THE FED PANICKING
Alarm ringing on the "Titanic"
An eminently Successful Analyst recently opined, "Rate Cuts will not save the stock market."
Yesterday CNBC interviewed Charles Minter, analyst and Portfolio Manager of the Comstock Capital Value Fund, which has enjoyed excellent performance during the present Bear market.
Per Mr. Minter, "Fed rate cuts in the past never saved any bear market – and it won't this time." To support his assertion he cites what happened in the Great Crash of 1929 and what is occurring today in Japan.
Minter said the US Fed repeatedly slashed rates from 6% down to 1.5% in the Great Crash era. But this action did not prevent the Dow from plunging 89% from its 1929 peak to its 1932 trough. Moreover, the Bank of Japan have cut rates incessantly since its 1989 Nikkei peak. Nonetheless, the Tokyo stock index is off 66% from its all-time high. Furthermore, Japanese rates can no longer be cut as they are now zero.
Ergo, rate cuts are no long-term solution to an emerging bear market.
Portfolio manager Minter went on to give his rationale on why he believes the stock market is still headed for a bad fall. He cited the following historic data:
The S&P Index P/E ratios of the worst two bear markets were:
At peaks
1929….21 times
1973….19 times
At Troughs
1932….8.5 times
1974….8.0 times
The S&P500 P/E in March 2000 reached a record high of 32. However, Minter expects the S&P500 P/E ratio to decline from its present level of 25:1 to around 10 times. He further commented that earnings would most likely NOT hold up. But if they did – and the P/E toughed at 10, the S&P500 index will have been battered down another 60% from today's value. This indicates a S&P500 nadir of 500. Not surprisingly, Minter's bear market target concurs with David Tice's estimate of a market bottom. (David Tice is president and portfolio manager of The Prudent Bear Fund - BEARX).
In essence we are seeing nothing more than a traditional BEAR MARKET RALLY…often violent.
RATE CUTS INEFFECTIVE
As all know the Fed just made a surprise cut of 50 basis points (bp) in Fed Funds rate yesterday. This is flabbergasting on a few counts.
Firstly, the cut was unscheduled and BEFORE the FOMC meeting.
Secondly, it is DOUBLE Greenspan's conservative and customary 25 bp cut.
The above sounds the alarm that there is indeed something very drastically wrong with the US economy. Greenspan obviously was motivated to sound the Alarm on the Titanic. To be sure Alan Greenspan "sees" the looming financial iceberg, and consequently wants to avert a total disaster...or at least to soften the blow.
What to make of the Fed rate cut?
Well, we need to remember the Japanese have been cutting interest rates since late 1989 - the year the Nikkei peaked at 39000. And during the last 12 years the BOJ has repeatedly cut rates until just recently, when rates bottomed at ZERO. Japanese rate cuts are NO LONGER POSSIBLE.
Despite relentlessly reducing interest rates, the Nikkei has inexorably fallen 66% during the last 12 years. Whereas a rate cut usually experiences an initial knee-jerk reaction, the market decline continues.
So will it be in Wall Street...Gabby Abby or no Gabby Abby.
BEAR MARKET RALLIES - REVISITED
To be able to appreciate the power of a Bear Market Rally (oft called a Suckers' Rally), we need to review similar occurrences in history. Let's see what happened in the two greatest stock market Bear Markets in the last 71 years – namely the GREAT CRASH of 1929 and the 1973/74 Wall Street Debacle.
GREAT CRASH of 1929
The chart below demonstrates the power of a Bear Market Rally (Suckers' Rally) in the GREAT CRASH of 1929. Following are the observations which may be gleaned therefrom.
Wall Street (Dow) peaked in October 1929, when across the board stock took a battering – quickly declining 48% in less than two months . However, starting in Novemeber1929 a Bear Market Rally (Suckers' Rally) ensued. The sucker's rebound rose the Dow from 198 to about 298 in the next five months – an increase of 50%. But then the inevitable occurred. Smart money sold heavily to the innocent and hapless investors, causing the Dow to again plummet.
The rest is history. The Dow relentlessly fell 83% from its Bear Market Rally (Suckers' Rally) high during the next 24 months without respite.
1973/74 Wall Street Debacle
Although much milder in intensity, there were two Bear Market Rallies (Suckers' Rallies) during the 1973/74 Wall Street Debacle (see chart below showing the drop of the S&P500 Index).
In late 1973 the S&P500 experienced its first Bear Market Rally (Suckers' Rally). The Index rose 12% before continuing on its journey south. From the peak of the first Suckers' Rally to the final 1974 trough, stocks plummeted 46%.
Then once again in late 1973 through early 1974 suckers were drawn in by rising prices. This Bear Market Rally (Suckers' Rally) rose 12% again, before doing an abrupt about-face. From the peak of the second Suckers' Rally to the final 1974 trough, stocks plummeted 40%.
In all the S&P500's slid a total of 50% in the 1973/74 debacle.
The moral of this history lesson is painfully simple. In ALL secular Bear
markets there will be one or more Bear Market Rallies (Suckers' Rallies). They can wicked in intensity and last few months.
Indubitably, we are today in such a Bear Market Rally (Suckers' Rally). But in my considered opinion it will be short-lived.
There is also one other thing that is crystal clear. No Secular Bear Market ever ended when the S&P500's P/E ratio was 25. Au Contraire. Bear Markets bottom when the P/E is close to 6 to 8 times. CONSEQUENTLY, this bear is just resting after nearly 12 consecutive months of hard work (i.e. NASDAQ falling). Technically, it is called a period of consolidation within the framework of a Secular Bear Market.
Indeed, the Fed's panicked rate slashing
is the Alarm ringing on the USS "Titanic"
H. Teetmyer
20 April 2001
Printer Friendly Version
Email this Article