Crosscurrents October 20/04
October 20/04
by Alan M. Newman
We recently read some comments from Charles Maxwell, generally acknowledged as the world's leading expert on oil prices. Mr. Maxwell averred that oil might climb as high as $45 but would then fall to below $40 and "....likely stay in the $35-$40 per barrel range for the coming autumn and winter seasons...." However, oil prices jumped as high as $54.75 on October 14th, so the forecast was already wrong by a fairly wide margin. What went wrong? Mr. Maxwell's assumption was that the expectations for major disruptions of supplies would not occur, but this was a mistaken assumption from the beginning, since it never took the demand side of the equation into account. As related to us by our friend Clyde Harrison, who runs the phenomenally successful Rogers Raw Material Fund, “….the demand side is all you need to know.” America and the major developed industrial nations use roughly 20-25 barrels of oil per day per capita. In China, the number is 1.3 barrels a day. In India, it is just 0.7 of a barrel per day. However, China and India are roughly 38% of the world's population and both countries are moving rapidly into the industrial age. Even if China's growth rate were to be cut in half from the boom now underway, this is still a population quite eager to finally move from bicycles to automobiles. A corrective sell off in oil prices is always possible, but shorting oil at this point suffers the risk of rising demand and still, the threat of supply disruptions from terrorists taking out vital pipelines. From what we can see, the result of higher prices has already begun to impact corporate profits and will continue to impact both corporations and consumers. Unless the Chinese economy implodes dramatically next year, it would appear that oil prices are going to remain at the very least, quite robust.
Debra Brewster's recent story in New York magazine was perfect proof that the silly season is still upon us. Ms. Brewster reported that money manager Bill Miller "is teetering on the brink of breaking the longest winning streak that the investment world has seen in recent decades - his own.... the only money manager ever to have beaten the Standard & Poor's 500 index for 13 years in a row." Mr. Miller is described as "a longtime value investor" and is roughly 4% behind the performance of the S&P 500 thus far in 2004. What strikes us as particularly odd is that Miller bought 12% of the Google IPO, and holds sizeable positions in Amazon and eBay. Also, Miller is quoted as saying, "The area that jumps out now in terms of value is the big financials - JPMorgan Chase, Citigroup, companies like that. We already own them, but if we were to start buying from nothing today, that is what we would buy." This is all very strange to our admittedly conservative bent. Google has traded at a $38 billion market cap, more than 17 times sales, which appears rather excessive for a company that is profited by less than 9 cents of every dollar in sales over the last year. By comparison, General Motors is valued by the market at only $23.4 billion and pays out dividends equal to 5.7 times what Google earns. Amazon and eBay suffer huge P/E multiples, an inference that everything must go right down the road, a risk that we prefer not to take on. And financials have gone from a paltry weighting of the S&P to over 21%. In the past, similar sector expansions would serve as a warning that a reversal might soon be at hand. Apparently not now, at least for Mr. Miller. Although we see some very interesting insider buying in JPM, insiders in the other constituents of the top ten issues of the IYF Financial Exchange Traded Fund are selling 24.3 shares for each share they buy and there are eight sellers for every buyer. These ten companies, half of them banks, represent 44% of the assets of the ETF.
What is truly troubling is that the definition of value investor has seemingly changed 180 degrees from what it was before the greatest stock market mania of all time took hold. If a 12% stake in Google represents the future of "value" investing, then it is clear that the mania remains in place. The silly season is still upon us.
Summer is vacation time for most of us and the effect
is typically felt on Wall Street. Volume slows to a crawl and unless
a catalyst arrives to excite the crowd, prices may simply linger near
the previous day, much as they have done this year. From the first
day of July through Labor Day, trailing 21-day average volume on the New
York Stock Exchange fell 13.5% and declined 12.5% on Nasdaq. Bulletin
Board volume fell as well, and resoundingly at that, by 42.2%. But
lest you believe the speculative juices no longer run rampant for penny
stocks, let us clarify these stats. First of all, bear in mind that
summer volume for the NYSE and Nasdaq fell 2.9% and 8.9% respectively,
from 2003, whereas summer share trading on the Bulletin Board actually
ROSE an whopping 61.8%! Any comparisons we may make with the past
clearly and convincingly infer manic status is still prevalent for the
garbage issues traded on the Bulletin Board. Although we certainly
cannot guarantee the next Microsoft is not amongst those issues traded
on the Bulletin Board, the odds against such a proposition would appear
to be overwhelming. As we have shown so many times before, www.otcbb.com
plainly states on its Investor Information section that "There are no
minimum quantitative standards which must be met by an issuer for its
securities to be quoted on the OTCBB" and "Issuers do not have any filing
or reporting requirements with The Nasdaq Stock Market, Inc., or the NASD."
How companies such as these can be considered "investments" is beyond
our ability to discern. Yet, trading volume continues at a pace
that can only be categorized as idiotic as well as manic. The Nasdaq
collapse of 2000 did indeed have an effect on Bulletin Board trading volume,
which contracted 18.4% in 2001. However, even as prices continued
under water in 2002 for the major exchanges, Bulletin Board volume
surged 72.1%. As a new bull phase commenced in 2003, Bulletin Board
volume soared another 61.7% and thus far this year, has exploded by another
82.8%. Average daily trading volume is now more than four times
what it was during a veritable stock market mania. Although daily
transactions are not as high as in 2000, they are higher than they were
in 1999, as Nasdaq went into orbit. Is there any explanation for
the current environment other than an extension of the mania?
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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