Big Week Helped Bulls Recoup Some Losses

March 20, 2000

Last week's running of the bulls on Wall Street brought a slew of letters, a few from Examiner readers eager to rub my nose in it. I respond to their questions and gibes below, as well as to queries from those who have found my oft-dour predictions at various locations on the World Wide Web.

Q: I made almost $13,000 this week in just three stocks, but I bet you didn't make a nickel. It's easy to see why you hate the market so much. You've been on the wrong side of it for years.

A: $13,000 is a nice haul for a few days' work, but if your portfolio has performed in line with the Dow Industrial Average, last week's spectacular gains would still have left you down almost 10% for the year. And if you were fully invested since last April you would merely be even, since the blue chips are trading about where they were twelve months ago. As for me, I'm strictly a short-termer and hold no stocks as investments, other than for my children. One of those investments, a Nasdaq-listed company by the name of Vertel, went from $2 in December to a recent high of $52. It was a thrill, I must confess, but it also reinforced my belief that the stock market has become nothing more than a crap shoot.

Q: [In Black Box Forecasts newsletter] you predicted that the shares of Merrill Lynch, now selling for around $100, would eventually trade for under $10. Isn't that a little extreme?

A: Not necessarily. Merrill was trading for around $8 when stocks emerged from the Bush recession in late 1990, and it would not be unusual for it to return to that level in the depths of the next bear market. The same reasoning has led one well-known guru, Robert Prechter, to predict that the Dow Industrial Average will ultimately trade below 800, where it stood when the market took off in August 1982. That would surely be overdoing it for the market as a whole, and most stocks would be distress-sale bargains at that point. But Merrill might not be, even at $8, for it is a bricks-and-mortar dinosaur that will not easily survive competition with Internet-based providers of financial services. For the moment, Merrill's share price has been buoyed by takeover rumors, but I strongly doubt that any company would be foolish enough to try to swallow the blue whale of the brokerage business.

Q: Last summer you recommended shorting a bunch of stocks in order to profit from an anticipated drop in their price. You must have gotten killed.

A: Even using a dart board it would have been hard to lose, since most stocks have fallen since last June. My five picks would have produced profits of about $1,600 if you had sold short a hundred shares of each. The two big winners were IBM, which fell from 132 to 109, and American Airlines, which dropped from 65 to 52. Gains in those stocks were somewhat reduced by losses in three issues whose price rose: Citigroup, up $12 a share to $56; Amazon, up $5 to $65; and Mirage, up $3 to $18. But it would surprise me if those last three were not under water by year's end. Citigroup rallied nine points last week but remains extremely vulnerable to an economic downturn. People tend to forget that in the depths of the supposedly "mild" 1990-91 recession, America's biggest bank was technically just a heartbeat away from flatlining. Meanwhile, Mirage has just been bought out by MGM's Kirk Kerkorian. He may be able to run the company more efficiently than Steve Wynn, Mirage's free-spending founder, but I doubt the savings will offset the downturn in business during the next recession. As for Amazon, I disagree with those who predict the company will never make a dime. But watch out below when it finally does make that dime, since it will drive home the fact that the company's shares are selling for six or seven hundred times earnings.

Q: What would it take to end this bull market?

A: Some technicians believe it ended more than two years ago, when the ratio of advancing stocks over declines peaked on the NYSE. That is certainly possible. But if you're looking for a more dramatic finale, keep your eye on the dollar. When its long bull cycle ends, so will the confidence that has enabled the creation of tens of trillions of dollars worth of leveraged financial assets around the world. When those gaseous, mostly undercollateralized assets begin to implode because of some disturbing event that no one can predict, the deleveraging process will overwhelm the Federal Reserve. The problem will be two zeros bigger than anything the world's central banks have ever attempted to inflate their way out of.

Q: What scares you most about the stock market?

A: The growing list of people who have become billionaires overnight. Almost as scary are certain statistics that suggest we are witnessing a mania like no other before it. Alan Newman, an analyst at H.D. Brous & Co., is a specialist in this department. He notes in the current issue of his newsletter, Crosscurrents, that the dollar trading volume in stocks is currently running at around 322% of GDP and that Microsoft alone routinely trades a dollar amount equal to 15% of the daily GDP. "Stock trading has become the biggest business of all time," he writes, and so it has. It's no longer a question of the shoeshine boy having a hot stock tip. These days, the shoeshine boy has a Web site of his own "spit-and-polish.com" and a seven-figure venture deal with Kleiner Perkins.

Q: Is there anything to be bullish about?

A: Based on fundamentals, no. Even the very best companies look overpriced when one combs through their quarterlies. Cisco Systems, for one, appears headed for a slowdown, and its shares could get socked the same way Dell's did when consistently strong earnings began to flatten ever so slightly. Actually, this may be happening already, since the company had to resort to tax finagling in the last quarter in order to show the kind of earnings growth that the analysts have come to expect. With respect to the broad market, however, the technical picture could support a sideways move for a while -- perhaps as much as year. You have to remember that most stocks are actually down year-over-year and that some solid blue-chip companies, such as Proctor & Gamble, have been hit so hard they are practically bargains.

Goldschläger and Goldwasser are liqueurs containing pure gold flakes.

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