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MORNING COMMENTS WEEK OF 3/06/00-3/10/00

 

3/10/00

 10,000 reclaimed, 5,000 attained, and not a frown in the house…and with a legion of new converts eagerly throwing their cash into the ring, and a squadron of brokerage analysts with dollar signs in their vapid eyes cheering the new arrivals on, why should there be a frown in the house?

NASDAQ 5,000 is barely dry in the record books, and with a seemingly endless sea of prosperity stretching as far as the eye can see, thoughts have already turned to NASDAQ 6,000. Technology is the king of the hill, the Internet is the ticket to riches in the New Age, and Biotech is the miracle cure for all that ails—nothing can stop the stocks of the New Economy from powering higher in these days of wine and roses. So why worry, just sit back and enjoy the bliss that only comes with a ride on the momentum-powered rocket to the land of endless stock market gains….

…or so the prevailing wisdom goes.

In the short term, following the prevailing wisdom might not be such a bad idea, but we would do so with both feet firmly planted in the exit door, taking profits in anything that resembles a tech, .com, B2B, or biotech stock, all the while striving to make it out the exit door before the annual seasonal slowdown in inflows turns the scene at the door into a panic driven stampede—and we would recommend worrying the entire time because, despite the graces of the Goldilocks economy, there is plenty to worry about.

…worry because there is no worry.

Yesterday’s rally was accompanied by a 0.32 reading on the CBOE equity put/call ratio, and a 0.88 reading on the index put/call ratio—numbers that from a contrarian viewpoint hint more of impending top than new leg up.

The complete lack of worry among "investors" in the Internet (particularly B2B) and biotech sectors is in itself a reason to hit the panic button. While there is money to be made in both sectors, we have more than a sneaking suspicion that in the end the lion’s share of the riches to be made from many of the profitless companies in these industries will be made by two groups of people: the insiders who made their fortunes by cashing in their chips, and the bankruptcy lawyers who are salivating in the wings awaiting the moment when many companies will be forced to face an age-old fact of life, "companies that never turn a dime of profit go bust".

…worry because NASDAQ hit 5000.

The NASDAQ Composite’s record close over the 5000 mark, and this morning’s brief sojourn over the 5100 level, drew cheers from investors turned believers, analysts, and financial commentators, but our fear of heights prevented us from cheering. Specifically, it was the distance between the NASDAQ’s current levels and its 200-day moving average that caused our Acrophobia to kick in. The index’s 200-day moving average is at 3260—the index itself sits 57% above that level—a difference in altitude that can only be described as frighteningly overextended.

When stocks rise parabolicly and attain such heights of enthusiasm driven overextension, the next step is more times than not a rapid decline, with investors who failed to heed the warning bells getting slapped in the face by the onrushing 200-day moving average. On the rare occasions when indexes have stretched so far above their long term average, a period has ensued when everyone, and not just investors, has gotten slapped.

…worry because despite a 2-day runup in the Dow Industrials, all arrows in the Trend is Your Friend guidebook remain red.

In short, the divergence between the performance (not to mention the trend direction) of the three major Dow averages (Industrials, Transports, and Utilities) and the NASDAQ Composite remains a cause for concern—a concern that continues to scream "Blow Off Top"

…worry because rising stock prices feed the wealth effect.

The Fed’s battle to tame the demon of unrelenting demand growth remains in effect, and will remain in effect until demand eases and the bubbling underground river of economic imbalances turns from raging river to dry gully.

…worry because the Fed’s efforts to date have been for naught.

Yesterday’s twin releases of initial unemployment claims and wholesale inventories continued to show that labor markets remain tight and demand remains on the rise.

The 4-week moving average of initial jobless claims dipped to its lowest level in 26 years, and the seasonally adjusted insured unemployment rate remained at 1.7%. The numbers indicate that the demand for workers remains strong and the pool of qualified labor remains small—in short, the numbers only tighten the Fed’s grip on the rate hike trigger.

Wholesale inventories rose at a stronger than expected 0.7%, with inventories in the interest rate sensitive lumber and construction materials sectors rising 2.4%. Wholesale sales of lumber and construction materials rose 3.0%, and interest sensitive sales of hardware, plumbing, and heating equipment climbed 2.1%. In short, interest rate sectors remain strong despite the Fed’s moves to date, and the stronger than expected rise in wholesale inventories is pointing towards another quarter of strong economic growth with no sign of a slowdown in sight—a fact that will not go unnoticed by the Fed.

…worry because the basic rules of investing haven’t changed.

…worry because a growing pool of inexperienced speculators believe the rules have changed.

…worry because this time it’s not different.

2/24/00

Bloodied but unbowed, temporarily waylaid by doubts but eternally faithful, the New Era’s sheep returned to their meadow of dreams, lured back to the tried and true performers of the day by that contagious little bug affectionately known as Selective Hearing.

The second journey to the Valley of the Fed Hawks proved to be a repeat of the last go round, the venerable Fed leader’s testimony a regurgitation of the prior trip’s sermon, but to a market that desperately wants to believe that fairy tales do come true, the hawkish words fell on deaf ears—the gathered crowd instead gravitating towards the one iota of good cheer that Greenspan tossed its way: the Fed will not use its iron rate hike hand to swat down surging stock prices.

Greenspan’s words, " ... we don't look at stock prices and say they're rising, we have to raise interest rates…’’ sparked a rally as members of the "20% returns are an inalienable fact of life" club, secure in their belief that the Fed had just given the green light to NASDAQ 5000 by March, eagerly piled into the increasingly narrow band of crowd pleasing technology, Internet, and biotech stocks that have led the NASDAQ Composite to uncharted territory.

In one respect, those afflicted by the oft times fatal malady of selective hearing are right: neither a further expansion of the Internet and biotech bubbles nor the sight of NASDAQ 6000 by Springtime would in themselves cause the Fed to embark on a scorch and burn mission of euphoria eradication.

Although there is no magic level at which the Fed members will suddenly jump up and shout in unison, "Stocks are up! Time to Hike Rates", it is perhaps best to remember that the Fed will continue to actively fight to tame the byproduct of rising stock prices: the wealth effect and the increased demand that accompanies it. In short, a sudden rise to Dow 15000 will not spur the Fed to act, but the trickle down effects of the wealth effect that are sure to accompany the surge in stock prices will cause the Fed to hike rates in an effort to slow demand growth.

Although the NASDAQ’s post Humphrey-Hawkins record setting rally produced a noticeable calm on the previously jitter infested streets of our little village on the Hudson, we were not among those who felt a sense of relief –we were too busy quaking in our boots at the sight of Goldilocks (the NASDAQ Composite’s record high) and the Three Bears (the Dow Industrials, Transports, and as of yesterday, the Utilities) arriving in town simultaneously. Our jitters only grew as we watched in awe as the NYSE Advance/Decline line tumbled to a new low, and winners edged out advancers by a narrow margin of 21-19 on the NASDAQ despite the record point gain by the index.

While divergences do not signal an immediate end to the days of wine and roses, the recent acceleration in the growth of the chasm between the market’s haves and have-nots does bear watching. As we have previously opined, strong inflows will likely keep the narrow band of crowd-pleasing stocks aloft until mid-April, but the deadly trio of an inhospitable Fed, growing divergences, and the annual post-April 15th slowdown in money flowing into the market could prove to be a deadly combination for many of the high flying stocks that are currently riding on the crest of a bubble of epic proportions.

 

2/23/00

 

2/22/00

 

2/21/00

 NO COMMENTARY PUBLISHED

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Last modified: April 02, 2001

Published By Tulips and Bears LLC