The Capitulation Tango

The Daily Reckoning
Weekend Edition
July 20-21, 2002
Paris, France
By Addison Wiggin

“Wall Street slump brings blues to Main Street” reads a headline in this morning’s IHT. Citing a Washington Post-ABC News poll, the article suggest that 4 in 10 Americans has been hurt financially by the recent sharp drop in stock prices.

“By contrast,” says the IHT, “in October 1987 – just after the Dow Jones industrial average suffered its biggest one-day percentage drop ever – only two in 10 respondents said they had been hurt.”

Eight in 10 Americans now consider the stock market to be a “risky investment”; that number three years ago was less than five in ten.

Are these signs of the fabled “capitulation,” we’re supposed to see at the end of a bear market? Not likely. Nearly 64% of Americans continue to believe that the stock market “treats individual investors fairly.” And buy-and-hold is alive and well in America.

John Mauldin broaches the subject of capitulation in his excellent weekly e-mail (from which I lifted the title to today’s issue of The Weekend Edition)…

“The pundits on TV and the press tell us,” writes Mauldin, “the bear market can’t end until we get to some magical condition called: capitulation. This is that wonderful state of affairs when all the wimps and fearful sell everything including the kitchen sink and there is no one but optimists and strong investors left. That is when we see the bottom and the next phase of the bull market will start.

“Massive sell-offs are the sign of this state of capitulation and this weekend we will see many pundits tell us that the 700 point drop in three days certainly looks like capitulation. Now we can get ready to enjoy the summer rally.

“The problem is that there isn’t much historical precedent for capitulation. Bear markets don’t end in explosive sell-offs. They end with massive indifference on low volume days when no one cares anymore.

“Weeks like this last one are typical of the middle of bear markets, not the end.”

This week… the Dow plunged through its post-9/11 lows. In a dramatic sell-off of nearly 400 points – the average’s seventh biggest point drop ever – the Dow ended the week at its lowest point in nearly four years. The Nasdaq slid 37 on Friday to close the week out at 1319 and the S&P 500 shimmied down to 847.

The dollar, too is putting on a show… in the wrong direction. The greenback dropped to 2-1/2 year low against the euro this week, closing Friday at $1.02. The dollar is also flailing against the yen.

Despite a record-breaking current account deficit in May, Dennis Gartman, editor of The Gartmann Letter, lays the dollar fiasco at the feet of the US president. Gartmann (also by way of Mauldin): “We’ve argued, and we’ll argue in the future, that the dollar’s weakness stems from the Bush Administration’s ill advised decisions on steel, textile and lumber tariffs and/or restrictions.

“The dollar will continue to fall as long as the US continues to abrogate its responsibility as the world leader in free trade. So too the US stock market…. and so too the prospects of the Republican Party at the upcoming elections in November. We are and we have been long standing, overt, very public supporters of this President and his administration, but we find these decisions on trade inordinately ill-advised.

“Would that the President went before the nation and the world, admitted the errors involved, reversed the decisions immediately and accepted responsibility for them. That, however, is very wishful thinking.”

At least it’s a beautiful summer day, eh?

Addison Wiggin,
The Daily Reckoning
July 20, 2002

P.S. When I got to the office this morning, I discovered I had received no less than 5 frantic e-mails from Christoph Amberger and his team in Baltimore over night. Apparently, a “Q-Wave trade” they had recommended in a December guest essay of the Daily Reckoning’s blue service (now, Strategic Investment) has paid off handsomely – to the tune of 271%.

They sent along a reader letter, too, which I reprint with some degree of satisfaction: “Thank God for those Dow puts, eh? I have the DOW 2003 88 puts. Bought several of them at $4.90 and $7.40. I think they are over $12 now. I am not planning on selling them until the next major support at 7200 and if that don’t hold… hmmmm, this could make a nice play!

“There is a chance we could fall below Adams 6800. I think the last letter he said it is a low prob. Well I am willing to bet its now a high prob! Good thing for us traders. But bad as a whole as folks wont want to invest for ages in ages… Well just broke the inter-day 911 low… nosedive to 7200 in the cards!”

Tim R.

You may recall Q-Wave. It’s… um, how do I say this… and interesting melange of Fibonacci retracement, um… and Japanese Candlestick somethings… truthfully, when I look at Adam’s charts, I get confused.

But, one’s things for sure – Adam and his partner in crime, Bryan Botterelli, get a lot of great letters like the one above from very happy traders following their advice. And Adam was right on with a recent DOW 8800 prediction we alerted you to in the Daily Reckoning.

“Thus far,” Bryan writes, “Adam and I are 5 for 5 recommending Dow index options, with all 5 gains making 75%, 93%, 41%, 120%, and 271% – not even including the gains Tim made!”

P.P.S. Seafood gumbo… jambalaya… Cajun Blues and sound investment advice – all rolled into one. What more could you really want? For over 20 years The New Orleans Investment Conference has been THE INVESTMENT EVENT of the year.

But this year, given how shaky the markets are, NEW ORLEANS promises to be very interesting, entertaining, profitable – even enjoyable. The speaker list includes:

Mr. Richard Russell
Sir John Templeton
Mr. Tom Calandra
Mr. John Rivkin… and a host of other luminaries.

Mr. Bill Bonner and Mr. Eric Fry two of your editors at the humbly presented Daily Reckoning will also be speaking, present and mingling with the attendees.

If you think you may want to join us for the fun, I urge you to take advantage of the super low-discount Steven King of the Oxford Club has scored for all Agora Publishing’s closest associates.

But if you are, in fact, interested I would act right away because… if you want to take advantage of the discount you must register before July 31st.

That’s next week…

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by Bill Bonner


“…Things look good right now for someone who wants to sell his house. He watches the supposed value of his house rise up like a drunk from the floor of a saloon. For a brief moment, he imagines himself rich…and begins to daydream about the marvelous retirement in the sun he will enjoy on the proceeds of the sale…But to whom will he sell?

Guest Essay by Christoph Amberger

“…The current accounting scandals are not at all the product of capitalism run rampant. By their very nature, they are clear affronts to the capitalist philosophy, creating profits not by increasing revenues or cutting costs, but by redefining the terminology…”

07/17/02 HOUSE MONEY

“…A man over 50 doesn’t want to wait a quarter of a century for stocks to come back to where he bought them. Rather than take the chance, he typically shifts his portfolio from capital gains to income. His risk tolerance also shifts, from return on investment to return of investment… and his savings strategy drifts too, from just-in-time to just-in-case…”

Guest Essay by Porter Stansberry

“…What today are the most expensive stocks in the market, will suffer enormous devaluations as investors come to understand the shell game that was being played with options and sharebuybacks…”

07/15/02 BASTILLE DAY, 2002

“…We wonder from time to time how it will all turn out – we mean the Great Bear Market and the long, soft, slow depression that America seems to be entering. What happens when a great people get themselves into a great mess?…”

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HEADLINE, NEWS And INSIGHT: Clintonian excess: sign o’ the times… will corporate balance sheets rebound quickly (or even at all)?… addicted to easy money – and profits!

Paying the Price for Clintonian Excess
by William Rees-Mogg

“…The U.S. will continue to pay a price, perhaps a heavy one, for the excesses of the second Clinton term. Bull markets come along quite regularly in financial history, perhaps once a decade. Bubbles do not come so often. They are so foolish and so damaging that it takes at least a generation to forget the horrors theyteach…”

Capturing the Gains From Change
by James Dale Davidson

“…Poor profits are telltale evidence of an economy constrained by some combination of surplus capacity, weak demand or high costs. The big question is whether profits will rebound quickly? Or whether poor profits will drag down therecovery?…”

Profit from America’s Easy Money Addiction
by John Myers

“…As the U.S. money supply grows at double-digit rates and America’s total debt burden surges to astronomical heights – $32 trillion and counting…Individual investors will not hesitate to sell dollars or investments denominated in dollars. They’ve done itbefore…”

The Daily Reckoning