Forum Archive Index - July 2001

["Geoff Brown" <brownz@xtra.co.nz>]

Hi Mike
I know that I am a dumb cockie but  you seem to state facts as truths......
would you believe me if I suggested that we are in the most inflationary
times in history and you would be quite happy to say sell goods and services
to the US and get paid by money with no backing ..an electronic flash .Would
you believe me if I showed you evidence that the gold price has been
manipulated by groups associated with the US.I feel I am trying to teach the
teacher but I will attempt to do that over time because I believe in what I
have posted.    Argument for the bear case:

Following the 1982 low the Dow embarked on super-bull cycle, gaining 1400%
in the eighteen years to early 2000.
When bubbles break and stocks enter a bear market, it goes through three
stages. We have gone through the "Denial" stage and have probably just
finished the "Concern" stage. The market usually takes a breath in between
stages and we could easily be in that period now. The last phase of the bear
market is by far the most painful---it is the "Fear and Capitulation" stage.
That is when stocks are sold indiscriminately and panic sets in as stocks
drop to levels that make them very compelling purchases.

NASDAQ long term trend line stands at around 1750.The Nasdaq PE ratio was
under 20 at both the 1987 and 1990 market troughs and was at 30 times as
late as 1995. The index would have to decline by another 50% just to get
down to a still richly valued 60 times earnings, a level it exceeded for
only a brief period in the 25 years between 1971 and 1996.

Bear markets are typically punctuated by counter-trend rallies that are
generally mistaken for major reversals.January was evidence of this.
Overconfident from years of soaring markets, investors have yet to come to
grips with the new realities. Investors do not recognize that we are in a
recession until the unemployment rate rises significantly.

An astounding 61% of investment advisors are now bullish according to the
Investor's Intelligence Survey. At prior market troughs the percentage of
bullish advisors was always under 30%, and often under 20%.Another key
aspect to consider in evaluating the potential depth and duration of this
bear market is the nature of the massive bubble that preceded it. The two
major equity market bubbles of the twentieth century were the US super bull
market that ended in 1929 and the Japanese super bull that peaked in 1989.
In both cases an easy monetary policy that saw interest rates fall to near
zero simply did not work in rescuing either the market or the economy. When
financial bubbles burst they are extremely resistant to being repaired by an
injection of liquidity.The pace of growth is slowing down rapidly in Europe
and Latin America while Japan is heading into yet another recession with
their short-term interest rates already at one-quarter of one percent and
their budget already running huge deficits. Not since 1974 has the world
endured a simultaneous economic slowdown of these proportions.

CEO business confidence is the lowest since 1980.

The Small Business Confidence Index is the lowest since 1993.

The Purchasing Manager's Index (PMI) for manufacturing is the lowest since
1991.

The PMI News Orders Index is at its lowest since 1991.

The year-to-year change in the leading indicators is the lowest since 1991.

Operating rates as a percent of capacity is the lowest since 1992.

Medium and heavy truck sales are the lowest in more than 13 years.

The year-to-year change in non-tech industrial production is the lowest
since 1991.

The year-to-year change in temp employment is the lowest since 1991.

Initial unemployment claims are running at the highest rate since 1991.

Employee layoff announcements are the highest since at least 1992.

The consumer savings rate is negative and at the lowest level ever.

The year-to-year increase in the CPI for energy is higher than at the time
of the Gulf War, and is the highest since the energy shortages in 1981.

The percentage of banks tightening their standards rose to 59.7%, the highes
t since the survey started in the second quarter of 1990, when the economy
was in recession.

Wall Street assumed in January, for no particular reason that the worst was
now over and that business would pick up from this point.There is not a
shred of evidence to support this view and an awful lot of evidence to
indicate that both technology and the economy are in a serious downturn with
no reversal in sight.

Ciena's report was similar to the proverbial needle in the haystack, and
will most probably be followed by a continuing barrage of negative reports
and earnings downgrades. In our view the sudden jump in Nasdaq over the past
two days is based on false hope, and will not last.

The current stock market rules are relatively easy to remember. Bad economic
news is good market news since that causes rates to go down. But when bad
economic news reduces the revenues and earnings of individual companies,
that is bad market news. However, if that is the last of the bad news, that
is good market news. If interest rates really go down a lot, that is good
market news because it leads to a second half recovery, but in order for
that to happen, the economy has to get even weaker, and that could break
business and consumer confidence, resulting in a major market downturn. Is
this clear so far?
This is the ridiculous but serious situation that Alan Greenspan was facing
as he gave his Senate testimony. Instead of being consoled that the economy
was not as terrible as some perceived, investors became concerned that what
Greenspan was really telling them was that he would not bring interest rates
down as fast or as much as they desired.
According to First Call, since January 1 tech earnings estimates for the
first quarter have dropped from plus 4% to minus 14%; for the second quarter
they declined from plus 2% to minus 13%; and for the third quarter from plus
11% to minus 2%. When the stubborn optimism of investors finally gives way,
the markets will likely cave in, and there seems to be little the Fed can do
to prevent it.

It is the good news that has been priced into the market in the form of
continuing Fed ease and a coming income tax cut, while future earnings
disappointments are being written off as inconsequential. Investor's
intelligence has reported the highest percentage of bulls among investment
advisors in 14 years. The ISI Institutional Equity Manager Survey shows the
highest position in equities since the survey began over seven years ago.
Equity mutual fund cash as a percentage of assets is in the low end of a
24-year range. The price-to-earnings ratios of the major averages, which are
also indicative of investor sentiment, remain at extremely high historical
levels.




Since 1998, truly unprecedented money and credit expansion have been only
briefly interrupted by respites of moderation. Yet, for a system hopelessly
addicted to extreme monetary excess, moderation simply doesn't work. This
fact is a best-kept secret and something Wall Street and the Fed would
prefer not to contemplate. Why do the GSE's and Wall Street create credit so
aggressively (the force behind exploding money supply)? Because it is
precisely the requirement for sustaining the Great Credit Bubble.

The major issue today is not NASDAQ, an inventory overhang, or the unfolding
severe capital equipment slowdown.

The fact of the matter is that the technology bubble is but one very
critical component of the Great U.S. Credit Bubble. The key yet
unappreciated point to recognize today is that years of reckless credit
excess have created unprecedented leverage throughout the U.S. credit system
and extremely weak debt structures.




"The boom can last only as long as the credit expansion progresses at an
ever-accelerated pace. The boom comes to an end as soon as additional
quantities of fiduciary media are no longer thrown upon the loan market. But
it could not last forever even if inflation and credit expansion were to go
on endlessly. It would then encounter the barriers which prevent the
boundless expansion of circulation credit. It would lead to the crack-up
boom and the breakdown of the whole monetary system." Ludwig von Mises,
Human Action, 1949

This is the most overvalued market in history except for last year's peak.
Nasdaq still sells for over 100 time earnings and the S&P 500 for 25 times.
This is not only far above any PE ratios seen at prior bear market bottoms,
but is also far higher than at any prior bull market top. Second, we never
even came close to the degree of pessimism that existed prior to the start
of past new bull markets, or raised the sideline cash that is a normal
prerequisite of a new round of stock market expansion.

But hey,keep buying your rubbish stocks......










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