Market Review: Just One More Ride

Stocks ‘rallied’ in the late hours Friday helping the Dow put a stop to its five-day losing streak. The Dow closed the day 118 points higher at 9774. The Nasdaq, up 36 points at 1818, also gave stock market bulls a thrill… if short-lived.

"Look at Friday’s market action," writes our friend John Mauldin, "Boom – out of nowhere the market rallied big in the last few minutes. There are still lots of true believers out there who dream that a world of 20% compound growth is possible.

"A lot of dreams were built in the last bubble. A lot of investors want ‘just one more ride’ and this time, they promise themselves, they will get out at the top. There is an entire industry of investment cheerleaders built around separating investors from their reason, their instincts and their money."

Don’t bank on the rally holding up, says Mauldin. In fact, he believes you can expect a decade – that’s right 10 more years – of this sideways muddling in stocks. (More in Flotsam & Jetsam below)…

Meanwhile, the big story of late isn’t stocks at all… it’s the HUI. As we noted Wednesday, "the gold bugs index has stretched its gains to 46% in just over 2 months. The ‘barbarous relic’ roared to within a whisker of the magic $300/oz mark [Wednesday], closing the day at a 2-year high. The index, which deliberately excludes the big bullion hedging concerns, is now up 148% in 13 months."

Is this the Greenspan ‘tidal wave’ of cash finally working it’s way into the resource market?

"The Fed dumped $20 billion of paper currency into circulation last year," says John Myers of Outstanding Investments, "cranking the total up to $540 billion… or twice the amount circulating at the start of the 1990s."

"With this much money flowing, all I can say is start moving some money aggressively into natural resources – not just oil, but gas and water. Mix in junior mining shares and blue chips, along with bonds, mutual funds, T-bills and cash for a cushion. And, yes… those stock- pushing brokers will think I’m looney for this… but buy some gold."

Of course, there’s more… this week in The Daily Reckoning below…

THIS WEEK in THE DAILY RECKONING
by Bill Bonner

02/08/02 MOTLEY FOOLS

"…Most of human striving and pining has no more purpose than to help him feel superior to other men – to look better, to play better, to have more money or a better life. Nothing is so trivial or preposterous that it cannot give a man an edge. One is proud of his new automobile, another of his roses…one believes his steadfast labor raises him above other men of his rank…another thinks his stock market returns give him a mark ofdistinction…"

02/07/02 SUMMA ARITHMETICA

"…In the tectonic shifts of the New Era, a whole range of phony assets and real debt was pushed up. Not far from Worldcom’s Mont Blanc, for example, lies Enron’s Jungfrau and Cisco’sMatterhorn…"

02/06/02 ENRON AND THE BUBBLE

"…Financial manias bring with them a huge misallocation of capital…we see businesses that never should have expanded into certain areas, and many that should never have been born. The investors, and unfortunately the employees, will all pay the price…"

02/05/02 GOLD DOES ITS JOB

"…In the Roman era it was reported that an ounce of gold would buy a man a decent toga with a belt. Today, an ounce of gold – at $289 – will still probably buy a decent toga, if you can findone…"

02/04/02 HEART OF GOLD

"…In a bull market, people are as empty of questions as a group of teenagers in sex education class. They think they know it all already. And if they don’t, they are embarrassed to admitit…"

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

FLOTSAM AND JETSAM: The Decade of The Slow & Steady

– from John Mauldin,
www.2000Wave.com

"…We entered a long term bear market cycle in 2000 which will typically last for a decade. There is a great deal of denial at the beginning of these cycles.

If that were not the case, we would all simply buy S&P 500 puts and make money hand over fist as the market crashed. But it is not that simple.

Look at Friday’s market action. Boom – out of nowhere the market rallied big in the last few minutes. There are still lots of true believers out there who dream that a world of 20% compound growth is possible.

A lot of dreams were built in the last bubble. A lot of investors want "just one more ride" and this time, they promise themselves, they will get out at the top. There is an entire industry of investment cheerleaders built around separating investors from their reason, their instincts and their money.

This is the decade of slow and steady. It is the decade of seeking absolute returns. It is the decade for market timers and nimble traders and value managers. But like generals who fight the last war, many investors seem to want a return of the old regime of momentum and growth investing.

We won’t see it return for this market cycle. As study after study shows, markets always – 100% of the time – return to trend. It can happen slowly or it can happen fast, but it WILL happen.

What this means is that gross over-valuations put an upper limit on the rise of the market. There is currently an artificial floor of investor expectations which prevents a drop of 40% or so back to trend.

The market will go back to trend. Either prices will drop or earnings will rise. I have made the case repeatedly that earnings will rise very slowly. The new Enron era of accounting just makes that case even stronger, as accounting tricks will become a thing of the past.

Will stocks drop to meet earnings, or will investors keep the market floating at current levels, patiently waiting for the Godot of earnings to appear?

I can make a good argument for either case. My firm has a unique database of money flow indicators going back almost 30 years. I can tell you that in our data for the last two years the markets are behaving in entirely new patterns. Two years ago I would have thought that could not happen.

We are in entirely new investor psychology territory, and to predict what will happen around the next curve in the road when no one has been there is difficult at best.

Aggressive investors with a few nickels to gamble and are bearish can buy a few S&P 500 or NASDAQ 100 puts. But don’t bet the farm. This is the decade of slow and steady…"

Have a grand weekend,

Addison Wiggin,
The Daily Reckoning
February 09, 2002

P.S. John Mauldin is the creative force behind the Millennium Wave investment theory, and author of the weekly e-mail The Millennium Wave Investor (highly recommended!). For more Mauldin’s analysis visit the Millenium Wave website and sign up for his weekly e-mail – it’s free – or send John an e- mail at John@2000wave.com.