JULY 4TH SURPRISE?

There are several reasons the American Stock Market could collapse by midsummer 1998. Of course, my timing could be off by several months or several years; yet, I think not. The only caveat is never to underestimate the ability of political system insiders to manipulate the economy to get reelected. Since the election is this November, we may safely assume a massive effort to stave off the inevitable until at least November 4th. I just don't think they will pull it off this time, but I could be wrong.

My reasons are split between economic, political and psychological, with one spiritual thrown in for good measure. The first economic one is the Asia Financial Crisis. You remember that one don't you? It's the one that is declared "under control" and then a month later shows up in another country - and then another etc. etc. Watching mainstream media would never tell you that an economic cataclysm began last July and rages unabated. An economic fire burns underneath Asia, flaring up regularly with the intensity of Yellowstone Park's "Old Faithful" steam geyser. The most fascinating moment, out of many choices, came when the CEO of Sony Corporation, Japan's equal to the head of General Motors, publicly stated that he felt the entire Japanese economy was on the verge of collapse. Wall Streets reaction was to gain 118 points. This simply amazes me. No one can deny the market is totally insane at this point.

For starters, can anyone spell earnings problems? Even the most rabid bull will admit something about how this market "punishes" companies that don't meet Wall Street earning expectations. And Wall Street seems to have totally ignored the potential earnings disasters flowing in off the Asian Monsoon. Punishes is not quite the right word for what happens. A local company called In Focus "disappointed" Wall Street recently with bad earnings, due to Asia mostly, and saw its stock "punished" 33% in ONE DAY. A good name for this would be the Piranha stock market. Because it has definitely shown a capacity for savagely attacking earnings laggards. By July it should be obvious to even the densest bull that Asia will hammer American earnings. First from loss of US exports to Asia. More domestic politically important will be the loss of domestic sales to Asian exports. When that simple fact sinks in, this twenty something PE market will look like one of those South American rodents, the capybara, that mistakenly wanders into a piranha filled pool.

The second economic factor is the Year 2000 bug. Briefly put, whatever the final result on January 1st, 2000 this "bug" will seriously begin to effect company earnings starting in June 1998. There is no indication the stock market comprehends, much less understands that large amounts of company earnings will be diverted simply to stay in business. What do you think will happen to a company's stock when Wall Street discovers the Year 2000 bug sucking happily away at the earnings teat? Combined with the Asia Crisis, this one/two blow will soon begin to drain company earnings for the foreseeable future.

Economics is not the only factor threatening this Piranha Market. The psychology that has nurtured and sustained it will finally turn against it. After the October 1987 crash, a crusty old stock trader pronounced that the crash happened because people figured Reagan was through. In other words, the psychology changed. Like the stock market, Americans don't seem to understand that we are on the verge of a first-class constitutional crisis. News reports indicate that Special Prosecutor Starr is within "7 weeks" of releasing his impeachment report to the House of Representatives. In mid-June 1998 we will have a sitting President fighting for his very political survival. Can people really expect that this will have no impact on Stock prices?

The next one refers to the law of cycles. This stock market has had three years in a row of 20% growth. It is now almost up 15% this year alone. That is up over 75%, nearly double, in just three years. This is just not sustainable over the long-term, even if people recently polled said they thought stocks would go up 35% a year for the next few years. Unreasonable expectations, inflated stock prices, outrageous Price/Earnings ratios will now be combined with a major political crisis, an Asian economic crisis and looming global computer shutdown. What do you think will happen? Business as usual?

As if each of these problems was not serious enough by itself, we have something called the synergistic effect. Normally, 2 + 2=4 - Synergism is when 2+2=5. Who knows what the result will be when all four of these factors are combined? For a global economy based on fiat currency and unshakable consumer confidence, what will be the effect of all this? Joseph saved Egypt by saving grain during the seven fat years for the seven lean ones. We have had 3 1/2 years of incredible economic blessing. Maybe our cycle is shorter than Joseph's.

WHO WILLS CAN
WHO TRIES DOES
WHO LOVES LIVES

Doug McIntosh

11 April 1998