|When I commenced
this series of articles back in January of 1999, I was positive that the
country was immersed in the greatest stock market mania of all time.
My father had been a broker at the very top in 1929 and I had heard all
the stories about the madness and the sad déneumont. Clearly,
what was underway in the U.S. in 1999 was no different. But in fact,
it was. The formerly greatest stock market mania in 1929 was unwound
rapidly with the Great Depression as stocks, measured by the Dow Jones
Industrials, sank 89% in less than four years. In 1929, stocks were
a big business, but they were outweighed in importance by America's burgeoning
influence in manufacturing. Steel, autos and textiles eventually
conspired to lift the economy back to a more normal level and after years
of pain, stocks stabilized and another bull market emerged. It was
another generation until the next super bull market began but the depression
had ended. Today is another story entirely. America is no longer
the world's leader in manufacturing and is now even exporting service jobs
as rapidly as possible. The one saving grace; the one category in
which the U.S. is still the undisputed leader and vaunted expert is the
manufacture of financial products and the marketing and advertising of
those products as indispensable.
This has enabled
the survival of the economy.
It has also
enabled Act II of the greatest stock market mania of all time.
If America can do anything
better than any other country, it is to promote financial products of every
kind and description, but in particular, stocks. We will save our
analysis of the derivative arena for another issue, and for now are fully
committed to illustrating the far reaching nature of the current stock
market mania, which is actually an extension of the bubble that began to
build slowly in 1995 - until it really began to take off in the late nineties.
There is only one way to look at the first picture we present below.
Stocks are the biggest
business there is. Nothing is bigger.
Even at the very lowest point
since the enormous 2000 peak in prices, Dollar Trading Volume never traded
below $1.70 for each dollar generated in the purchase or sale of goods
and services in the domestic economy. And the rally since March has
now enabled DTV to surge to $1.92, very close to where the indicator was
at the end of 1999. In retrospect, there is not a human being alive
who would argue against the point that the country was immersed in a veritable
mania at the end of 1999. Can anyone argue that point now?
In fact, the bubble did not burst. It only took a time out.
The greatest stock
market mania of all time is STILL in progress.
In what we term "normal"
times - those years that are not part of a mania - the stock market tends
to trade about 40% of total market capitalization during the course of
a year. Folks decide prices are attractive, they buy. Others
decide price are too high, they sell. Obviously, since bull markets
proliferate time wise over bear markets, we can infer that the high range
for "normal" probably extends far past the average of 40%. Since
activity rises above 100% of market cap in so few years, this particular
assumption may be as good as any other for determining "abnormal" or excessive.
Note that after the 1929 crash, DTV vs. market cap contracted rapidly below
100% and remained there until, of all years, 1987, which was highlighted
by an enormous crash. For those of you who may not remember the Crash
of '87, the Dow Industrials fell from 2722 in August to as low as 1738
in October, a 36.1% slide of which 23.1% was accomplished in only one day!
What marks the current environment as a continuation of the mania is the
steady increase in trading since the initial drop in 2001.
Despite a 50% drop
in the S&P 500 and a 76% decline in Nasdaq,
stocks still trade
with the exact same velocity seen in manias.
has simply been followed by Act II.
Since we first published our Chart
of the Year privately for our subscribers, it has seen exposure in Alan
Abelson's column in Barron's, in Kate
Welling's newsletter welling@weeden,
the Elliott Wave Financial Forecast,
edited by Steve Hochberg and Pete Kendall, Germany's Der
Spekulant, Jim & Mary Puplava's Financial
Sense and possibly other places we just haven't caught up with yet.
Below, what subscribers saw first, reprinted from the September 22nd issue
of Longboat Global Advisors Crosscurrents:
Sometimes a chart comes down the pike that is just
so astounding, you have to sit up and stare at it for a few moments in
order to grasp just how meaningful it is. Typically, we cite such
a picture as our “Chart of the Year” and feature it on page one.
Today is no exception. What you see here today is a picture that
is clearly worth a thousand words. Trouble is, we wrote those words
back in late 1999 and early 2000, when we penned extensively about the
greatest stock market mania of all time. Déjà Vu?
Before delving further, we hasten to explain that the data for the picture
before you comes from NASD firms, not the New York Stock Exchange.
Still, it is patently obvious that the mania has taken a great leap forward
- towards an abyss of intolerable risk. The rise in margin has been
so emphatic that the NASD was compelled to issue an official "warning"
about the dangers of margin on Monday. Mary Schapiro, NASD
vice chairman and president of regulatory policy and oversight, cited a
"precipitous increase" in margin use and warned of the "consequences that
can result." The chart speaks for itself, illustrating an explosion
in risk taking as stock prices - ironically and particularly Nasdaq's more
risky issues - improved into the summer. Given that August and September
are not yet pictured, we can only guess what level of risks speculators
are currently suffering. We are somewhat mollified that total margin
debt including the NYSE is not yet at a new record, but then again, without
the benefit of results from August & September, we are only making
an assumption that might conceivably be wrong - heaven forfend! Given
that margin debt is exploding at the same time that mutual funds are spending
their cash reserves to one of their lowest levels ever, it would appear
that risks could conceivably be as high now as they were in March of 2000.
There can be no doubt that the greatest stock market mania of all time
is still very much in progress
One of the most emphatic reasons why we believe
the mania is ongoing and that we are simply in Act II, is illustrated by
absolute and relative cash levels of mutual funds pictured below right.
Even the fund manager who believes stocks are ludicrously overvalued cannot
afford his own opinion. Index funds - by definition - are always
fully invested in the index and index funds now account for more than 10%
of all stock assets. If prices are rising, any fund with cash reserves
must choose better performing stocks or perforce, must under perform the
index. For instance, if a fund carries a cash reserve equal to 5%
of assets and the market rises 15%, the fund will lose on average, 75 basis
points to an index fund. In this business, 75 basis points of under
performance is a disaster. This is clearly the principal reason why
the cash-to-assets ratio has declined significantly since indexing began
taking a huge hold on investor’s assets. The is clearly the principal
reason 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 ratio of cash-to-assets
bottomed at the end of 1999 and the beginning of 2000 as prices soared.
It was quite another thing when the ratio of cash-to-assets bottomed in
February 2003, coincident with a major market bottom. Since when
is a major stock market bottom associated with a low point in the level
of cash reserves? Since indexing, when active managers realize they
cannot compete otherwise. Incredibly, as the index performs even
better versus active management because more money is thrown at it, still
MORE money is thrown at it. Indexing becomes a cycle of moronic simplicity.
The impact, clearly visible in our picture - is lower cash reserves on
both an absolute and relative basis, illustrating rising risk for those
who are long the markets.
Thus, we have a two edged sword; not only is margin
exploding for the most speculative issues but the one area that can support
the markets in a price correction - cash reserves - is rapidly dwindling.
Prices may be lower than they were in March
2000 but risks are just as high.
Until we saw the data on the NASD
website for margin, the picture at left below was destined to our Chart
of the Year. This article, as well as some others you see on this
site, was published first in our newsletter, Longboat Global Advisors Crosscurrents.
If you haven't seen the newsletter, you should. If you are not a
you will probably not find a better way to spend 46 cents a day.
Every once in a while, we tally where insiders
stand in order to get a better grasp on where stock prices might be headed.
The rationale is easy - if insiders are gobbling up their own shares or
are loathe to sell, it would seem a fair bet that business - and perhaps
even prices - are about to pick up. On the other hand, if insiders
are unloading their shares in droves, it would appear to be a decent bet
that things are not going as well as stock prices imply they are.
Regarding the 30 Dow Jones Industrial issues, we have been through this
exercise a number of times in the last year-and-a-half and although we
have always seen sellers proliferate, the current tally is so far beyond
what we have ever seen before, that even a second glance does not do justice
to the numbers. This is phenomenal! According to the data from
the last six months provided by S&P Marketguide, insiders at the Dow
companies are falling all over themselves to ditch their own shares and
are doing so at the most rapid rate since we began tallying the numbers.
As our next chart shows, going back to February 2002, the ratio of sellers
to buyers ranged from 2.8 to 7.3. It's interesting to note that the
former high ratio occurred on June 10, 2002 when the Dow traded at 9645.
Exactly four months later, the tape showed the Dow trading as low as 7197,
a 25.4% collapse.
The Dow's seller/buyer ratio has now ballooned
implying a similar or worse dénoument
is now in store for stocks.
As our right-hand chart illustrates, buyers are
not particularly visible. Since we last ran the numbers back in mid-May,
buyers have contracted from 25 to 15 and sellers have expanded from 151
to 435! All too often, Microsoft has acted as an outlier, as sales
by Bill Gates and dozens of other Softee employees have tipped the scales.
This time around, Gates & group take second place to the very busy
folk at Walmart, who number 204 sellers. And oh yes, zero buyers.
We have also kept track of total shares bought and sold and are eager to
report that the overall shares sold/shares bought ratio peaked at 382-1
back in February 2002. It fell sharply to 92-1 in June ‘02 and 62-1
in August ‘02 before turning the corner. The ratio registered 105-1
in December ‘02, 171-1 back in May ‘03 and now once again, stands at a
We'll have to keep our bull hat on the shelf.
If they don't want their own shares, neither
In the quest for fairness, we must reveal that
the same exercise applied to the top ten Nasdaq issues produced nothing
quite as astounding as our Dow view, but Nasdaq stocks typically see sellers
proliferate in fair quantity. However, the seller/buyer ratio at
56.2-1 was almost double that of the Dow and the ratio of shares sold to
shares bought was a cool 1220-1, near the high end of the range for all
of our prior tallies.
They don’t want their own shares either.
Neither do we.
We would guess that Richard Grasso's crowning achievement
in his stewardship of the New York Stock Exchange was the rapid growth
of Program Trading. By mid-1995, when the mania had already gotten
underway, a good day for programs was 15% of total volume, which averaged
about 343 million shares at the time. Thus programs may have accounted
for 51.5 million shares on a good day. By 1997, programs were averaging
about 17% of volume and volume was averaging about 550 million share per
day, so programs accounted for perhaps 93.5 million shares per day.
By 2000, programs accounted for 224 million shares per day. By 2001,
they accounted for 342 million shares per day. By 2002, they accounted
for 469 million shares per day. Thus far in 2003, programs account
for about 546 million shares per day, about as much as total NYSE volume
ran in 1997! Growth in Program Trading has been exploding.
Our concern with programs is that we cannot pin any vestige of sentiment
on their implementation. Transactional velocity in the market that
is driven without sentiment or the benefit of the fundamental analysis
of individual companies - like indexing - destroys the pricing efficiency
of individual shares. As you can clearly see, Programs now comprise
41% of NYSE volume. Is the small investor important anymore?
Does the NYSE even care? And when will the public finally stand up
and ask for an accounting of how programs move the market and affect the
small investor? At 50% of total volume. 70%? 90%?
This is a major trend and it is clearly in
At some point, the involvement of the individual
investor will not matter.
The way we see it, in a mania,
what matters is the mania.
The public be damned.
We have shown our regression chart quite a few
times over the life of our Pictures of a Stock Market Mania, and we suggest
you take a quick look at the next-to-last chart at our archived
update presented back in July 2002 at Dow 8191. We postulated
an eventual return to Dow 7151 and indeed, the Industrials came within
46 points of the target, printing as low as 7197 on October 10, 2002.
However, the Dow has yet to trade below our regression line, a circumstance
we fully expect to occur at some point. Not only do we expect it
to occur, we expect that the Dow may remain UNDER the regression line for
an extended period. Given that the Industrials have been under the
5% regression line for nearly 80% of all period measured over the life
of the chart, we do not see our expectations as bearish. Our expectations
are for the norm! Although the regression line is now at 7587 and
rises a bit each day, there is no earthly reason why prices must remain
above the line. Given the extent of the super bull market and subsequent
mania, driving prices up 15-fold, even a rather large dip below the line
could be viewed as typical.
Once the Dow trades below the regression
line, it may remain there for years.
We were wrong on the extent of the rally from the
Almost immediately after the market made its bottom
on March 10, 2003, we had offered a high
side forecast for the remainder of the year on this site for Dow 9200-9600
/// SPX 955-999 /// Nasdaq Composite 1500-1600. Our subsequent adjustments
lowered our upside Dow target to Dow 9400, upped our upside target for
the SPX to 1015 and upped our upside target for Nasdaq to 1776. These
targets were not terribly far away, however, our big mistake was that we
stressed much higher odds for our low side forecasts and they missed the
mark by a mile. The low side forecast was Dow 6400 - SPX 680 - Nasdaq
1000-1100. This has been our worst forecasting error ever.
Act II of the greatest stock market mania
of all time.
Although subscribers to Longboat Global Advisors
Crosscurrents have seen "easier" intermediate targets in place for several
weeks, all of our long term analysis still points to the lower Dow 6400
- SPX 680 - Nasdaq 1000 as not only possible, but quite probable.
However, these targets will likely play out over a longer time frame than
we previously imagined - most likely in 2004.
The two strongest emotions in the market are fear
and greed. As action since March has conclusively proved, greed still
has the upper hand. But if we are correct in our analysis, Act II
is now ending and fear will once again - finally - come into vogue.
The curtain should soon fall
for Act II.
Targets for the remainder of 2003:
Dow 8500 /// SPX 900
/// Nasdaq Composite 1540-1630
Our upside targets
have all been exceeded
(by 2.8% for the Dow,
2.4% for the SPX and 7.5% for Nasdaq)
Long Term Targets
for the bear market - odds now favor 2004:
Dow 6400 /// SPX 680
/// Nasdaq 1000-1100
OF THE ENTIRE WEBSITE ARE COPYRIGHT 2003 ALAN M. NEWMAN
Alan M. Newman, October 2, 2003
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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,
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entertainment purposes only. Longboat Global Advisors, 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.
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