
YOU REQUEST A FREE TRIAL, YOU WILL BE GIVEN SEVERAL ALTERNATIVES.
THE FREE TRIAL PROGRAM SHOULD BE REINSTATED WHEN THE ARTICLE SERIES
IS COMPLETED, PROBABLY IN FEBRUARY 2005.
ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 22 times per year and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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