Old World, New World
Eric Roseman predicts a mini-bull for gains of 35% to 50% in 2003 – in the context of a wider secular bear market. "Buy-And-Hold" surely doesn’t work anymore, but can you still make money – "nimble and quick" – as the global economy founders?
The consensus is bleak – and not just for the U.S. economy. I recently returned from a nine day visit to Europe. Bankers in Copenhagen and Zurich believe that the U.S. dollar will continue to struggle going forward, but at the same time, they’re not particularly excited about the Euro, either.
European GDP growth is slowing this fall. Germany, Europe’s largest economy, is barely expanding her economy, accompanied by rising unemployment. The country is the key to Euroland economic vitality, at 36% of GDP. But you certainly wouldn’t get that impression from her stock market: The Frankfurt DAX is down a dizzy 57% from its all-time high back in March 2000. Earnings are generally poor, the rising Euro is hurting exporters and companies are not spending capital.
The only good news in Europe is that stocks are generally much less expensive than Wall Street. But again, the consensus here in the Old World is that corporate earnings projections are still too high and that 2003 will not be particularly good for European companies.
Both the U.S. dollar and the Euro are like two drunks after a big night of partying. They walk in tandem, occasionally stumble, intoxicated by spending, sluggish growth and deteriorating trade balances. But in a relative world, Europe is indeed healthier, still harboring a positive trade-balance and current-account surplus versus massive deficits for the United States on both scores. The Euro is simply a better currency at the moment.
The key word here is at the "moment."
Europe is now embarking on a huge spending spree after the worst floods in over one hundred years delayed tax cuts in 2003 for several countries, including Germany. This is not bullish for personal consumption, but might give the economies a short-term boost because of billions in government outlays.
Bonds are still favored by some heavyweight money- managers over here, though durations have been cut to just three years for many clients. Bankers in Denmark and Switzerland believe interest rates can’t go much lower from these levels.
And what about stocks? The advisors I spoke to were generally avoiding equities. Values, however, do remain in the emerging markets. The big money to be made over the next few years will generally not be in common stocks. With the exception of short-term trading opportunities, the bulk of profits will come from foreign currencies, alternative mutual funds, gold and commodities. You’ll also make good money betting against U.S. stocks.
In August, after flirting with a summer rally, global stock markets failed to rebound and ended the month flat. Usually following a dramatic decline in values (such as in July), equities would stage a big recovery the following month. Remember last October? Though the Dow and S&P 500 Index are up 15% since the July 23 lows, they both ran out of gas just over a month ago.
This is going to be a bad decade for most common stocks, similar to the 1966 to 1982 bear market. During that period, and adjusted for inflation, the Dow did absolutely nothing for 16 years. That doesn’t mean we’ll have the same boring market this decade, but it is extremely fundamental to understand what possibly lies ahead in the 2000s.
After a stock market bubble has burst, it can take years for the public to return en masse, years for stock prices to recover and years for domestic and international stability to re-emerge. During bear markets, the economy turns sour; the government gets bored and decides to make war. They also print their way out of misery, discontent and ultimately, invite Mr. Inflation as a consequence of stupid policies. That is exactly the scenario unfolding around us today.
Take a good, hard look around you…Does 2002 feel or look anything like 1999? In the space of just three short years, the world is a completely different place. We just finished the greatest bull market mania of all time, in 2000. And now, I hear some pundits predicting a new bull market, starting in 2003.
While this is dangerous thinking, what we are likely to experience in 2003 is a huge mini-bull market in the context of a secular bear market. From 1966 to 1982, stocks did enjoy some terrific gains – but these profits were wiped out by big spills in between, and of course, by inflation. But you earned fat gains in 1975, 1976 and 1978.
Over the next four-to-six weeks, you could try very speculative index-based trades. Notice how I said "trade", and not an investment? That’s because the "buy- and-hold" mentality we enjoyed over the last 20 years is finished. If you don’t get out with nimble but quick profits in this mess, you’ll get clipped by the bear. It’s that simple.
Sometime, very soon, I’m looking for a strong BUY signal on the stock market. We’re not there, yet. But that day is coming. I’m betting that most of 2003 will be a superb year for global equities. Yes, I realize you may want to have my head examined. But in a secular bear market, the bull visits, but just for a short while. His goal is to take as many suckers as he can to the cleaners, making them believe the bull is REAL.
But I don’t plan to stick around for that to happen. If I’m right about 2003, we’re looking at 35% to 50% profits by Christmas next year.
Sound bold? Maybe off the top?
Yeah, I’m pretty alone on this call, and that makes me feel quite confident.
The indicators I follow continue to be extremely bullish for the stock market near-term. All the key ratios I track are flashing BUY. I’m just standing by and waiting because September is statistically the worst month for stocks – even worse than infamous October.
We’re going to see a rapid acceleration of these trends over the next 12 months. It is very important that you diversify, diversify, diversify…and stay tuned.
for The Daily Reckoning
September 26, 2002
P.S. In August, the gold stocks were the best performing stock market constituents, up an average 15%. We did very well last month with a few mining shares that were in the midst of a big sell-off earlier in June and July. Those who followed my advice are easily ahead about 20% by now.
I’m currently telling my members to continue to sell the U.S. dollar, buy gold stocks, buy commodities, avoid most bonds and continue to carefully add to your value- based stock positions. And if you’re able, move a portion of your IRA overseas or purchase an offshore variable annuity to invest in hedge funds.
Editor’s note : Eric N. Roseman is the President of a Montreal-based investment consulting firm specializing in offshore portfolio management. The firm currently manages $27 million in assets from individual investors and private organizations around the world.
Mr. Roseman also sits on The Sovereign Society’s Council of Experts and is editor of The Global Market Investor.
After weeks of losses, stocks managed a bounce yesterday.
We don’t know whether it is the beginning of a trend or the end of one. But it scarcely matters. The stock market will do what it wants; we will do what we should.
For, as George Washington put it, "We cannot guarantee success, but we can deserve it."
We are out of this market. Not because we know what it will do, but because it is too expensive. People who buy stocks at 30 times earnings may get rich…by accident. They don’t deserve it. People who buy at 10 times earnings, on the other hand, may still go broke. But at least they have done their duty. They have bought low. If they never get the chance to sell high, well, too bad. At least they can go to the poorhouse like an aristocrat to the scaffold, with their grace and dignity intact.
Our guess is that stocks will go a lot lower than they are now before finally hitting bottom. Bill Gross puts the low at about 5,000 on the Dow. He may be overly optimistic.
But it may takes years to get there – in a long, slow- motion bear market/recession…following the Japanese model.
"If you’re investing in a company, or you’re running a company, that’s counting on a recovery in the second half of the year, or counting on a robust economy in ’03 to make your numbers," warned GE CEO Jeffrey Immelt, "I’d redo the plan."
Immelt has noticed that business is not picking up as most economists said it would. Profits are not improving as Abby Cohen and most other analysts forecast.
"The great surprise of the past few months," writes our favorite Austrian school economist, Dr. Kurt Richebacher, "has been the worsening carnage on Wall Street, affecting virtually every nation in the world. In terms of absolute amounts of wealth destruction, it is already by far the worst bear market in history."
Most economists and analysts think investors are being too pessimistic. Dr. Richebacher disagrees:
"What this carnage on Wall Street is beginning to reflect is definitely not misguided market psychology but the terribly bad shape of the U.S. economy, as strikingly reflected in the disastrous development of capital formation, savings and profits. These three are the key determinants of healthy economic growth in the long run. But in the past few years in the United States all three have been devastated as never before."
What holds the economy together is the heroic spending of the homeland consumer. But what is he spending? The BBC reports that Americans are earning less money this year than last – the median household income fell 2.2% to $42,228. The only way he could possibly increase his spending would be by borrowing money.
Not surprisingly, the two consumer sectors that have shown the most growth – autos and housing – are those where financing is most relaxed. But even these two lend-happy industries seem to be breaking down. Auto sales are slipping and, as Eric elaborates below, housing is looking weaker and weaker. GM shares lost $3.41 on Monday. GM and Ford bonds are being treated like near-junk…trading at 300 and 400 points, respectively, over treasuries.
In the end, you cannot build real prosperity on debt, the Austrians tell us; you have to build on savings. That is a lesson that needs to be relearned every three generations or so. Unfortunately, the tuition can be painfully expensive.
Eric, fill us in…what’s the latest from the schoolyard?
Eric Fry, in the Big Apple:
– The stock market rebounded from multi-year lows yesterday to chalk up some sizeable gains. The Dow tacked on 159 points to 7,842, while the Nasdaq jumped more than 3% to 1,222. General Electric helped spark the advance on Wall Street by assuring investors that its third quarter earnings are still "on track." Meanwhile, the reputation of GE’s former CEO, Jack Welch, has derailed.
– Poor Jack Welch; he has been tossed into the ignominious ranks of disgraced former CEOs…and all because he’s getting paid millions of dollars for doing nothing. Isn’t that what being a CEO is all about? Is it his fault that the GE board of directors gave him a retirement package worth millions of dollars per year?
– Even so, Welch has decided to start paying for his myriad post-retirement perks, although, just to be on the safe side, he’ll continue drawing his $9 million annual pension. Newsweek reports: "He’ll write GE a check every year for about $2.5 million for all the stuff he was getting for free-the $15 million Manhattan penthouse, the 737s, the helicopter, the limo…Welch’s perquisites in perpetuity have become the new symbol of CEO excess, replacing stock options as the most criticized form of ‘stealth compensation.’"
– Isn’t funny how rising stock prices covered a multitude of sins and other nefarious deeds? The very same folks who – in the late 1990s – would have exuberantly carried Jack Welch on their shoulders along their town’s Main Street (if only he would have come to their town), are now scouting about for some sturdy rope with which to hang the man. A hanging seems a little harsh to us. Has anyone considered a caning? Or tar and feathering?
– "When it comes to executive excess," Newsweek continues, "it’s hard to trump Tyco’s Kozlowski. He didn’t bother with board approvals to tap company funds for personal extravagances…such as a $1 million birthday party for his wife in Sardinia last year. The party, which sported a gladiator theme, included an ice sculpture of Michelangelo’s David with vodka streaming from his penis into crystal glasses."
– It’s easy to ridicule Dennis Kozlowski, of course. But is that really fair? Haven’t we all – at some point – embezzled millions of dollars from our employer to throw lavish parties in which expensive liquor flows from the genitalia of ice-statue replicas of famous sculptures?…Just kidding Bill…There were absolutely no ice statues at my party.
– Former CEOs like Kozlowski give new meaning to the term "filthy rich." Speaking of the filthy rich, it seems their houses aren’t selling quite as briskly as they used to.
– "The country’s most super-priced homes, the ones that start at eight figures, are in the midst of an unprecedented glut," says the Wall Street Journal. "According to one count, there are at least 44 $20 million houses for sale across the country – four times as many as just five years ago." And soon there will be a 45th $20 million home for sale. A friend of mine mentioned yesterday that one of his clients will be listing his home on Long Island for $26 million dollars. I imagine it’s a pretty nice place.
– But the bursting of the stock market bubble has certainly culled the ranks of the uber-rich. As a result, far fewer Prada-shod and Hermes-bedecked folks are jetting about the country looking for a new megahome. "According to historians," says the Journal, "the country hasn’t seen so many monumental new homes since the days of the robber barons a century ago."
– Meanwhile, down on the other side of the tracks, where we ordinary folks buy and sell our homes, the recent data are not very encouraging. Housing starts fell in August for the third straight month. And building permits dropped as well. Yesterday came word that existing home sales fell a "surprising" 1.7% last month. Add to this bad news the fact that a record 5.7% of all mortgages are delinquent and that foreclosures are on the rise and suddenly, what was once a pillar of strength for our economy looks more like a pillar of salt.
– The housing market still seems fairly robust from all outward appearances. But most bubbles do…until they don’t.
Back in Milano…
*** "Could it get worse?" a Money article asks. Then, Adam Lashinsky, citing a recent commentary by Stephen Roach, answers: you bet it could! There are two more bubbles waiting to burst – consumer spending and housing, says Roach. With falling incomes, both depend on the willingness and capacity of consumers to go deeper into debt. Sooner or later – as we keep saying – both bubbles will find sharp objects.
*** First the criticism…and already the obituaries. "How the reputation of the ‘maestro’ crumbled", headlines a Financial Times article. Alan Greenspan should have retired gracefully, when he had the chance. For now, he cannot escape – even by dying. "The evil that men do lives after them…"
*** "It’s so nice to be in a civilized country," said Veronique, who had just come from Paris to check on her models in Milan. "You know in Paris, girls don’t care what they look like anymore. Here, people are so much more fashionable."
The women here are not necessarily more attractive than those on the streets of Paris, your editor noticed, but they do seem very stylishly dressed. The men too. In Paris, it has become customary for men to dress down in business. Coats and ties have almost disappeared from some sections of the city. But here in Milan, men seem to dress up…
*** A Milan restaurant offers this translation of its "Lardo di Colonnata": Lard from Colonnata. Sounds delicious.
*** "I wouldn’t trade my trip to Parma for a million dollars," my mother remarked over lunch yesterday.
"It was so pretty. And the camera crew were all so nice…"
She showed me the photos. There was her granddaughter on a stone wall or propped up against a tree. In front of her were a whole crew of photographers, reflector holders, makeup artists and friends. Behind them all must have been the 81-year-old grandmother, the model’s chaperone, clicking her own photos on a throwaway camera.
"And I felt so lucky to be there…" she continued, "and so lucky to be able to get around. You know, most people my age are dead."