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ACTIVITY STILL AT MANIC
We're not sure how much longer we will be able
to run our Dollar Trading Volume charts. Although Nasdaq again publishes
the data it temporarily witheld a couple of years ago, the data is never
easy to find. Our prior estimates via whatever data we could get
a handle on were never off by more than 2% but estimating is an onerous
task. Worse yet, there is also no way for us to get an easy handle
on everything that is traded - such as Exchange Traded Funds - and
there can be no question that the trading of individual issues has become
much less important than before. We have gravitated to a derivative
world and we must address whether our focus on DTV bears any resemblance
to reality unless we include options, futures, and even single stock futures.
Derivatives have grown to an extraordinary degree. Case in point:
the fantastically popular QQQQs, which represent the Nasdaq Top 100 issues.
This trust is comprised of 535.8 million shares and is so actively traded
that a complete turnover is registered approximately every 5.67 days.
In other words, the entire trust is traded over 44-fold during the course
of the year. There are other very popular ETFs that trade significant
volumes as well. Although none trade as prolifically as the QQQQs,
they nevertheless represent speculative activity that has only been registered
in very recent years.
We now estimate that the trading in the QQQQ
comprises roughly 3.5% of all dollars traded
in the U.S. markets.
We believe the data presented below is accurate
through the month of June. Total Dollar Trading Volume is apparently
still raging at levels that exceed any year except the blowff peak established
in 2000. DTV for the NYSE is up 17.1% over last year and is 23% ahead
of the clip maintained in 2000. Nasdaq's DTV is ahead 16.6% of the
pace of 2004 and is an amazing 44.6% ahead of 2003. Although Nasdaq's
DTV still lags over 50% behind the pace of 2000, bear in mind that prices
remain far, far lower than the manic peak. Even when the Composite
Index briefly touched 2200 a few days ago (at the beginning of August),
the index was still 56.4% off the peak!
Total DTV is estimated at $28.321 trillion versus
GDP (through June) of $12.183 trillion and total market capitalization
of $14.733 trillion. This places DTV at 232.5% of GDP and at 192.2%
of market cap. These measures are the second and third highest ever
recorded respectively and clearly illustrate the the mania for stocks is
ongoing and in fact, never really ended at all.
It is extremely difficult to conceive that
trading activity can increase from here,
meaning that a peak in optimism is likely
THIRD HIGHEST TRADING VELOCITY
OF ALL TIME
Our second chart measures total DTV versus total
market capitalization. The extended pink bar for 2000 shows where
the measure stood at the very peak in prices in March. By comparison,
the bar for 1929 simply shows the final data for the year and we can only
assume that at the prior manic peak, the bar for 1929 would have been somewhat
higher. It is clear, however, that even if the peak DTV levels for
2000 were not quite as emphatic, they were at the very least, still indicative
of an enormous stock market mania and quite possibly, the worst mania of
all time. While the several years since the 2000 top for both indicators
pictured here are well below their manic peak, these levels of activity
continue to represent an intensity that belies any possibility of normalcy.
Compare the fall off in activity after 1929 and the fall off today.
The former mania definitively ended in 1929.
The latter mania is still very
For more than a year, we have
reprinted several articles originally published in Crosscurrents for this
report. Presenting all new material on a public site only
punishes subscribers for their loyalty. Meanwhile, looking back at
our previous Mania reports, we are pleased that our desire to serve the
public has been fulfilled with very powerful commentary and unique perspectives,
despite presentation weeks or months after the original publication.
After re-reading the material we published since the May 2005 mania report,
we realized that most of our July 18th issue was perfect for this report.
Charts and commentary have been updated.
TOO MANY BULLS, TOO FEW
We recently posted a new commentary to the website,
claiming our impatience and dissatisfaction with the intense concentration
of media exposure about a housing bubble to the complete exclusion of any
coverage of a continuing stock market mania. But are stocks still
in a mania? Given the collapse from the lunatic peak of March 2000
and a subsequent recovery that is still only halfway back to the price
highs after two plus years of robust rally, one might be excused for believing
that the game over screen appeared long ago. However, the vast majority
still appear to be playing the game quite intently, even if on a slightly
more modest scale than before. Public participation remains above
the 50% level and institutions still cannot get enough of equities, taking
cash reserves to levels that imply nothing can possibly go wrong.
when the overwhelming assumption is that nothing can possibly go wrong,
something will often go horribly wrong. Our most important
indicator of mania-like activity is Dollar Trading Volume versus Gross
domestic Product, which now stands second only to the incredible manic
peak of 2000 and is far higher than any other year in history [see first
chart]. Yet all we hear about is a housing bubble? As we said
in our July 6th commentary, give us a break! There remain a huge
number of indications that the biggest stock market bubble of all time
is still very much in progress.
For one, the Investors Intelligence survey of investment
advisors is now well into the silly season. As of last week, bulls
ran as high as 57.3%. As of the end of June, bears plunged as low
as 19.1% and the bull/bear ratio soared to 2.88 from a low only half that
level just eight weeks earlier. Bulls were at the highest they have
been since March 9th, when the Dow was 6.2% higher. Bears were at
their lowest since December 29th when the Dow was 5.1% higher. The
ratio was the highest it has been since January 5th when the Dow was 4.7%
higher. Dating back more than two-and-a-half years, when advisors
were this emphatic, it generally has not been a great time to buy stocks.
Indeed, ten weeks later, the Dow was higher 19 of 30 times but the average
gain worked out to a mere 1%, clearly not as robust as advisor sentiment
would have indicated. Over the subsequent 13 weeks, the Dow was higher
only 13 of 30 times and average gains came in at a measly 0.7%.
Then again, measuring from the beginning of our
chart is somewhat misleading since the huge move towards optimism after
the March 2003 bottom almost certainly had to result in sharply higher
prices. Such a rapid expansion in bullishness is typically a sign
that prices are already going up. However, if we measure from
2004 on, just before the Dow initially peaked above 10,700, a different
picture is visible, likely one that is far more applicable to the current
environment. As our chart illustrates, even though the gap between
bulls and bears has repeatedly grown to significant levels, the Dow is
pretty much where it was before. The effect of the initial expansion
in bullish sentiment has already been very much played out. Subsequent
contractions to modestly complacent levels result in modest corrections
while new expansions in bullishness are now insufficient to take prices
to new highs.
We arbitrarily chose a bull-to-bear ratio of 2.5
to 1 (weekly basis) to indicate a sentiment extreme and again looked at
results out 13 weeks. Over the last 65 weeks, measured from 2004
through 13 weeks ago, there were 29 instances in which the bull/bear ratio
surged as high as 2.5 to 1. Prices were lower 72.4% of the
time averaging a 1.4% loss and on four occasions, the 13-week loss was
in excess of 5.4%. As always, we would caution that bullish
extremes in advisory sentiment do not always result in an immediate correction.
However, the current ratio is a clear warning of excessive optimism.
Bulls have outnumbered bears
for 145 weeks,
more evidence of a peak in
The logical expectation is
that a major top is close by, if not already in hand.
ED NOTE: AS THIS UPDATE WAS
BEING COMPLETED, THE BULL/BEAR RATIO WAS REPORTED AT 3.06 ON AUGUST 10th,
THE HIGHEST RATIO SINCE DECEMBER 29, 2004 AT DOW 10,829.
IF NOT A BUBBLE, WHAT IS
The last time we checked in on the OTC Bulletin
Board was back on March 28th. Given the modest advance in the major
averages, it seems appropriate to reflect upon how the minor leaguers are
doing. They're doing quite well, thank you. Speculation as
measured by Bulletin Board share volume is still on a tear, averaging more
than 1.8 billion shares per day, more than the totals registered on Nasdaq's
popular market! The pace of trading has gained 2.2% on 2004's frenetic
activity and given the levels achieved during 2000, it seems certain that
the stock market mania is still very much in force.
Although Bulletin Board dollar trading volume and
total transactions are below their peak levels, they are sufficiently high
to presume that participants have gone off the deep end. Daily transactions
are running at virtually the same rate as 1999, a year that ended less
than three months from the biggest blowoff ever. Bear in mind that
investors cannot readily obtain information for most Bulletin Board stocks,
other than price and volume. Research, even on the internet, is not
easy to come by and these issues are typically regarded as the most speculative
of all. In a few recent cases such as Globalinks Corp., market action
inferred the likelihood that there were more shares available to trade
than actually existed! Does this sound like a vibrant arena for capitalism
to flourish or a market where one must tread with constant suspicion?
And yet, daily share volume is now four times as high now as it was in
Talk about a bubble!
ANOTHER PORTRAIT OF OPTIMISM
As the first half of the year closed out, the Investment
Company Institute reported how mutual funds fared for the month of May.
Inflows remained modestly positive at $11.2 billion, up 30% from April
but still down 26% from March. Through the first five months of the
year, inflows totaled $67.1 billion, down 38.2% from the same period a
year earlier. Including the recent report for the month of June,
inflows are down 38.4% for the first half of the year. Interestingly,
in the 18 months since the end of 2003, inflows have totaled a huge $251.8
billion and have not only bought no price improvement for the Dow but the
inflows of a quarter of a trillion dollars have resulted in a 2% loss through
June. Fancy that. A quarter of a trillion bucks buys nothing.
And the media are only worried about housing prices?!
The bigger news is that the cash-to-assets ratio
is now down to 4%, the lowest reading since the peak of the mania, when
the ratio plunged to 4% in March 2000. The June level is tied for
the lowest over the life of our chart and the 12-month moving average of
the mutual fund cash-to-assets ratio is now down to another record low
of 4.27%. There is no doubt that indexing in all its many forms,
especially Exchange Traded Funds, have contributed to this phenomenon as
active money managers spend literally every penny coming in (and more)
since interest on cash generally cannot compete with a rising stock market.
As well, absolute cash levels are anything but
robust. At the end of February 2000, just days before the manic peak,
total mutual fund cash was $186.7 billion. By October, cash levels
had reached $256.7 billion, still insufficient to prevent much lower prices.
But by the arrival of 2002, mutuals began spending down cash rapidly to
support prices. By the end of February 2003, just days before an
important bottom, cash had dwindled to only $109.1 billion. Absolute
cash levels are now $178.8 billion, way too close to the levels reported
in February and March of 2000 for investors to take comfort.
It is now estimated that three-quarters of all
inflows are going into ETFs, a telling factor in our analysis that we remain
in the midst of a mania. Prices for individual stock issues are no
longer relevant—it is only the various and sundry indexes that count.
In such an environment, there cannot be any assumptions that constituent
issues are fairly valued, thus there can be no assumptions that the index
itself is fairly valued. The stock market has become a game where
indexing and other games totally govern prices, rather than a capital market
based upon studied perceptions of value. None of this rates even
a few lines in the evening press, which is now fully devoted to nothing
other than the housing bubble.
How incredible is that?!
WHAT IS FAIR VALUE?
Are studied perceptions of value at all possible
when Program Trading encompasses as much as two-thirds of all trading on
the New York Stock Exchange?
Over the last couple of months, programs have surged
to 62.1% of all NYSE volume, as the “rebalancing” of several major indexes
took place, including the Russell and S&P. In these maneuvers,
certain stocks must be sold and other purchased to more effectively represent
the actual index. During the week of June 24th, a daily average of
1.34 billion shares were traded on the NYSE to achieve the desired mix,
than three-quarters of all shares traded! Not one of these programmed
shares were traded on the basis of value. What the share might be
worth according to the company’s prospects was simply not a part of the
“decision” making process. Such trading might not be a concern if
limited to a very small fraction of overall share volume, but with programs
now accounting for close to 60% of all NYSE volume, it is clear that whatever
transactions are catalyzed by judicious analysis of company prospects,
far more are not subject to analytical scrutiny.
We do not believe stocks are fairly valued, simply
because most are traded without regard to value. The current environment
is unique in history and is worsening. Our chart below clearly illustrates
that the small investor is rapidly disappearing as a factor in determining
how much stocks are worth. Instead, indexing and mechanical procedures
have overwhelmed the arena. The NYSE is quite happy with the results,
since the business generated by programs is clearly counterbalancing the
losses from traditional trading.
The trend in program trading
is rising rapidly.
The trend in non-program trading
is falling rapidly.
Does “algorithmic” trading really add anything
to the efficiency of prices? According to Mike Santoli’s piece in
Barron’s over a year ago, “The use of statistical formulas [determines]
which stocks to trade, when to trade them, and at what price. Big securities
firms are making aggressive use of this approach and sharing their systems
with institutional clients.” It’s all about generating business and
commissions. But the more commissions dwindle, the more volume must
be generated. Add in “statistical” and “index” arbitrage and the
massive trading of exchange traded funds and it is clear that only volume
counts, not investors and not prices.
So what about the bubble in
TERM PRICE CORRECTIONS
The common wisdom is that
stocks always go up in the long term, but unfortunately, they do not.
The long term "guarantee" is a myth. How so? Via the erosive
impact of inflation. As our final chart clearly shows, there have
been at least two extremely lengthy periods in the last six decades when
inflation ate away at returns and investors would have been better off
just stuffing their lucre in the mattress. Consider the poor soul
who bought stock reasonably cheap in 1950. By 1966, stocks had achieved
an extraordinary peak. However, if our hapless investor had hung
on for the "long term," his fortune would have sunk as inflation rose.
By the bear market bottom of 1982, 32-1/2 years later, he would have nothing
to show for his patience. Then consider the unlucky wretch who bought
at the top in 1966. It took 29-2/3 years before he saw sunlight!
Inflation plays nasty tricks. If you do not agree with how inflation
can ravage purchasing power, compare how much you paid for your very first
car and for your most recent auto.
Inflation has been relatively
tame for quite awhile. There has not been a year-over-year increase
of 4% since 1991 and the increase from May of last year to May of this
year is only 2.8%. However, inflation still has a nasty way of cutting
the purchasing power of dollars, whether they are in your pocket or in
the stock market. Take another look at our chart. The circled
area shows very strong evidence that the countertrend rally from the October
2002 bottom has completely played itself out. We can now see a lower
high and a lower low in the constant price of the Dow. Although a
back of the hand computation shows the Dow off only 11% or so from the
all-time high, when you adjust for inflation, it's more like a 23% hit.
Equally horrific is that the adjustment means investors have gone nowhere
since February 1998, when the Dow first hit the level it trades at today!
That's seven years plus and no gain, in a low inflationary environment.
Just think of how investors may be punished if and when inflation really
begins to pick up. While we're at it, the aforementioned scenario
is the likely method by which any housing bubble will undergo a price correction.
over a prolonged period.
and time should do the damage,
YEAR RETURNS SHOULD DECLINE DRAMATICALLY
Twice in the last year, we
showed our 20-year return chart and for the sake of diversification, this
time we present the 10-year return chart (ex-dividends). Please note
that returns are still well above the historical average of 5.25%.
This statistic has of course, expanded throughout the mania and will continue
to do so until ten-year returns drop to below 5.25%. Bear in mind
that until the beginning of 1999, ten-year returns were only 4.76% on average.
returns have been below 5% more often than not.
In fact, until 1999, a hefty
55.5% of all ten-year periods averaged a return of less than 5%.
Although returns have forged as high as nearly 17% in the mania, there
appears to be a natural limitation on what stocks are capable of over the
course of a decade. Of course! If long term returns
consistently remained as solid as 15% or more, no one would ever invest
in any other type of asset. But since the assumption of lower demand
for other assets would drive the prices of those assets consistently down,
they would necessarily at some point, be far more attractive that stocks
and stocks would then lose their appeal. Why else would our chart
show huge moves in both directions over the course of time?
Clearly, ten-year returns
hit a brick wall during two earlier secular bull markets and given the
subsequent slides towards zero, there is no reason to assume a repeat condition
will not occur. Thus, we will make two assumptions for the sake of
our argument; 1) that ten-year returns must eventually fall at least to
the historical average of 5.25%, and 2) that ten-year returns can very
likely fall to zero at some point. The latter assumption is justified
by the fact that ten-year returns have fallen to zero or worse fully 17%
of the time.
We can extrapolate any number
of price or time targets for our assumptions, but for the sake of simplicity,
we'll use only the Dow's recent level of approximately 10,700.
Thus if prices remain
at their current levels, a ten-year 5.25% return
would be achieved
by December 2006.
A ten-year 0% return
would be achieved by late April 2009.
are relatively best case scenarios,
since we are assuming
no real decline in prices.
favor the secular bear market has further to run.
Our high side
targets for 2005 have been modestly adjusted. Although the Dow's
10962 target has not yet been breached, the SPX target of 1229 and the
Nasdaq target of 2199 have both been exceeded by very nominal amounts (1.3%
and 0.9% respectively, print basis highs). We believe these recent
highs represent the highs for the remainder of calendar 2005.
Our low targets
have been changed. The odds for reaching the targets formerly set
have diminished and the targets are no longer realistic or practical.
We still believe a 20% decline is possible from the highs but given that
particular parameter and the relative outperformance of the SPX and Nasdaq,
we have adjusted all our low side targets upwards.
targets with better odds are modestly higher at Dow 9000, SPX 1050, Nasdaq
We also believe
prices are capable of rallying as much as 17% off a September/October '05
bottom into the spring or summer of 2006, to be followed by the worst decline
since 2000, one that may very well mark the secular bear market price low.
If our 2005
low side targets are not achieved this fall or if the recent highs are
exceeded before the end of the year, we will likely have to adjust our
long term targets for 2006 upwards as well. That said, our work still
points to an eventual break below the 2002 lows at some point in the next
two years, at the very latest in 2007.
Targets for 2005 - high odds that the tops are in:
Dow 10962 /// SPX
1245 /// Nasdaq Composite 2219
Targets for 2005 - diminished odds
Dow 8770 /// SPX 1000
/// Nasdaq Composite 1775
Term Targets for ultimate secular bear market low - most likely to occur
in autumn 2006
Dow 6400 /// SPX 680
/// Nasdaq 1000-1100
OF THE ENTIRE WEBSITE ARE COPYRIGHT 2005 ALAN M. NEWMAN
I hope you have enjoyed your visit and please return
again. If you know anyone who might be interested in seeing what
we have to offer, we'd be happy to have them visit as well!
Alan M. Newman, August 10, 2005
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All information on this website is
prepared from data obtained from sources believed reliable, but not guaranteed
by us, and is not considered to be all inclusive. Any stocks, sectors
or indexes mentioned on this page are not to be construed as buy, sell,
hold or short recommendations. This report is for informational and
entertainment purposes only. Samex Capital, Alan M. Newman and or
a member of Mr. Newman’s family may be long or short the securities
or related options or other derivative securities mentioned in this report.
Our perspectives are subject to change without notice. We assume
no responsibility or liability for the information contained in this report.
No investment or trading advice whatsoever is implied by our commentary,
coverage or charts.