most astonishing development of the last six years is not the scandals
that have surfaced and not even the routine acceptance of same by investors.
The passing of prior generations and the "sizzle" of new technology have
conspired to convince investors and speculators that the environment has
changed for the better, for the MUCH better and permanently so. However,
the market remains an arena where human frailties can cause the grossest
judgments to occur. It is not only the emotional response of the
mania that has brought us closer to a fall out from which we will not easily
recover - the circumstances are driven as well by mechanical factors such
as the U.S. stock market have never experienced before. When I was
invited to speak before the I.F.T.A., I immediately knew there was only
one direction in which my presentation could go, the metamorphosis
of the American stock market.
of sentiment has changed significantly.
of investment has changed dramatically.
I was 8 years old when I heard about the Roaring
Twenties for the first time. My Dad was a stockbroker in 1929 and
he told me all the stories of the great rise in prices and the crash that
followed. In 1930, the stock market suffered a staggering 51% loss
in capitalization, an amount equal to 80% of the gross national product.
And it changed the way Americans viewed the stock
market for decades to come. Risk became a four letter word.
My Dad did the only thing that made any sense. He placed all of his
stock certificates in a safe deposit vault at National City Bank and forgot
Finally, in 1968, after receiving letters from
asset tracers for at least 20 years, he caved in. After 39 years,
he had to know what he had forgotten about. That is real fear.
That is capitulation. My Father's experience was certainly not unique.
An entire generation lost respect for the market and avoided risk.
So, what was in the vault? I spent weeks
at the Brooklyn Business Library, looking up corporate names in huge dusty
Commerce Clearinghouse volumes. He had plenty of wallpaper to be
sure, like Lawyer's Title & Guarantee, which went from 400 to zero.
He had certificates of every kind and description, spin-offs, takeovers
and even some real survivors. One set of certificates read Chase
National Bank on the front and on the back, read, "Amerex Corp. attached
share-for-share." If anyone thinks they have heard this story before,
they have. It appeared in Nelson Demille's book Gold Coast
a few years ago [ED NOTE: PAGE 42]. The
story is true and originated with my Dad's experience. We finally
found out why the asset tracers were trying to hunt him down for a 50%
fee. Amerex was the forerunner of American Express and the company
had no idea how to get in touch with him for the dividends that had accrued.
So, he didn't have to pay the asset tracers a dime, but the happy ending
came almost four decades later. The long term had bailed him out,
but my father was then 69 years old.
Over the 39 years he waited, the Dow gained an
average of 2.6% per year. Dividends averaged 4.7%, a rather large
difference from todayís stock market.
[ED NOTE: THE S&P 500
YIELD 1.7%, THE DOW INDUSTRIALS YIELD 2.2%]
Fast forward to the year 2003. Despite a
veritable stock market mania, the subsequent collapse of Nasdaq and the
eradication of more than 40% of total stock market capitalization, capitulation
in the classic sense of the word was nowhere to be found. Newsletter
writers never really gave up on the market. For a period of 190 weeks after
the Dow peaked in January 2000, bears outnumbered bulls only nine times.
Strategists continued to allocate 70% to stocks just as if a bull market
had been in effect all along. And although mutual funds did briefly
experience net outflows, they were tame by comparison to the fallout of
both the 1972 and 1987 tops.
The nature of sentiment has changed significantly.
Fear and capitulation are not what they used to be. After the crash
in 1987, mutual fund outflows reached 11% of total fund assets. But
we had a far worse and just as dramatic price collapse for Nasdaq after
March 2000 and even a 50% collapse for the S&P 500, yet mutual outflows
only reached 3.6% of total assets. In 2001, the loss in market cap
was more than 31% of our GDP. Yet there were only three weeks in
the entire year where bearish newsletter writers proliferated over bulls,
strategists maintained high allocations to stocks and mutual fund inflows
remained positive in seven months and were positive for the year.
Looking at chart #1, one can easily see the impact
of wealth losses after the 1929 crash - sufficient to generate the kind
of fear and loathing experienced by my father and countless others like
him. Incredibly, even with losses of the same magnitude following
the collapse of Nasdaq in the current bubble, there was anything but fear
and loathing for stocks.
On July 30, 2001, at Dow 10,400, strategist's stock
allocations were at 71%. Fourteen months later at Dow 8200, only two weeks
from the bottom - strategists STILL had 70% allocations to stocks.
A pattern has developed - a resistance to fear
- much of which is based on purely mechanical factors - and as an effect
- there is an artificial imbalance in demand. This is the linchpin
of a metamorphosis of the financial markets - and the metamorphosis does
not augur well for the future of the U.S. stock market, the world markets,
or for Technical Analysis.
Stocks have become the biggest business in the
world. NOTHING is bigger. When prices peaked in 2000, an average
day witnessed the transaction of a little over $27 billion in Gross Domestic
Product. On that same day, nearly $90 billion was transacted in stocks.
For every dollar transacted in goods and services, $3.28 was transacted
in stocks, two-and-a-half times what occurred at the peak in 1929.
On one day in February 2001, Cisco Systems alone traded an amount nearly
one-third of the value of all goods and services transacted that day.
Some critics have complained that the much lower commission structures
in place and even better research techniques account for the increase in
trading. Nonsense. There's only one way a mania develops.
It is driven by persistently higher prices. And in a mania, prices
are easily influenced by mechanical forces and frauds. Sentiment
eventually becomes a one way street.
Technical Analysis is all about interpreting sentiment.
Sentiment drives price and it drives volume. Sentiment is the ultimate
distillation of supply and demand. BUT sentiment has been evolved
significantly by the mania.
At a recent family reunion, I spoke with Michael,
an engaging 23-year-old who had become a day trader. He was trading
upwards of a million shares per day of Intel. Just Intel. He
had recently traded three million shares in one day! By his own admission,
he knows nothing about the economy, nor Intel, and simply hopes to ram
through a penny of profit at a time, in and out every few seconds of every
trading day. Sentiment for Michael is simply the spur of the moment.
Are there several hundreds just like him? Think about the math.
300 day traders like Michael? A million shares per day? 300
million shares? So just what portion of daily volume has to do with
"real" investing? What portion has to do with players who use no
analysis at all, just a gut feel of a one-stock market, a penny at a time,
ten seconds at a time? Can we possibly determine what portion of
transactional volume actually depends upon corporate prospects any more?
Does sentiment drive Michael to buy or sell?
Or is it more like the flow of electrons that nudges him one way or the
other? How easy is it for Michael to be swayed in one direction or
another? In his book, the Psychology of the Stock Market, David Dreman
describes an experiment that demonstrates the "pressures of compliance."
Each subject was asked to pick which of three lines on a card was the same
size as a single line on a second card. Dreman wrote, "The lines
were of such disparate lengths that there should have been no difficulty
in immediately choosing the one of the proper length." Of eight people
who participated in each group, seven were confederates and one an actual
subject. As the experiment progressed, the confederates would go
from indicating the correct line to calling out wrong answers. The
pressures of group opinion increased the rate of error tenfold as subjects
simply "went along" and also responded incorrectly, whether they thought
the group was right or wrong!
The natural and human response is to remain a part
of the community. Exclusion from the community equates to being "wrong."
Thus, "compliance" is a strong element in our behavior.
Did the same "pressure of compliance" coerce Michael
and other day traders into doubling Intel's price from last fall?
J. Doyne Farmer, of the Santa Fe Institute in New
Mexico, has presented a theoretical model that assumes traders place orders
at random rather than on the basis of calculation and observation of economic
trends. The model nevertheless reproduces the statistical features
and characteristics of financial markets. Modern economics recognizes
that traders are not fully informed or rational. How do they cope
with imperfect information? Their behavior is interdependent and
sometimes irrational and leads to herding, otherwise known as the "pressures
Have the same "pressures of compliance" coerced
active managers to lower cash-to-assets ratios of mutual funds? Emphatically,
Much of the "pressures of compliance" that are
visible today have to do with what has become widely known as the "Greenspan
Put." Can we deny that the Federal Reserve comprehends just how important
the stock market has become? Can anyone fight against a central bank
policy that is designed to promote stocks as an asset class? Of course,
this is another controversial subject and none of us would like to admit
that the market can be manipulated in any way, shape or form.....but it
can....and it is.
Consider Tuesday, October 20, 1987. The stock
market had crashed the day before. Specialists opened the Dow 11.5%
higher on Tuesday morning. The gains faded rapidly as self preservation
took over and specialists sold. There is no stronger emotion in the
marketplace than self preservation. The downside accelerated and
fears rose that another crash was possible. Prices fell below Monday's
close of 1738 until 12:30 pm, when the Dow printed as low as 1708.
All options had ceased trading. All futures other than the XMI Major
Market Index had ceased trading. At the time, I remember wondering
how the illiquid XMI contract could remain open while the vastly more liquid
S&P pit needed to be closed. Then quite suddenly, the XMI exploded.
Within five minutes, the December futures contract rose from a deep discount
to a huge premium, a swing equal to 24% of the Dow's value. The arbitrage
window opened and program traders roared in to take advantage by buying
stocks. The crash had ended. The mysterious rally was triggered
by only 808 contracts. Eyewitness reports later claimed that the
ring was completely deserted as liquidity dried up, then ONE MAN entered
the pit and bid for everything he could buy at 12:30 pm. The man
just as suddenly disappeared. The person that saved the market has
never stepped forward to claim our thanks, let alone his 15 minutes of
fame, and has never been identified! Perhaps the Plunge Protection
Team really does exist? Certainly, the Federal Reserve has already
told us on several occasions that they possess the tools to adjust the
markets to their particular reality and that they will use these tools
Remember, stocks are the biggest business there
is. If stocks suffer, the economy suffers. And so, we have
the Greenspan "Put." And with it, we have an environment that promotes
optimism and denigrates pessimism. This environment is necessarily
accompanied by the "pressures of compliance" on all levels, from day traders
to newsletter writers to strategists and to the public.
The nature of sentiment is metamorphosing.
How does this impact TA? If Technical Analysis
requires interpreting sentiment, how does TA measure the "pressures of
compliance" or the influence of mechanical factors? Could it be that
TA might not work or might work less effectively in such an environment?
Could there actually be threats to our craft?
Yes, there might.
The most emphatic threat to TA is indexing, an
idea that belongs on the garbage heap along with portfolio insurance.
It's called "passive investing," and is part of modern portfolio theory.
MPT works on the principle that the stock market is efficient because all
possible information is already priced into stocks. Hence, one can
only beat the market by taking greater-than-market risks. Thus, the
best course of action is to simply BUY THE ENTIRE MARKET. Ironically,
the Nobel Prize winners who gave us the theory now feel the S&P 500
is no longer the perfect benchmark. What is disturbing is how their
sentiments have simply shifted to wider benchmarks, such as the Wilshire
5000. What is even more disturbing is how many have now been taken
in by a theory that cannot possibly work, to the point that better than
one in every ten dollars invested in the U.S. is now indexed to one or
another benchmark - a trend that is now in place worldwide.
What is the problem with indexing? Suppose
there were only three stocks to invest in. Letís further suppose
company A's valuation is twice B's and is triple C's. Since the index
is capitalization weighted, a brand new index fund formed with $6 million
would need to buy $3 million worth of stock A, $2 million worth of stock
B and only $1 million worth of stock C. And as new money rolls in,
half must go into stock A, one-third into stock B and one-sixth into stock
C PERFORCE. Over time, stock A's prospects might deteriorate and
stock C's prospects might improve and the two capitalizations might tend
to converge - BUT at any particular point in time, large must necessarily
equate to even larger. With each new index fund that is formed and
with each new dollar invested in indexing, stock A MUST receive more sponsorship
in the form of an artificial demand, a demand that exists only because
of the company's present capitalization relative to other constituents
and having nothing at all to do with the company's prospects.
Furthermore, as indexing grows, so does the tendency
of indexing to beat active money management. Ironically, the reason
for this development is that money is blindly thrown at the largest stocks
regardless of prospects. In essence, active money management is punished
for making rational and intelligent choices.
The fund manager who believes a conservative route
is best cannot afford his own opinion. Index funds are always fully
invested. If prices are rising, any fund with cash reserves must
choose better performing stocks or must under perform the index.
If an active manager carries a cash reserve equal to 5% of assets and the
market rises 15%, he will lose on average, 75 basis points to an index
fund. 75 basis points of under performance can mean oneís job.
This is the principal reason why the cash-to-assets ratio has declined
significantly since indexing began taking a huge hold on investors' assets.
This is why the cash-to-assets ratio continued to decline even as prices
were declining into the March 2003 low.
It was one thing when the cash ratio bottomed at
the end of 1999 and the beginning of 2000 as prices soared. You could
see some sentiment at work then. It was quite another thing when
the ratio bottomed in February 2003, coincident with the bottom in price.
Since when is a major market bottom associated with a low point in the
level of cash reserves?! Since indexing, when active managers realize
they cannot compete otherwise. Sentiment has been corrupted by the
Incredibly, as the index performs even better versus
active managers because more money is thrown at it, still MORE money is
thrown at it. Indexing has become a cycle of moronic simplicity.
The technology of economics has given the world the perfect answer to the
decision making process. There is now no need for decisions and therefore,
there is no human error. After the crash in 1987, Professor Joseph
Wiezenbaum of MIT concluded that "People tend to rely on technology to
escape the burden of acting as independent agent." We saw this conclusion
operating in real life as portfolio insurance "protected" investor assets
in 1987. The result, as technology did the thinking instead of human
beings, was a stock market crash. The Professor's conclusion has
surfaced again as fiduciaries have elected to separate themselves from
the decision making process. They have wrongly accepted the easy
route, that the market cannot be beaten and thus, believe they have escaped
the burden of being wrong. However, when "average" market performance
is championed, no one wins.
As the mania shifted into high gear and Nasdaq
was touted as the "stock market for the next hundred years," perhaps S&P
feared for their franchise and felt compelled to compete by including stocks
like JDS Uniphase and Yahoo. Ironic, isn't it? Although indexing
supposedly represents passive management, in reality, the index IS actively
managed by a "selection committee." Although JDSU had "as reported"
losses in each of the four prior quarters, the stock was included in the
index and an artificial demand for the shares was created. At its
peak valuation, JDSU was one of the largest companies in the country, worth
as much as $225 billion.
Selection criteria have far less to do with corporate
prospects than we would care to admit. In July 2002, the selection
committee announced the dumping of seven foreign issues in favor of seven
domestic companies in order to align the index as a pure US play.
The seven new constituents arrived with a collective 67.5 P/E and 0.26%
Amazingly, the impetus was that the move would
provide buying power for US stocks as the additions were a smaller total
market cap than those leaving. As explained by David Blitzer, the
chairman of S.& P.'s index committee, "This is a net buy. When
the dust settles, the index funds will buy a little bit more of the other
493 companies." However, the presumption of billions more invested
in the other S&P constituents necessarily meant billions more invested
with zero regard to corporate prospects.
The 30 largest stock losses after the bubble burst
amounted to $3.8 trillion in market cap, as the group fell more than 72%.
So much for the efficiency of the stock market and MPT. If the theory
were correct, such relative overvaluations could not have been possible
and declines of this magnitude could not have occurred.
Now that the focus is shifting towards wider benchmarks
such as the Russell 3000 and Wilshire 5000, the problem worsens since the
new proxies are also capitalization weighted. The same inefficiencies
are present! The top 25 stocks still account for an enormous share
of each index; 41% of the S&P, 35% of the Russell and 33% of the Wilshire.
If indexing continues to grow, more money will be thrown at stocks regardless
of their prospects, and more money will be thrown at the largest issues,
no matter how potentially overvalued. The efficient market hypothesis
is bunk. Information is nowhere nearly priced into stocks.
Enron at $70 and Worldcom at $60 were perfect proof.
And since the only way to beat indexing is to take
larger risks, this is precisely what you see happening today. This
is why Nasdaq is up 50% from the bottom. It's not corporate prospects
that drives the price of these stocks - it is the survival instincts of
the active managers who buy them! It is - in every single aspect
of what David Dreman wrote about - the "pressures of compliance."
And here's the punch line. Picture two markets.
One totally without indexing. Stocks trade based solely on their
prospects. Technicians gauge these prospects with their analysis
of sentiment, of supply and demand. Picture another market that is
totally indexed. No one buys on the basis of prospects. Stocks
are only bought in proportion to their capitalization. If sentiment
for company prospects is not an issue, how can one analyze supply and demand?
How can TA function in such an environment?
In scientific terms, we could call indexing ENTROPY.
Entropy is defined as the degradation of the matter and energy in the universe
to an ultimate state of inert uniformity. The more indexing is utilized,
the less meaning sentiment has in determining price. Eventually,
price has nothing to do with sentiment.
Another threat to TA is program trading.
Programs are defined as orders for the purchase or sale of at least 15
different stocks with a total value of $1 million or more. This includes
but is not limited to stock-index arbitrage.
In just a few years, programs have expanded from
a small fraction to more than 41% of all volume on the New York Exchange.
Because of the "pressures of compliance," the chances are increasingly
likely that programs take place because of an indexer or because of an
active manager competing with indexing. Additionally, some institutions
are now selling the benefits of packaged programs to hedge funds that are
buying puts and calls and immediately taking the other side of the trades
by selling and buying stocks. One colleague who has been offered
such programs has privately confided to me, "None of this trading has anything
to do with where the market is going or what the economy is doing."
It is no wonder that frauds have been perpetrated upon investors.
The individual investor is simply disappearing as a factor in the stock
market and has become an all too easy mark. This is an environment
where sentiment can lose its meaning entirely.
EXTRAPOLATING THE FUTURE
The U. S. stock market has metamorphosed into something
quite grotesque. Since stocks have become such an important business
and are so essential to the survival of our economy, the Federal Reserve
must endeavor to keep the wealth status quo and must accommodate investors.
Investors know this and are emboldened to take risks. Thus, the nature
of sentiment has changed so markedly that one's best course would be to
impart a positive bias to whatever techniques they use. The situation
is exacerbated by active money managers in their quest to compete with
index funds. In order to compete, they buy riskier issues.
In order to compete, cash reserves are spent down and represent an additional
source of demand having not to do with sentiment, but survival. Ironic
and amazing - the strongest emotion is self preservation. Look how
that has changed - from selling stock to establish high cash reserves to
buying more stock to accomplish lower cash reserves. Sentiments are
How does TA cope with the threats posed by corrupted
sentiments? By evolving, along with the mania.
My own preference is to use "extrapolation."
Extrapolation techniques can be predictive because one extrapolates possible
trends to construct an image of the future - this is otherwise known as
"inductive logic." My last charts today will provide an example of
an extrapolation technique.
First, let's examine a chart of 20-year annualized
returns for the Dow Industrials.
The picture you see is ex-dividends. The
Dow has returned only 4.7% annualized over all rolling 20-year periods.
This is even with the benefit of survival bias. Over the life of
this chart, the Dow's selection committee has excised the garbage and added
new superstars on a total of 29 separate occasions. Yet remove the
mania years of 1995 to the present day and 20-year annualized returns fall
to only 4%. Even if you keep the manic returns in, over the 86 years
shown, 20-year annualized returns have been under 4% fully half the time.
Question. I need a show of hands. How
many of you believe we are in a bull market? How many of you believe
we are in a cyclical bull market within a secular bear market? How
many of you believe the correct answer is neither - that we are STILL immersed
in the greatest stock market mania of all time?
[ED NOTE: THE MAJORITY OF THE
AUDIENCE "VOTED" FOR A BULL MARKET,
AND ALMOST THE REMAINDER OF THE
AUDIENCE VOTED FOR THE CYCLICAL BULL WITHIN THE SECULAR BEAR.
ONLY ONE PERSON IN THE AUDIENCE
OF PERHAPS 100 VOTED FOR A MANIA STILL IN PROGRESS.]
If you're in the bull market group, you are certainly
not looking for the Dow to trade below the October 2002 lows. If
you're in the secular bear group, you're not completely sure. Like
the period from 1966 to 1982, you might think we have already suffered
the equivalent of the 1974 low and stocks will simply remain in a wide
trading range until the next secular bull market arrives.
However, if you believe we're still in a mania,
then you're dead certain that the answer is that the Dow will eventually
take out the October 2002 lows.
Using extrapolation techniques, we can see why.
First, let's use Professor Jeremy Siegel's bullish
views as a guide. Siegel claims that stocks should have a real return
of 4%-5%, translating into nominal returns of 7%-9% a year. Using
Siegel's mid-point of 8%, our next chart takes us to Dow 13,685 without
suffering even one week on the downside. The absolute low point for
20-year annualized returns falls in July 2007 at 7.95%. Spectacular,
if you ask me.
Over the life of the chart, a 7.95% or better return
for rolling 20-year periods is in view less than 26% of the time.
Can we fairly extrapolate returns that are still so unlikely from a historical
perspective? Worse yet, if you consider the 77-year history before
June 1994, the last time 20-year annualized returns traded under 7.95%,
returns above 7.95% occurred only 12% of the time. The mania has
done an astonishing job of convincing participants that returns will be
All I have done in our final chart is to plug in
a 7196 number for the Dow for each week over the next five years - this
is one point below the Dow's print low achieved on October 10, 2002.
As you can easily see, the low point in the next five years is achieved
in July 2007 at a 20-year annualized return of 5.01% - this is still well
above the historical average.
The argument for using extrapolation techniques;
although stocks do not always follow a predictable course for 20-year returns
over the short term, they must offer some predictive value over the long
term since there are competing asset classes. For most of us, the
choice is either stocks or bonds, although commodities and real estate
are clearly alternatives. Stocks cannot possibly continue to earn
returns approaching 8%. If they did, there would eventually be no
reason for anyone with a long term horizon to ever buy bonds yielding less.
But if no one is going to buy corporate bonds, corporations would have
to sell more stock. And if corporations issued more stock, that would
water down everyone else's holding, lowering overall returns. And
what about governments? In order to compete - governments would have
to offer much higher coupons and yields. Once they were able to compete,
investors would then have the choice to buy bonds instead of stocks, and
thus lower the returns for stocks. One way or another, the two asset
classes must co-exist or one must die. To co-exist, they must compete.
The odds appear to indicate that Dow 7196 or much
worse is somewhere in our future. Using extrapolation techniques
like this might clear the way for asset allocators to make changes they
might not otherwise consider.
The stock market has metamorphosed before our eyes.
We live in a unique period, driven by the biggest industry the world has
ever known. An industry that is now driven by many purely mechanical
factors. These factors have aided the corruption of sentiment, not
only allowing a mania to emerge but maintaining the mania. The Fed
has also impacted sentiment by maintaining the "Greenspan Put."
If price is a function of supply and demand, and
the supply/demand equation has been impacted by mechanical factors and
corrupted sentiment, what is the future for TA, which attempts to predict
prices via the analysis of sentiment?
Technical Analysis MUST evolve. Extrapolation
techniques are one methodology that should be worth examining. These
techniques should work - with imaginative perspectives - on all time frames.
Although the above speech was prepared for an audience
of technical analysts, the primary objective was to provide proof that
the metamorphosis of the U.S. stock market threatens all participants,
not just the methodology of technical analysts. This writer feels
the U.S. capital markets have changed so significantly that inertia alone
may be able to provide a continuation to the mania. Of course, prices
cannot rise forever and March 2000 was the prefect example of how rapidly
and emphatically excesses can be unwound. Regarding the point that
the momentum or inertia of the market can continue, witness how overt and
excessive bullishness has yet to end the rally.
On June 18, 2003, the Investor's Intelligence reading
for newsletter writers showed 60.2% bulls and only 16.1% bears, a ratio
of 3.7 bulls for every bear and the most one-sided survey since shortly
before the Dow peaked in 1987. We do not have to remind you of the
consequences that suddenly appeared in October 1987.
Contrarian stances typically work and they work
But in a mania, we have learned that just about
anything can (and will) happen. Although bulls and bears have both
consistently remained at levels that in normal times would be a clarion
call for a significant price correction, nothing of the sort has occurred.
In fact, as of this writing the Dow has tacked on another 8.3% and the
Nasdaq Composite has gained an additional 21.6%!
NOTE: THE TWO LINES ARE CORRECTLY
LABELED. WHEN BULLS ARE AS HIGH AS THE TOP "BEARISH" LINE AND/OR
BEARS ARE AS LOW AS THE BOTTOM "BEARISH" LINE, SENTIMENT IS DECIDEDLY NEGATIVE.
We believe this is the first time in stock market
history that such a one-sided sentiment reading has not catalyzed a price
correction. And without any doubt, this is also the longest period
in stock market history that bullish sentiment has prevailed to this degree.
Just how bullish are investors and speculators?
Probably a LOT more bullish than they were at the
top in March 2000. How do we come up with that assumption?
In the last seven months, net inflows into stock
mutual funds have totaled over $134 billion, even while the stock market
has suffered some of its worst scandals, including the managements of the
very mutual fund companies to which investors were sending their money!
Of course, some of the inflows are being funneled
in via corporate and government pension managers who believe there is no
place else they can invest. Despite valuations that they must recognize
are historically "off the charts," they are nevertheless, content to buy
stocks at quite literally any price. In the case of indexed dollars,
the money is thrown at many stocks regardless of their prospects, regardless
of how insanely valued the company's shares may be and of course, this
only makes the shares even more expensive and thus, larger components requiring
even more index dollars! This is a cycle of unbelievable stupidity
and atrocious judgment is being shown by any and all managers who are tied
to any cap weighted index.
Lest we forget about speculators, they have gone
completely off the deep end and are generating activity as never before,
well beyond even the manic peak in March 2000. Bear in mind that
Nasdaq's Bulletin Board is comprised of the riskiest issues, an arena where
listing requirements are nearly non-existent; in the words found on the
Information page of the OTCBB site, "There are no minimum
quantitative standards which must be met by an issuer for its securities
to be quoted on the OTCBB (bold italics ours)." NO minimum quantitative
standards yet trading is off the wall in a blowoff that is likely to be
twice the level achieved in the manic year of 2000!
Finally, we must admit that we are most heavily
influenced by persons whose wisdom and experience far outweighs our own.
Warren Buffett, 73, Richard Russell, 79, Seth Glickenhaus, 88, and Sir
John Templeton, 92, have all made their fortunes by buying stock.
They have completely sworn off the current environment. In the cases
of Buffett and Glickenhaus, they cannot find anything worthy of purchase.
In the case of Russell, he foresees a massive bear market still ahead.
In the case of Sir John Templeton, he sees the market as "broken," [CLICK
HERE FOR ARTICLE] an assessment we clearly agree with, and
perhaps an even better appellation than "metamorphosis" for a market that
is no longer recognizable from the one we grew up with.
Could they all be so
Dow 8500 /// SPX 900
/// Nasdaq Composite 1540-1630
Our upside targets
have all been exceeded
(by 5.1% for the Dow,
5.3% for the SPX and 11.7% for Nasdaq)
Long Term Targets
for the bear market - odds now favor October 2004:
Dow 6400 /// SPX 680
/// Nasdaq 1000-1100
OF THE ENTIRE WEBSITE ARE COPYRIGHT 2003 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, December 2, 2003
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