Saturday Morning at Soccer Practice
by Martin Goldberg CMT. September 25, 2003
Saturday, I saw my dentist at my daughter's soccer practice. We got to discuss stocks. Last year, we talked mostly about sports. This year probably due to my dentist's perception of a new bull market, the conversation seems to be running toward the stock market. As a long-term investor, his large cap technology stocks were doing well again. He told me how he thought that there have been some signs that the market was going to go up. I asked him if he thought the market already had gone "up". He didn't. Seems his focus was still on the old days of NASDAQ 2,500, and higher. Compared to where it was, the market was still down. In his mind, it would go up soon. "There is an economic recovery coming," he said.
My dentist's thoughts are probably the same as many Americans. We hope that there is a true economic recovery. But the public seems blind to the fact that the stock market is already discounting a robust extended economic boom. They are exposed to the popular financial publications and TV shows which have a parade of smiling bullish analysts providing hot tips on this stock and that on the basis of "the economic recovery". Rarely in these lighthearted TV spots is the word valuation mentioned. The crowd is drinking it up too. You only have to look at the stock charts of E-Trade and Ameritrade stock to see how much of the potion is being distributed and consumed. There seems to be little public perception of the high risk of the current overvalued stock market.
My dentist seemed very confident and comfortable with his technology stocks again. There is a wealth of statistics that describe an excessively complacent market. Beyond the statistics, the mood on business radio and TV once again has a celebratory feel to it. Last night I actually saw a CNBC report on the defense sector with their missed attempt at comedy - using the song, "Raw Hide" as background music. There were smiling TV talking heads laughing and gushing over their own use of this music while talking about the weapons business. How disgraceful! How complacent.
I told my dentist that although the market had momentum, it was fundamentally overvalued. Warren Buffett wasn't finding value in stocks back in February 2003, when the indices were much lower than they are now. He dismissed Buffett quickly. "What did Buffett know in the '90s? Following his advice would have kept investors out of the bullish party of the late '90s, when stocks continued to go up in spite of high valuations!" He was right on that point.
I asked my dentist, how would he react if Alan Greenspan told him that the market was way overpriced? Would he believe Greenspan? When he heard the mention of Greenspan, his eyes lit up. Greenspan is the man that still commands the respect and confidence of most of the public. In the minds of many, it’s Greenspan who is responsible for the "economic recovery". "Yes", my dentist said. "Of course I would believe Greenspan. When did Greenspan say the market was overvalued"? I explained that on December 5, 1996, Alan Greenspan, made the "Irrational Exuberance" speech. He warned of the overvalued stock market and its move from sound investment to uncharted speculative territories. On that day the NASDAQ closed at 1,300, about 45 percent lower than where it is today. There have also been similar increases on top of "irrational exuberance" levels for the Dow and S&P indices. In 1996, the leading NASDAQ companies were actual growth companies. In the last 7 years, these companies have grown into mature companies, with predictable and modest long-term growth rates. Yet they are still valued as if they were agile and rapidly growing high-flyers. I am not sure, but I think my dentist was more concerned about the soccer practice than my explanation of current stock valuations.
The conversation moved on to how I was dealing with the current market. When I mentioned my positions in gold and silver stocks, my dentist looked at me in a puzzled manner; like may be I was nuts. (He gave me the same look in the spring of 2000.) I think it will be a long time before the public discovers precious metals and precious metals stocks. As I tried to explain to my dentist, there are both solid fundamental and technical cases for precious metals. (See) For this reason, I'm comfortable when my dentist gives me that puzzled look.
As I tried to explain to my dentist, we're early in the precious metals bull run. Its eventual end will likely be marked by long high parabolic charts, and lots of smiling bullish analysts finally suggesting precious metals as a "strong buy". In addition to the fundamental and technical reasons why precious metals have a potentially spectacular future, there are simpler reasons that are not explained by the technical charts or fundamental analysis. There is still a lot of "hot" speculative money that is only chasing performance. Even as the stock market dropped from March of 2000 to October 2002, there was always some hot sector for the speculative money to pile into. If it wasn't donuts, it was defense stocks, crafts retailers, or generic drugs. At some point the hot money that currently is highly involved in technology, biotechnology, and retail stocks is going to discover the momentum of precious metals. This will happen when the momentum in the current hot sectors is soon lost. When they pile in, it’s going to be very good for early buyers of the precious metals stocks. The relatively low floats and low market capitalization of these stocks will boost their stock performance well in excess of underlying fundamentals.
As we parted the soccer field with our daughters, my dentist reminded me to floss on a daily basis, and I reminded him to be careful, because there was a lot of risk in the current richly valued stock market. I doubt that either one of us will take the other's advice.
Here's An Important Long-Term Chart of the Dow
The long-term trend of the Dow Jones Industrial Average shows a clear and defined long-term downtrend beginning in the spring of 2001. It will be important if this trend-line is broken with gusto. If it happens, that would suggest a "new bull market". I'm skeptical, but that is my fundamental opinion based on P/E's, dividends, and economic prospects. A good chartist must leave his fundamental opinion on the sideline. So from a pure chartist's perspective, the trend line is alive and suggests a good exit point.
The NASDAQ market suffered the fourth "distribution" day in 14 trading days Wednesday. I mention this because the Investors Business Daily criterion for selling either has been met or is being approached. Remember, when you identify a hot guru, it pays to follow his advice.
Today the market didn't mount any dead cat bounce. In fact, the indices headed lower on healthy volume, selling off toward the close. The small caps led the way (down over 2.5%), followed by the NASDAQ speculative favorites (down 1.4%). The Dow (in spite of Eastman Kodak) and S&P 500 fared better, down 0.9 and 0.6% respectively. One day does not a market make, but it seems like the hot speculative money may be bailing out.
Anecdotal Evidence of Economic Recovery
Finally, last week, I asked readers to e-mail me with their anecdotes of their first hand experience of an economic recovery or precursors to an economic recovery. I was hoping that these anecdotes could supplement all of the positive economic data we are bombarded with on a daily basis. Although the daily wrapup receives as many as 10,000 "hits", I only received one (1) response. It referenced the highly publicized new jobs at Microsoft. Lets not be shy! Send me your e-mails.
Let's be careful out there!
© 2003 Martin Goldberg