first majestic silver

Strength of Market is Illusory

Flight Capital Fuels 15-Year-Old Bull Market

December 31, 1997

With Asia's financial markets festering seemingly beyond remedy, Japan mired in near-depression, and the locomotive economy of South Korea in danger of seizing, why has Wall Street barely flinched?

Even after Friday's scary drop, which saw the Dow Industrials off nearly 300 points in the first 90 minutes, they rallied almost 200 points to close within about 7 percent of their all-time high.

Here are two possible reasons, neither comforting, why the great bull market that began in 1982 refuses to die.

First, as investors all over the world have grown increasingly nervous about deflationary fallout from the Pacific Rim, the flow of their cash into the supposedly safe haven of U.S. stocks and bonds has become a torrent. This has helped keep U.S. shares aloft and credit loose, but it has also created a financial bubble that cannot be deflated easily or painlessly.

This flight capital has been pure oxygen in the jets of a 15-year-old bull market that has begun to flame out. Like laundered money, cash desperately seeking safety cares little about value or risk and asks few questions. It is just speculation with a pinstripe pedigree, and it has been helping to pump up our debt and equity markets.

For better or worse, this has solidified investors' perception that the United States is indeed an island of safety. It has also seriously impaired the stock market's ability to gently and gradually correct excesses of bullish zeal.

With the whole world throwing money at U.S. securities, one might expect the blue-chip Dow stocks to be setting new highs regularly and easily, just as they had been doing for seven years. Instead the Dow has oscillated violently within a 1,300-point range since Aug. 8, when it topped near 8,300.

This suggests a second reason that shock waves from Asia have not yet caused U.S. stocks to buckle: It is no longer the rational judgment of investors that drives shares up and down, but panic and technical factors that include frequent short squeezes.

Panic was clearly in the air recently when the shares of Oracle Corp. took a 30 percent hit after second-quarter earnings came in a mere 4 cents below analysts' expectations. This is no fly-by-night operator, but rather the dominant global vendor of database systems.

Moreover, its business prospects remain bright, according to the two dozen or so Oracle consultants and Fortune 1,000 customers that I talked with last month in preparing a report for a San Francisco-based investment company. Yet Oracle's stock still got pulped. Imagine what will happen when investors start beating up on the corporate mediocrities.

Wall Street's rallies lately have been nearly as steep and just as scary. They occur in a vacuum, driven not by the earnest bids of bulls, but by the panic buying of short-sellers who have been forced to cover the premature bets they had made on this market's collapse.

Still, it's hard not to notice that even buying binges steeped in nervous sweat have failed to push stocks to new highs in recent months. It seems there are plenty of sellers around every time the indexes approach their old highs.

Some would say the opposite, that there are plenty of buyers to support the market every time it dips. The question, then, is whether it is fools who are buying stocks now, or selling them. Regardless, it is fools who evidently choose to ignore the implications of Asia's deepening troubles.

The recent collapse of the Korean won, for instance, as well as rumors - subsequently denied - of riots there caused by the closure of 14 merchant banks, barely rated mention in the news here. U.S. stocks fell slightly at the time, but by later that week they were again charging higher, just short of record territory.

Far bigger troubles are brewing, though, because Japan supposedly has been expanding its money supply at a rate of 1 percent a day to help reinflate the economy. On Tuesday the Japanese government tried the intravenous approach by announcing a one-time tax rebate worth about $15 billion.

This is a clear sign that panic reigns in the world's second-largest economy. It is also as good a reason as you could have for dumping U.S. stocks now, while there is still enough bravado to provide bids.

I wrote here recently that Apple is doomed, but the eulogy may have been premature. There are evidently enough Macintosh fanatics out there to keep the company alive, if not quite robust, for the foreseeable future.

The zeal and intelligence with which they firestormed me suggest a path of action that evidently did not occur to Chiat / Day, the high-powered advertising firm that dreamed up the ineffectual and badly targeted "Think Different" campaign featuring the faces of Einstein and Picasso.

Instead of sloganeering, Apple should refocus the ads to tap into the vast reservoir of brain power and relentless enthusiasm possessed by Mac die-hards. I'd replace Chiat / Day with a much smaller agency, then use the proceeds to sponsor a Mac software development competition with a $1 million prize. This strategy would allow the faithful to return Apple's destiny to its roots in the basements and garages of America.

Rick Ackerman forecasts stock, index and commodity futures prices for market professionals in his daily newsletter, Little Black Box Forecasts.

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