In My Opinion, the U.S. stock markets in general will trade sideways to down. The DJIA might decline to 9200 by Mid March and will be in the 8000 range by summer.
I am not as pessimistic as Doug McIntosh in his recent essay:www.gold-eagle.com/gold_digest_02/mcintosh012302.html
There are numerous opportunities for "speculators" and "gamblers" to make big money by shorting some stocks and/or buying "put" stock options. JPMorgan-Chase bank is at the top of my list to buy puts on followed by Citybank, Bank of America, and Motorola in no particular order.
History shows that stock market prices in general decline whenever investment money leaving the stock market is greater than investment money entering the stock market. I believe that will be the case during most of 2002.
On the plus side, many precious metals sector stocks will have price increases even though much of the stock market experiences price declines. Homestake Mining increased in value throughout the 1930's depression years.
U.S. Government politicians & most investment firms say the U.S. recession is to be over in March to July time frame. This scenario is somehow a sufficient reason to invest now in the U.S. stock market. This belief is apparently based on the past 40 years whereby the average recession length was 11 months to 16 months. In my opinion, many politicians and media investment people are merely shills to spin doctor that:
- the U.S. stock market will go upwards forever.
- U.S. stock market downturns of 40% or more have been legislated out of existence.
- the U.S. stock market "wealth effect" is real.
- the stock market always acts 'linear' and 'non linear' phenomena can no longer occur.
- Every year from now on, more money goes into the U.S. stock purchases than the previous year and remains in the stock market. Everybody is investing in stocks.
- U.S. Stock market will continue to provide annual returns on investments at rates of 10% to 20% in 2002 and beyond.
- The U.S. stock market has few 'risks' when 'diversified.' Definitions of 'diversified' and 'risk' vary widely in their usage
I am one of the few contrary believers. In my opinion, no meaningful or significant stimulus (or reason) exists for a U.S. stock market price increase. My reasons are:
- January Effect. As the values of the stock market (in general) go in January, so goes the rest of the year. Stock index averages have declined. Is this a realistic "cause and effect" or simply a tendency to be a self fulfilling prophecy?
- Stock Market Bullishness is over 80%. High bullishness (look at Enron promoters last fall) is a typical precursor to a major stock market peak and subsequent declines.
- Historically stock market trading volume is typically 4 or more times higher at stock market peaks than 4 to 6 years prior. Current trading volume of NYSE is now often 1.5 billion shares/day as compared to 200 to 400 million shares of 6 years ago.
- Wall Street Scandals such as Enron and others unfolding in the next few months have historically coincided near major stock market peaks. The Enron Scandal of 66 billion dollar loss (to stockholders) has made a fact that "Wall Streets promise of guardianship of the small investor is a lie." Arthur Anderson has destroyed trust in auditing accounting. Investors are going to avoid any company's stocks with even a hint of accounting deceptions. One key indicator of such companies with deceptive accounting practices are those companies that pay more in consulting fees to auditors than they do for auditing.
The following is a brief list of some larger companies. All numbers are in millions of dollars.
- The U.S. consumers are tapped out in debts. Increased unemployment or threat of unemployment is cutting back consumer spending. U.S. consumer debt is 1.653 trillion (Nov. 2001). Credit card debt averages $7,500/family. Savings rates continue to be negative. Pay down of high interest debts is taking priority over using the money for investing purposes. Paying down debt is reflected in lower consumer demand. Investor money tends to be used for real estate and not the stock market.
- U.S. Businesses having lower earnings and lower consumer demand will decide not to expand. Manufacturing production capacity is decreasing from 70% range level More manufacturing is now being done overseas eliminating many U.S. manufacturing jobs. The U.S. steel manufacturing industry is a typical market segment in current financial difficulties. Lower foreign demand for U.S. manufactured goods is likely since Japan, many European countries, and various oil producing nations are currently in recession economies.
- Record U.S. Bankruptcies are going to increase debt write offs with accompanying lower profits by those still in business. Corporate defaults by 211 companies in 2001 was $115.4 billion. Corporate defaults by 132 companies in 2000 was $42.3 billion. Individual bankruptcies were 1,437,354 in 2001 up from about 800,000 in 1990. The number of bankruptcies in 2002 is expected to be up 10 to 15% from 2001. (www.abiworld.org).
- U.S. Savings Rate is negative at 2%. Economist once and may still promote the concept that investment = savings. Negative savings means negative investments including stocks.
- Unemployment rates now exceed 7% in some states. Many unemployed will be selling assets including stocks in order to raise cash to meet immediate living expenditures.
- Foreigners with investments in the U.S. on net will be taking their money out for Euro money, and/or repatriation uses. Over 1 trillion dollars of investments in the U.S. is owned by Japan, China, and oil rich Middle East countries. Other reasons may be fear of U.S. dollar devaluation, seizure under U.S. terrorist laws, and/or negative real rates of return.
- Traditional stock market fundamentals predict the stock market as a whole is over priced by a factor of three. Historically, near a major peak in stock markets, popularity investment decision makers ignore traditional investment fundamentals. This is now the case. Three traditional fundamentals of the DJIA by Barrons, January 21 2002 are:
A. Price to book 743% (100 year historical normal is 100% to 200%)
B. P/E 26.6 (100 year historical normal is 10 to 20)
C. Price to Dividend 53 (100 year historical normal is 15 to 30)
Declining projected earnings per share in 2002 is increasingly projected by many companies. Many investment experts base stock buy decisions almost exclusively on projected earnings increases. Similarly stocks are sold when projected earnings increases do not meet expectations.
The Advance Decline line is showing that more stocks are declining in value than are increasing in value at increasingly shorter intervals of time.
Accounting Changes in 2002 will reduce book value = assets - liabilities is reported (rumored) for many companies. There are reports (rumors?) that there will be "write downs" (reducing the book value) approaching 1 trillion dollars in 2002 of intangible assets such as good-will, patents, intellectual property, trademarks and copyrights. The purpose is unclear, but may be to present more realistic (believable?) company valuations.
Corporate "Financial Statements" are becoming increasingly difficult to comprehend due to the misleading practices of many companies. This includes such practices as:
* "one time write-off charges" almost every quarter. "Write off charges" is the removal from the accounting books such things are uncollectable debts and valueless assets.
* The use of "Pro-forma" accounting practices to diminish or understate many important risky activities. "Pro forma" is defined as: made or carried-out in a perfunctory (routine or superficial) manner or as formality. "Pro forma" is something provided in advance to prescribe form or describe items.
* Many companies including ENRON use offshore banking and financial derivatives. These activities are done in part to avoid U.S. taxes and to hinder bringing to light many crucial and risky financial activities.
Increasing usage of footnotes and asterisks to describe accounting practice changes that alter the financial picture.
- Foreign bankruptcies. devaluations, and/ or defaults in 2002 and 2003 by Japan, Argentina, Venezuela, Turkey, and/or Brazil plus others will cause large U.S. bank losses due to their exposures to these problems. Stock prices of large U.S. such as JPMorgan Chase, Bank of America, and Citibank will plummet.
- Herd Mentality is that once a declining market price occurs and becomes widespread public knowledge, a significant percentage of investors go into a panic mode of selling. This selling becomes a self fulfilling prophecy of driving the market down much faster. Major market price declines of 40% or more historically occur within a 6 to 16 month period as compared to market price rise times of 6 to 10 years.
- A five percent annual rate of inflation and the monthly rate is the highest monthly rate within the past year is a stock sell signal according to Dick Storkens book "Strategic Investment Timing." In my opinion, inflation of this magnitude signifying "an inflation spiral has begun" will occur before the year 2002 has ended.
- U.S. government debt and interest payments do not allow politicians to easily tinker significantly with the economy through spending and tax programs. The U.S. has returned to deficit spending in 2002 to finance the "terrorism war" undeclared by the U.S. Congress. U.S. Federal Govt. deficit spending almost always shows up as inflation after about 1 to 2 years. The U.S. Federal government uses "cash accounting" practice which is illegal for U.S. private companies. U.S. companies must use Accrual Accounting practices based on Generally Accepted Accounting Practices (GAAP) ideology and definitions.
The following table shows some numbers that may be useful in assessing the debt. and the confusion. Official and actual U.S. govt. deficits are from the Weiss Safemoney Report. Federal debt numbers are from www.publicdebt.treas.gov/opdpenny.htm M3 Money supply numbers are from www.stis.frb.org/fred/data/monetary/m3si
It should be noticed that:
* the U.S. govt. official debt has increased by about 1 trillion dollars in the six year time period.
* the M3 monetary money supply has increased by 3.4 trillion dollars. which is about the same increase as GDP.
* inflation has been avoided in part by the on going real estate bubble of 12 trillion dollars.
* politicians continue to use smoke and mirrors in their budget explanations & rantings.
Wally Bently
February 2, 2002
I appreciate all E-mails, questions, comments, and flames on this essay. wallybently@aol.com