After a nearly two-month rally that saw the NASDAQ 100 index rally 50% and the semiconductor stocks a stunning 80%, unmistakable and ominous storm clouds are again forming around US financial markets. Importantly, despite a global crisis with Japan and Asian economies falling deeper into depression and noticeable weakening in European economies, the dollar is again under heavy selling pressure. This should be interpreted as a clear warning that the situation here at home is not the bastion of health that is claimed by many. After trading at almost 150 yen and 180 marks in August, the dollar, after a feeble rally from the October lows, trades today at 120 yen and 167 marks. Going into year-end, dollar weakness could be a problem for US markets.

The troubled dollar and global crisis were brought home today with Boeing's shocking announcement that it would lay-off 48,000 workers, or 20% or its workforce, as it now recognizes rapidly deteriorating prospects necessitating major production cutbacks. With many Asian airlines on the brink of financial collapse and order reductions from domestic carriers, Boeing now faces intense pricing pressure as well as the potential for major order cancellations. Importantly, Boeing has faced considerable deterioration in just the past two months forcing management to take extreme action. And with aircraft traditionally a major US export, this news provides further evidence of a major deterioration in the US trade position. In this regard, it is worth noting that for the Port of Long Beach, our country's busiest port, reported for the month of September, the arrival of a near record 199,000 20-foot containers full of imports, while less than 74,000 containers were filled for export. With this in mind, it is not difficult to see why US manufacturing is in serious trouble and deflationary forces gather steam.

The evidence of real trouble is everywhere. Today the CRB commodity index trades at a near 21-year low. Energy prices are in a virtual collapse with crude oil trading at $11, a twelve-year low, and the price of natural gas has dropped by almost one-third over a period of only several weeks. Copper today traded at a eleven-year low and the price of hot-rolled steel is the lowest in decades as imports flood the market. Also this week, we had the National Purchasing Managers index report the 6th straight month of deterioration in its lowest reading in almost two years. Reports of layoffs also escalate as manufacturers throughout the country are forced to cut production. Over 90,000 layoffs were announced in October, and for the year, job losses are running at the highest rate since 1993.

And after a huge speculative run, it looks like reality is beginning to seep back into the marketplace. So far for the week, the Dow has declined almost 3% and the S&P500 about 2%. Benefiting from the collapse in energy prices, the Transports have risen 1%. Responding to weakening fundamentals, the Morgan Stanley Cyclical index has been hit for 3%. The technology sector, in wild volatility consistent with topping action, has been mixed with the NASDAQ 100 and Morgan Stanley High Tech index experiencing a small loss and the semiconductors gaining 2% in what has become a wild short-squeeze completely disconnected from poor business fundamentals. Leading on the downside this week, however, are the internet stocks with a 5% decline after appearing to put in mania highs during last week's holiday shortened trading. Financial stocks are also signaling a change in environment with the S&P Bank index dropping 1% and the Bloomberg Wall Street index getting clobbered for 5%. Small stocks have been relatively quiet but look vulnerable with a 1% decline this week.

Today's announcement from Boeing is a clear example of why it is unreasonable to expect the US to remain an island of prosperity in an intensifying global crisis - a crisis that continues to deepen in Asia, Russia, Europe, Latin America and here at home. The unappreciated trouble-spots today are the faltering economies in Latin America, a very vulnerable dollar, excessive leverage in the US credit markets, and an unprecedented speculative mania in American stocks. And while everything appears fine here at home when stocks soar, the harsh reality remains that this is one huge financial and economic bubble that is on course for a painful bust.

IS THE CURRENT STOCK MARKET "A BUBBLE"?

"Bubble" - a light hollow ball, Webster's II. The stock market is a "bubble" looking for a pin. The purchase of a securities at one price may be an investment, at a higher price - speculation, at an even higher price - irrational exuberance, and today, 2500 points above "irrational exuberance", the greater fool theory.

Everyone is investing in the market. People buy at high prices and expect to sell at ever-higher prices. The overall stock market is selling at the highest valuation in more than seventy years. People have forgotten that in order to "buy low, and sell high", you have to sell.

It is extremely rare for a Federal Reserve Chairman to warn investors about the stock market. This has happened only twice before in this century (1929, 1965), and in both cases, a severe bear market followed that required more than twenty years to breakeven after inflation. Alan Greenspan chooses his words very carefully. Yet Greenspan referred to the stock market as "a bubble" in a prepared speech when the Dow was about 6000.

Only in a bubble can a stock like At Home Corporation be worth $2 billion on its first day of trading when it posted revenue of only $2 million and lost $23 million for its previous six months. Slow-growing companies like Procter & Gamble and Coca-Cola are posting sales growth of 4% and 2%, respectively, yet are selling at 31 and 41 times earnings. Normally, the P/E's of stocks sell closer to their growth rates. These companies have been posting earnings growth slightly faster than sales, but not by much, and this never lasts forever. In the 1960's, people justified paying-up for great companies that would continue to grow, but look at their market returns from 1973-74 - (Coca-Cola -70%, Walt Disney Co -85%, PepsiCo -67%).

So why can't I wait until the end gets closer? "Times are too good now for the bubble to burst yet", you say. I only wish it was this easy. People always ignore history. They fail to realize that markets always get the most overvalued when times appear to be wonderful. The view is always clearest at the top. But it "feels so good" when the economy is strong, and everyone is making money "hand over fist" that people ignore the perils of a ridiculously overvalued market. Stock market moves nearly always precede economic events, and therefore people rarely predict the event which might cause a market decline. But in a bubble, they always think they can. When times are the best, all you have left is risk.

Stock markets never go up forever. It's not as easy as Wall Street would like you to believe. It isn't typical for money to be given away on Wall Street, but with the Dow Jones average increasing at a 19% rate since 1982, it seems like it. Consider the recent warnings of Greenspan, Buffett and Templeton. Think more about preservation of capital and less about greed. Expressing caution today is like being against motherhood and apple pie. History does repeat itself, so to protect yourself and your family's future, don't invest in a "bubble".

David W. Tice
December 2, 1998

DAVID W. TICE manages the Prudent Bear mutual fund.
His Dallas-based research firm advises more than 150 institutional investors.
Prudent Bear Fund: http://www.prudentbear.com