HOME OF "PICTURES OF A STOCKMARKET MANIA"
August 19, 2009
Alan M. Newman's Stock MarketCROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our August 17th issue
Rationales & Targets
In the last issue, we said, “We’re still cognizantthat the expected reversal will not necessarily occur immediately.” Although we confided that there was “a bit of room on the upside,” we werelooking for only 2% at most, not the 6%+ that we experienced. Clearly,the failure of the rally to generate any improvement in volume remainsa significant problem. Plus, given that any and all bad news seemsto be greeted with enthusiasm, we believe the gestalt is complete. Optimism has reached levels consistent with a reversal and even seasonalfactors are about to work against stocks. The reward/risk ratio remainsabout as horrid as one might imagine; as bad now as it was good at theMarch bottom.
Despite the constant barrage of news stories hawkingan imminent economic recovery, without the creation of new jobs, the economycannot grow. We still view the economy as a tenuous affair, likelyto maintain modestly negative or zero growth for now. At Dow 6469in March, there was plenty to cheer about. At Dow 9309, a goodlyportion of that cheer has expired. Downside risk of over 20% is intolerable.
The Threat Is Dead, The ThreatLives On
Matt Taibbi's recent blog (see http://tinyurl.com/l3529t)focuses on the presumption that the federal government had to bail outGoldman Sachs, lest they follow Lehman Bros. into the abyss. Thestories about this dreadful time in our history just keep on coming andprobably will, for years to come. As in the stock market crash of1987 and the LTCM fiasco in the fall of 1998, the entire financial systemprobably came no more than a few days (perhaps only hours) from a completemeltdown. We hasten to note that each episode was triggered by theover utilization of derivatives and reliance on models that could not possiblywork, since their construction to anticipate the future was based solelyon the past. Although we tend to make the same mistakes over andover again, we typically make them a little differently than we used to. The past may be prologue to the future, but the future is never the sameas the past.
The decline in price of Goldman's shares extendedover 80% from the October 31, 2007 top to the November 21, 2008 bottom. So large was their influence in the financial markets that they were arecipient of government largesse in the bailout and were eventually grantedthe same status given to bank holding companies. This has resultedin the distinction of placing GS at the top of the list of U.S. banks sufferingoverwhelming credit exposure to risk based capital. We intend topresent our report on derivatives again in the autumn (our last reportwas featured in the June 1st issue - see http://www.cross-currents.net/q060109b.pdf). In the meantime, we can share with you that the largest total credit exposureto risk based capital for the other top four banks was the 475% currentlytolerated by HSBC. The same measure for JPMorgan Chase, Bank of Americaand Citibank ranges from 169% to 323%. Goldman Sachs now enduresa resounding 1048% total credit exposure to risk based capital.
Taibbi concludes that the government's interventionand continuing mode of bankers to award themselves gigantic bonuses, "saysthat these bankers are, well, nuts." For confirmation, we point to oneof the strangest news stories of this or any other year was recently reported(see http://tinyurl.com/nc2ej7). The inference is clear. NY State Attorney General Andrew Cuomo claimsemployee pay "has become unmoored from the banks' financial performance,"and Goldman Chairman Lloyd Blankfein has even asked employees to avoidmaking high profile large purchases with their bonuses/gains (lest thepublic perceive them as ill gotten?). As Taibbi concludes, bankerslike Goldman’s were "saved from disaster....[but] turned the ship aroundand headed right back for the iceberg." Well, we should not be toosurprised. Greed is a mighty incentive and if anything, the new derivativeera has resulted in one bubble after another. Some believe that anotherbubble is the only solution to the mess we have made. Others, likeyour Editor, doubt that further foolishness can alleviate the problemscaused by past foolishness. Manias do not serve the future. Derivatives still have the potential to rupture the fabric of our economyand leave us without a functioning financial system. That we wereable to stave off collapse once, or twice or yet again does not mean wewill always be successful. In our view, quite the contrary.
YOURCOST IF YOU RENEW FOR A YEAR = ZERO! |
Buy And Hold Is Dead
Two greatly respected observers, James Montierand Marc Faber, have recently shown the average holding period for stockson the NYSE is now down to six months. We have covered this aspectof the market several times, most recently in our March 30th issue (seehttp://www.cross-currents.net/z033009k.pdf)wherein we illustrated turnover for certain selected ETFs was down to anaverage of only one hour and 43 minutes! Not only is this not yourfather's stock market anymore, it is really not an investment market atall. Investment rules do not apply and the arena is all about highfrequency trading (HFT), program trading and momentum “investing.” Mutual funds do not purchase individual issues based on merit or valuation,but buy them because they are bought by others. Mutual funds do notspend down cash because they have confidence in the fundamentals, ratherthey do so because others are doing so in order to compete. A managerwho holds back cash when the market rises faces immediate career risk. Ironically, a manager who has spent cash only to face a crashing marketcan easily point to everyone else in the same basket. Not my fault,it was the market. Career risk avoided. It is the verysame Groupthink mentality shown by David Dreman decades ago (see http://tinyurl.com/natsc7). If managers cannot act as independent authorities and utilize proper investmentcriteria, then they are not investment managers and are simply throwingin their lot with everyone else and with zero regard for the consequences.
Above at center, our chart is reprinted with permissionfrom the August 2009 issue of Marc Faber’s “The Gloom, Boom & DoomReport” (see www.gloomboomdoom.com). We have taken the liberty of adding a single line at a point marking anaverage holding period of exactly one year. Note that the line accuratelydelineates the periods we have identified as certifiable stock market manias,periods during which investment criteria were totally ignored. Wefurther note that the episode of the roaring Twenties was soon reversedwhile in the current era, holding periods (if you can call them that) continueto decline.
As shown below, using only the last month’s data,the average holding period for the top ten Dow constituents of the DowDiamonds Trust (DIA) is roughly eight-and-one-half months. Giventhat volume is down over 37% since March, average holding periods wereconsiderably smaller back then, probably somewhere in the neighborhoodof 5.3 months. Thus, the data illustrate that investment has almosttotally disappeared as a rationale for involvement in the stock market.
Although volatility has contracted substantiallyas the major averages have rallied, the short term focus will undoubtedlycatalyze an opposite reaction when prices finally begin to correct. When the time horizon for participants is brief, value is not important,only movement. Since value has far less relevance, the tendency isto push prices to overvalued levels. Like now.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTSsince the first issue was published in May of 1990. Mr. Newman is alsoa member of the Market Technician's Associationand has been widely quoted for years by the financial press, media, andother newsletters and has written articles for BARRON'S.
The newsletter is published roughly every threeweeks and focuses on economic and stock market commentary, often coveringcontroversial subjects. Several proprietary technical indicators are usuallyfeatured in every issue accompanied by current interpretation. Broadsamples of our work can be viewed at http://www.cross-currents.net/.
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