Crosscurrents March 17/05
March 17/05
by Alan M. Newman
Remember? It was just five years ago.
Nasdaq rose two points to close at 5048, a day after first breaching 5000.
The incredible influence of the greatest stock market mania of all time
pushed Nasdaq 88% in a bit more than four-and-a-half months and a 15%
rocket in only a dozen trading sessions before 5000 fell. Our headline
in the February 28th issue began, "The "New Economy" Rationale Is Bogus,"
underlined for emphasis. We added that prices were unsustainable
and that Nasdaq was facing a crash. In fact, in our "Two Weeks Ahead"
feature, we went on record with one of the most sensational calls we made
in our 15 year publishing career, calling for a target of “...under 3000
for Nasdaq, possibly as soon as mid-April” [italics added], which would
be a 33% decline only six weeks in the future. And indeed,
Nasdaq collapsed 33% from the March 10th high, down to 3351 by April 14th.
And now? Amazingly, investment advisors
are equally bullish and even less bearish than they were on March 10,
2000. Mutual funds have virtually the same absolute cash levels
and cash-to-assets ratio. But prices are significantly lower and
the odds for a crash from these levels are probably zero. However,
the odds for a return to 5000 is also probably zero for a long time to
come. It took 26 years for the Dow to surpass its 1929 high.
It took 16 years for the Dow to finally break convincingly above 1000
from its first foray into hallowed ground. More than 15 years later,
Japan's Nikkei index is still down close to 70% from its peak. Bubbles
always burst and when they do, they remain deflated for many years to
come. And now? The cyclical bull market underway has persuaded
too many to forget about the past. History is a great teacher, but
only if you listen.
John Dorfman recently penned a piece for bloomberg.com
on "Little Gems on Stocks From Graham and Bernstein," the original purveyors
of ideas on what constitutes value. Dorfman reiterated his annual
exercise of assessing "the fate of the four stocks that analysts loved
12 months earlier -- those with the most unanimous chorus of 'buy' recommendations
-- and the four that they hated the most -- those that garnered the most
'sell' ratings," adding that "Over seven years, on average the most-hated
stocks have outperformed the most-loved." We're not surprised.
The Dogs of the Dow have had a fairly stellar
track record over the years and as pointed out by Gerald & Dr. Marvin
Appel in Systems & Forecasts (http://www.signalalert.com/),
the ten-highest yielding and typically unloved Dow stocks at year's end
have gone on to post 9.1% total return gains in the next calendar year
with lower drawdowns and a better risk adjusted basis than the categories
of Large Cap Value, Russell 1000 Value, the S&P 500 and the entire
Dow. As of the end of 2004, the Dogs of the Dow yielded 3.82% but
as of this writing, yields were 4.01%, not too shabby given the remainder
of the Dow yielded only a smidge above 1.5%.
We have compared Wall Street's analyst ratings for
the Dogs of the Dow versus the top 10 constituents of the QQQQs.
Bear in mind, in our last issue, we showed how insiders were still overwhelmingly
selling the ten popular Nasdaq issues even as analysts continued to rack
up "Buys" to the tune of 61.1% of all recommendations offered. On
the other hand, only 48.8% of all recommendations of the Dogs were "Buys."
Similarly, Nasdaq's heavy hitters only struck out with "Sells" 4.4% of
the time versus 6.7% for the Dogs. Although insiders seem to be
selling everywhere we look, the Sale/Buy ratio for the Dogs came in at
a relatively okay 4.25 to 1 against 11.63 to 1 for Nasdaq's top ten.
Frankly, we're perplexed that the Cube Qs still retain the mantle of leadership in terms of coverage, transactional velocity and excitement. After all, other than the sizzle, what do you get? Overpriced merchandise should never be this attractive. Also, using Dorfman’s criteria, we’d probably be a lot better off with the group analysts disdain. It's not an epiphany, just a hunch; we suspect the Dogs will outperform the Cube Qs on a total return basis over the remainder of the year. We'll definitely check back at the end of the year and just for entertainment value, we’ll see how the two groups stand a couple of times along the way.
As stock prices fell 2.5% in January, total margin debt unexpectedly rose another $2.5 billion to $220.1 billion, nominally higher than the $218.3 billion registered in November 1999, only three months and ten days before the greatest stock market bubble of all time finally burst. Why unexpected? Margin debt has risen in only 16 of 57 prior months (28%) that stock prices have declined.
It is not likely that the record level of nearly $300
billion in margin debt established in March 2000 will be seen for a very
long time to come. The Fed had already recognized the possibility
of a mania as early as December 1996 and was considering methods to deal
with the bubble right up to the end. Although they sat and watched
last time around, dealing with the fallout meant forcibly pulling short
rates to negative, which only accentuated the public’s desire to take
on debt. Given that the current level of margin debt versus
total stock market capitalization is actually higher than it was in November
1999, we believe the Fed is monitoring the situation far more closely
now. If margin debt continues to rise as it did in the last few
months before the bubble burst, the Fed will have a compelling reason
to finally increase margin requirements. We would expect Wall St.
to fight such a move tooth-and-nail.
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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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