Crosscurrents November 17/04
November 17/04
by Alan M. Newman
The November 1st issue of Time magazine presented us with arguably the most cogent reason why the secular bear market must endure. Confidence and complacency knows no bounds. The wipeout amounting to half the S&P's value did nothing in retrospect, to erase fears of price corrections, a situation that permits valuations to remain stretched far beyond historical parameters. What is even worse is that Wall Street continues to PUSH an agenda that favors the public's increased exposure to risk, despite the lessons taught from 2000 to 2002. Our proof appears in a print advertisement from "Total Merrill," wherein the world's largest brokerage firm purports to help retirees "....realize the full potential of their new retirement." A gray-haired gentleman, somewhere in the vicinity of your Editor's 64 years of age is pictured at top left of the page with the caption, "Lee came with: A retirement plan that relied solely on 401(k)s and IRAs." Lee looks somewhat concerned about his future. At top right, Lee is pictured again, but this time with the grin of confidence and assurance about the golden years to come. According to the wisdom of Total Merrill, "Lee left with:" a number of items, the first of which was "An adjustable-rate mortgage on his beach condo, freeing up money for his retirement nest egg" (italics ours). Did we see this correctly?! Let's get this straight. Total Merrill is advising Lee to take an adjustable mortgage on his home? One of the perks of Total Merrill was listed as "An annuity to ensure a steady flow of income...." Although that sounds conservative enough, if Lee has borrowed from his home via an adjustable rate mortgage to take advantage of this "ensured" income, we simply do not get it. What if the interest rate on his adjustable rate mortgage skyrockets? Given the proposition of "freeing up money for his retirement nest egg," where else might Total Merrill invest it, perhaps in stocks? We are talking retirement money and adjustable rate mortgages, which in our view equates very simply to the equivalent of a margin loan. The "full potential" offered certainly sounds like a risky approach! Foisting increased risks on retirees or the soon-to-be-retired would be exactly the kind of proof we're looking for to conclude the mania is still in progress.
Who cares if Merck, Marsh, Triple M and Fannie Mae collapse? Who buys individual stocks anyway now, right? Who needs the headache of the single issue risk when the bottom drops out, especially after insiders have already dumped their shares and those in the know have bought their puts? [see Reality Check, page 2, October 18th issue] Let's all buy Exchange Traded Funds ("ETFs"). Wait, they already do!
A recent report from the Investment Company Institute
places ETF assets up 3.6% in September to $180.8 billion. Total
assets in ETFs are also ahead close to 20% thus far this year. Of
course, there are logical reasons why investors or traders gravitate towards
ETFs, not the least of which is lower expense ratios than most mutual
funds. More importantly, ETFs can carry with them the benefit of
very significant tax advantages. Buy a typical open-ended mutual
the day before they declare capital gains for the year and you are responsible
for paying the tax on those gains, even if you haven't yet sold the shares!
Regarding ETFs, what you see is what you get. You can only pay a
tax on gains if you sell at a profit.
And disadvantages? None, really, and that
explains the phenomenal growth rate since their introduction in 1992 with
the S&P 500 proxy, the Standard & Poor's Depositary Receipt, or
SPDR, now a $46 billion entity, followed by the second largest ETF, the
$22 billion Nasdaq 100 Index Tracking Stock, more popularly known as the
QQQ. We'll report in more depth in a few weeks.
In the October 4th issue, we ran a table showing results for stocks one week, one month, six months and one year out from rate hikes. Typically, the first three rate hikes still produced gains, but nothing to write home about in the case of the third. The fourth rate hike began to show strains for stocks and the fifth and sixth were clearly negative events. The fourth hike is now history and the fifth is 82% odds for next month. What happens beyond the fifth, we can only guess at this point, but if history is any guide, a year from now, stock prices are likely to be about 2.8% lower than today.
All our incarnations of Emotional Intensity have soared
to levels consistent with mass hysteria. As we have noted on numerous
occasions, the crazy can always get crazier, so our indicators are not
allowed to register sell signals until they turn down below the top line
marked as “optimism.” We will alert subscribers to that happenstance
when it occurs. Until then, we can only sit back and marvel at the
current insanity, comfortable in the notion that the bear market has not
yet ended.
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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