Crosscurrents February 9/05
February 9/05
by Alan M. Newman
The New York Stock Exchange's announcement of plans to extend the trading day by two hours should come as no surprise. After all, it's all about money, right? And falling seat prices. It was just revealed that NYSE seat prices have fallen to their lowest level in almost ten years, clearly raising fears about the future for the venerable 212-year-old institution. A seat sold for $2.65 million in August 1999, less than seven months before the Crash of Nasdaq, and two weeks ago a seat traded hands for a mere million bucks. The Specialist system must now compete with electronic exchanges and members face a vast increase in competition from other products, such as Exchange Traded Funds, most of which trade on the American Stock Exchange. But the NYSE has run with their only advantage, encouraging program trading of every kind and description. Programs now account for the lion's share of activity on the most senior of U.S. stock exchanges. Program activity is still rapidly on the rise after accounting for more than half of all volume last year. Program volume has more than quadrupled in five years, even as non-program volume has declined. At the current rate, for every share of non-program activity transacted on the NYSE, there will be at least 1-1/3 shares of programs.
So, once again, we consider whether the U.S. stock market is a buy or a sell. One method of determining the answer is to consider the alternatives. The Fed giveth, the Fed taketh away. Not only are stocks not more attractive as interest rates rise, but banks are more readily able to compete for the attention of investors. Although the mania's echo is convincing many participants to stay the course and invest or speculate at valuation measure still way in excess of what history has shown to be sustainable, many others are sure to begin taking advantage of the recent rise in short term rates posted by the nations banks. Your Editor's checking account now pays 2-1/2%, quite attractive under the circumstances. With another hike already a certainty and at least two more favored, the competition for stocks can only increase along with rates.
According to Thomson Financial, insiders sold $41 billion of stock last year, versus $1.45 billion on the buy side. Sales were up 40% from the prior year and purchases were the second lowest since 1996. The 28 to 1 ratio of sales to buys was the worst Thomson has recorded since they began tallying insider activity in 1990. Last year ended poorly as the last three months of the year witnessed a 37 to 1 sale/buy ratio. To boot, 2005 has not started out well, either.
We haven't shown this particular perspective of sentiment
in quite awhile, but the right time certainly appears to have arrived.
Simply put, when folks are at their most bullish, they cannot resist going
out on a limb. When the mania surged to its most lunatic levels
in March 2000, speculators levered themselves like never before.
Margin debt levels increased to a hair shy of $300 billion, equivalent
to roughly 3.1% of Gross Domestic Product and 1.7% of total market capitalization.
The former was the highest since the Roaring Twenties slammed head-on
into a collision with reality. Total margin debt is now more than
1.8% of GDP and over 1.4% of total market cap, clearly not as high as
in 2000, but considering how prices collapsed after March 2000, at very
worrisome levels nevertheless. Margin loans have soared by 60% since
September 2002 and the additional $81.5 billion in buying power provided
by these loans has bought a 48.7% improvement in the S&P 500.
We do not yet have data for January but the tally visible below through
December, is on an exact par with November 1999, a scant four months from
the peak. We're not sure how much more evidence is required to prove
the mania only took a time out, but it is crystal clear from what we have
shown in the last few issues that participants are not concerned about
the possibility of a stiff price correction, let alone a resumption of
the secular bear market. The time elapsed from the October 2002
bottom is now 2.3 years. In the twentieth century, a 15% price correction
occurred on average, every 2.23 years. Maybe the twenty-first
century will find markets unfolding in a more friendly manner, but we
wouldn’t make book on it..
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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