10/25/03
Is the party winding down? Or are the hosts merely running out of hors d’oeuvres and party favors?
Without any titillating new reasons to buy stocks this week, many investors called it a night and headed for the door. The Dow slumped 1.4% for the week to 9,582, while the Nasdaq dropped 2.4% to 1,866.
Miscellaneous chatter about our recovering economy continued to stream across the newswires all week. But these happy thoughts do not arouse the same sort of exuberance they once did. Perhaps the thrill is gone because the recovery is finally here, and it is not as comely as expected. Our Greenspan-sired recovery is a freakish changeling – not the hardy, all-American variety that we are used to seeing. We are happy it’s here, but boy is it ever ugly!
To be sure, the recovery is statistically pleasing…But something is not quite right with this thing. GDP boomed during the third quarter; and yet, many American workers are struggling to find a job…and many of America’s blue chip companies are producing noticeably un-boom-like earnings. Although most companies are meeting or exceeding Wall Street’s earnings forecasts, very few are registering any meaningful revenue growth. We cannot say what the appropriate valuation ought to be for the shares of companies whose sales are growing slowly, if at all. But it is probably not 30 times earnings.
The slumping stock market chased investors out of the U.S. dollar again last week, and into sanctuaries like gold and bonds. Both of these safe-haven assets enjoyed brisk demand, as the dollar fell to $1.1787 per euro from $1.165 per euro the prior Friday. Gold jumped $17 to $389.20 an ounce.
One week does not a trend-reversal make. But it’s worth noting that gold and gold stocks both outperformed the S&P 500 again last week. The Amex Gold Bugs Index soared nearly 9%. Gold stocks have been dazzling performers ever since the bond market peaked on June 13th. Since that date, the Gold Bugs Index has skyrocketed more than 50%, versus a meager 3% rise for the S&P 500.
Is Mr. Market trying to tell us something? Is he hinting that dollar bills and long-dated government bonds are dangerous items to own, and that the Fed’s reflation campaign is succeeding very nicely?
One thing is certain, foreign investors are enjoying very little of the bull market in U.S. stocks, unless they happen to be buying U.S. gold stocks. The Nasdaq has tacked on 4.5% since the end of August…for dollar-based investors. But euro-based investors have LOST 4.5% over the same time frame! When gold stocks dramatically outperform ordinary stocks and foreign investors suffer steep currency losses, it’s time to leave the party.
What’s more, complacency is in a bull market…which means that the stock market might not be. Stock investors are about as bullish as they have ever been, which – from a contrarian perspective — is a troubling omen for share prices.
As we noted in this column on Thursday, the most surprising aspect of this week’s stock market selloff was that it hadn’t happened earlier. "A ‘correction’ was long overdue, based on the most recent sentiment readings," we noted. "The nation’s investors have rarely exhibited such universal exuberance. Let’s take a quick tour of the latest investors sentiment readings. The four most widely followed gauges of investor sentiment — Bullish Consensus, AAII, Investor’s Intelligence and Marketvane — all registered extremes of bullish sentiment as of Tuesday evening, immediately before yesterday’s trouncing.
In fact, as professional sentiment-watcher Christopher Cadbury observes, all four of the gauges showed that greater than 57% of those surveyed are bullish. Never before have all for sentiment indicators produced bullish readings above 57% at the same time. The AAII survey, for example, which polls members of the American Association of Individual Investors, finds that 60.3% of its members are bullish, versus only 13.8% who are bearish. These sorts of extreme readings often presage the end of stock market rallies. At best, bullish sentiment does not reach an extreme when the buying is good."
Don’t despair; the buying may not be good when bullish sentiment reaches an extreme, but the selling is very, very good.
Regards,
Eric Fry,
The Daily Reckoning
October 25, 2003 — Paris, France
P.S. This week in THE DAILY RECKONING below. Be sure to check out Dan Denning’s BED spread indicator, in Thursday’s guest essay below… it may prove a useful tool in determining the market’s ‘opinion’ of US government debt while deficits skyrocket and the dollar weakens.
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THIS WEEK in THE DAILY RECKONING
TYRANNY OF THE HERE AND NOW (10/24/03)
by Bill Bonner
"…Many are the times we have railed against this injustice. That is the problem with democracy and popular markets, we have pointed out; only the living get to express an opinion. The poor corpses lay mute, still, and lifeless as a senator…"
CONVERGENCE UNDER THE BED SPREAD (10/23/03)
By Dan Denning
"…To get it, I established a spread between emerging market debt and U.S. government debt. If I’m right about the U.S. bond market losing its gold-standard reputation, the spread should converge over time. U.S. government bond yields will rise as the dollar falls. And emerging market debt yields will fall, as it becomes comparatively less risky than dollar-denominated debt…"
DECLINE OF THE OLD ORDER (10/22/03)
By William Rees-Mogg
"…Early in the 20th century there was much fashionable concern in Europe about the decline of the West. Many observers thought that the European lead in 19th century manufacturing would prove to have been a temporary advantage, that Europe was suffering from long-term social decadence, and that Asia would become the dominant continent by sheer weight of numbers…"
COMMODITIES V. THE DOW (10/21/03)
By John Myers
"…It is a similar story for the adjusted monetary base, or the super money that the Fed lends to banks, who in turn lend it out in multiples. The surplus cash key component of the adjusted monetary base is rising at an even more alarming pace than during the tough stagflation of the 1970s…"
MOGAMBO MONDAY (10/20/03
by The Mogambo Guru
"…And in case you are at a loss to understand why the sirens in the Mogambo Bunker are blaring, why the klaxons are sounding, why all the bells are ringing, or why I have maps showing emergency routes out of town, the answer is that price inflation is here…"
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"The Borders in Brighton Michigan," Pat Cross writes in to say, "can’t keep Financial Reckoning Day in stock. I personally know they had 2 copies, then ordered 6 more… then 12 more then 20 more! I still have not got mine. They sell out before I get home from work."
Mr. Bonner asked you Thursday if you wouldn’t mind being our "eyes and ears" on this project. He suggested sending an e-mail to let us know when and where you find the book in your local bookstore. The response has been incredible. We will write back, as soon as we can, but we wanted to give you a little sampling of the kind e-mails we’ve received:
"…read it cover to cover and enjoyed every minute…"
- Del Mar, California
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- Las Vegas, Nevada
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- Knoxville, Tennessee
"…Great book! I had a hard time putting it down, read it in three nights…"
- Atlanta, Georgia
Some readers have the experience of Dave Schmidt in Ames Iowa: "I went to the local Border’s at lunchtime today. I did not find your book displayed (Bill O’Reilly’s was), so I inquired at the information desk. The nice young lady checked her computer, then walked me all the way to the back corner of the store to the business section. After a brief search, she located a lone copy on the bottom shelf of the corner-most bookcase…"
If the latter is your experience, too, we have a small request: go immediately to the sales counter and give ‘em holy hell! For Pete’s sake, how are we going to start a revolution if bookstores are stuffin’ "a lone copy on the bottom shelf of the corner-most bookcase"?!?
Thanks again, for your eyes and ears. We also received e-mails from Singapore, Jakarta, New Zealand, South Africa, Australia, Austria, England… and far away Nova Scotia. (Never fear… the book will be available in the UK, Europe and points beyond starting this week!)
Regards and once again, THANK YOU!!!
Addison Wiggin,
The Daily Reckoning
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