Stubborn Optimism

“From a psychological point of view, stubborn optimism is more a sign of a market top than a market bottom.”

Mark Hulbert

Jerry Garcia’s pulse stopped many years ago. Even in Minnesota, where the labor market is so tight almost anyone could get a job, Jerry is unemployable. There have been, at least to my knowledge, no sightings of him entertaining in Minnesota bars. He has not been reported living incognito in another country or on another planet. He is stone, cold dead…as dead as a defunct laptop computer.

And yet, the Deadheads — fans of Garcia’s band, the Grateful Dead — still turn out by the thousands to see the band play…and many still follow the group on concert tours. Stubbornly optimistic, the ‘Deadheads,’ seem to hope that one night, Garcia will be raised from the dead and walk on the stage, maybe in a tie-dyed, angelic robe.

I have this on good authority. My new assistant, Addison, admits to having been a ‘Dead’ fan himself. Perhaps he was not actually a ‘Deadhead’ — but for a time he followed the band more or less faithfully, selling beer for $2 a can out of an old VW bus, with neither a liquor license nor a W-2 form.

Finally, Addison tired of the ‘Dead.” He determined to get a real life…to enter the real world, of real employment, for real wages.

Failing that, he joined me in Paris.

It was a pleasure having Addison visit over the holiday weekend. We did our work, and in the evening, pulled out guitars. Addison knows the Grateful Dead songs…

But what is astonishing is the tenacity with which the ‘Deadheads’ stick to their dreams. Not unlike tech, net, and telecom investors.

“I have no idea whether a major bear market is on its way,” wrote my old friend Mark Hulbert in his recent newsletter. But Hulbert is sure that “what we witnessed in late March and early April wasn’t one.” At least, not the bottom of one.

“I say this with such confidence,” he continues, because a bear market is, above all else, a psychological phenomenon — and none of the psychological characteristics of a bear market have even begun to appear.”

“At the bottom of a bear market,” Hulbert clarifies, “virtually no one is willing to buy. Yet in mid April, at which time the Nasdaq Composite was more than 30% off its high, many investors eagerly were declaring that it was a buying opportunity.”

Garcia lives. Well, maybe not…but the bull market has yet to be pronounced dead. And judging from last week’s action — it may be a long time before it is officially laid to rest. The fans still believe.

Mark Hulbert tracks the performance of newsletter advisory services, including some of ours. He watches, among other things, how many of the services are bullish or bearish. As the market collapsed in March and April, you might have expected that the number of advisors that were bullish would have collapsed too. Well, it did go down. But not much. And currently, sentiment remains bullish.

In fact, so far for this year, the advisors in this group were considerably more bullish than they were in 1999. This, of course, is in line with our contrarian analysis. The more bullish the advisors, the more of their money (and their followers’ money) is likely to be already invested. As money pours into a market, prices rise — obviously. Higher prices mean that each stock is more expensive…so a given amount of investment capital will buy proportionately fewer shares. As prices go higher…it takes more and more money to drive prices higher, since each share costs more. You reach a point where there is not enough buying pressure to push shares higher — and they begin to fall.

At market extremes, you want to be invested against the prevailing sentiment. Because that is where the potential for gains is. A market that cannot go higher – – will not.

Hulbert explains: “Contrarians know that, because bull and bear markets are psychological phenomena, the market often confounds the majority. Bull markets like to climb a wall of worry, just as bear markets descend a wall of hope.”

Investors today face a monumental wall of hope. Every fantasy of the New Era, New Technology, The Internet and the New Economy is cause for hope. It will take a lot of losses until these dreams are exhausted.

In the bear market of ’73-’74 we have an example of how stubborn investors’ optimism can be. After a long period — from ’66 in fact — of up and down, trading range prices…a bear market finally began in ’73. It cut the NYSE in half and the AMEX by 90%.

But all along the way, investors — remembering the go-go years of the ’60s — kept thinking that ‘the worst is over.’ “By the summer of 1974,” Hulbert reports, “the average stock’s P/E ratio had dropped to around 7…[investors thought it] surely couldn’t drop any further, the market must already have bottomed — and that therefore it was time to buy.”

But the market continued to drop. It fell to an average P/E of 6 and then to an unbelievable 5. “The low didn’t finally occur,’ Hulbert writes, “until late in 1974 when, according to the Value Line Investment Survey, the median P/E of all stocks they followed fell to 4.8.”

Today, we are a long way from a bottom. Investors are still cyclically bullish. They follow the news — and buy every dip that looks promising. Investment advisors are tellingly bullish. The media is amateurishly bullish. And the financial community is always professionally bullish.

There is a wall of hope so high, with so many indentations and footholds — it may take years to descend.

Then again, investors might suddenly lose their grip.

Best regards,

Bill Bonner

Paris, France June 5, 2000

P.S. Mark Hulbert also has a piece in today’s Herald Tribune — reporting on new research on the long term returns from stocks. More on that tomorrow.

*** You may recall, Friday morning I quoted an analyst who said, in effect: ‘If we get a good employment report today we will have a real big day.’ Well, he got a ‘good’ employment report, and the market had a ‘real big day.’

*** In fact the day was so big that you have no doubt already heard all about it. The news on Thursday and Friday was great — less pressure on prices, less pressure on the labor market. The economy is slowing down, in other words. The news “blew away the cloud of fear” hanging over the market, said one analyst quoted by Reuters.

*** The teenaged tech and net stocks were especially favored — they seemed to enjoy a growth spurt just as the news was announced.

*** On Friday morning, just after the market opened, the Nasdaq 100 futures shot up 8%. Taking the week as a whole, the Nasdaq grew more than any week in history — up 19%.

*** By the way, the fad du jour in the TNT (tech, net and telecom) set is for stocks that are “Internet infrastructure” plays. These are companies that make the picks and shovels for the Internet miners. Maybe the e- tailers will fail. Maybe the B2B sector won’t be as great as we thought. Maybe AOL and MSFT have stopped growing. But someone’s going to make some money on the Internet and these infrastructure companies are going sell them the tools!

*** So Broadcom was up 42% by the end of the week. JDS Uniphase rose 50%. And Network Solutions rose 52%.

*** And now that school is letting out…the teenaged stocks are expected to enjoy a perfect summer: complete with a huge stock market rally, the beginnings of which we have just witnessed. We’ll see.

*** Of course, ‘Easy Al’ Greenspan said he wasn’t targeting the stock market. He was just trying to head off the inflation he saw forming up like an enemy armada out beyond the harbor. So, he fired six volleys from his rate hike cannon. And what happened? Well, some inflation indicators may be sinking. But the results have been mixed.

*** Bonds, for example, are rising — on the evidence of a slowing economy. Yields are falling. But most disturbing…the speculative euphoria of Wall Street seems to be running a few paces ahead of the Fed. Last week’s irrational exuberance alone added about $1.5 trillion to the nation’s potential purchasing power. Of course, easy come…easy go. That which the market has given last week, may be taken back the next.

*** It was a very good week, of course, for stocks and bonds. The Internet, newspapers, TV, radio, and even tin cans linked by baler twine are reporting the news — the bear market is over. We’ve seen the bottom. Let the good times roll — again. More on that below…

*** What is really going on? Well, I don’t know…but bear markets are often marked by explosive rallies…followed by long periods of grinding, frustrating action, in which stocks give back all the gains, and then some.

*** And while the media focus on the explosive rally, there is very disturbing news about the dollar — which fell, both against the yen and the euro. The euro seems to be staging a comeback. It is rising against a wall of worry — as I feared (because I pay my bills in French francs, linked to the euro…I’d prefer a low euro and a high dollar).

*** What’s more, gold finally roused itself, got up and advanced $8.90! (This is by the way, the anniversary of the day the US went off the gold standard in 1933.) When the dollar goes down…and gold goes up — watch out. Both the American economy…and its stock market…rest on the willingness of foreigners to price the dollar at more than it is really worth. When that goes — it all goes. And it could be a long time before it comes back.

*** Richard Russell reports that Patricia Dunn, CEO of Barclay Global Investors, with $780 billion in assets (bigger than Fidelity or Vanguard) was asked what she did with her own money. “California munis are plenty exciting for me,” she replied.

*** Archeologists believe they have discovered the long lost cities of Herakleion and Menouthis. The cities are mentioned in the ancient records, often, but have never been located. Now, divers in the Bay of Aboukir, off the coast of Egypt, believe they have found ruins of the submerged cities, dating from the 5th to 9th centuries before Christ.

*** And here’s something interesting — reported with perhaps a little too much smug pleasure by the French press: The U.S., ranked 24th worldwide, has the lowest life expectancy at birth of any industrialized nation. France has the third highest ranking…after Japan and Australia. A Japanese citizen, assuming he does not throw himself in front of a moving train, can expect to live 74 years and 6 months.

*** Speaking of Japan, during the heyday of the 80s, few sectors of the hot economy were as hot as the golf course industry. 2,400 courses were built, charging membership fees as high as $200,000. But according to the report in the NY TIMES, 1,700 of those golf courses are now in financial trouble or bankrupt. Ten years after its bear market began, the nation faces an estimated $1.2 trillion in bad loans — of which 20% are thought to be related to the golf-course crisis.

*** Today is also the anniversary of Adam Smith’s birth…