No replies to this topic

[TTHQ Staff]

 

HOME OF "PICTURES OF A STOCK MARKET MANIA" July 21, 2004 Longboat Global Advisors CROSSCURRENTS Alan M. Newman, Editor This excerpt from the July 19th issue has been posted to coincide with receipt by snail-mail subscribers.  Jim Bianco runs the shop at Bianco Research, L.L.C., a source for much of the best financial market research available.  Recently, they focused on the growing percentage of profits derived from the financial sector of the U.S. stock market.  At last count, Bianco's research places sector profits above 40% of ALL domestic corporate profits, up from only 3% in 1982.  Remember when tech was all the rage and the S&P 500 became a tech-heavy index?  Well, the tilt is clearly to the financial sector now (hint: derivatives can be enormously profitable).  Unfortunately, it always seems to be when one sector or another takes the spotlight so completely that the time is ripe for a reversal.  The bias is so emphatic now that one of the industries that made America the great country it is, now exists for practically nothing other than feeding its financial arms.  As pointed out in the July 2nd issue of The Elliott Wave Financial Forecast, "Last year GM got 87.5% of its profits from GMAC, while Ford would have had a loss of more than $1 billion without the $1.8 billion in profits from its credit extension operations."  These statistics are stunning in their scope. How did we get to the point that the manufacture of autos is now far less important to the manufacturers' prospects than the financing deals that originate from their sales?  If Ford would be better off just closing up shop and offering financing on other manufacturers' autos, then what would this say about the rest of the country's ability to retain a viable manufacturing base in any industry....?   Meanwhile, it's likely a good thing that financial profits have boomed since the Federal government would certainly have more problems if they had not.  At last count and as a percentage of GDP, the budget deficit is approaching what it was during the Reagan era.  As well, foreigners are now financing 40% of U.S. Treasury debt, up from 6% in 1970 and 18% in 1994.  Can we continue to find buyers of our debt at the low rates of interest we offer?  This remains the biggest argument in favor of higher rates down the road.  The second argument is higher inflation, the worst enemy of bonds.  If the economy is to maintain its current strength, it is vital for companies to have pricing power.  Thus, continued economic strength should not be bullish for bonds.  Unfortunately, economic weakness will equate to a lower tax base for the Federal government and hence, a larger budget deficit.  Thus, economic weakness should not be bullish for bonds.  While it appears bonds may be in for some rough sledding - if only due to a very uncertain environment, we are not taking the bear route for bonds YET.  Sentiment for bonds appears far too bearish at this time.  This is another market where we believe we have no choice but to sit and await developments, rather than expose ourselves to a stance far too many are now promoting.  The bull's biggest enemy remains sentiment.  After a very brief and weak foray by bearish newsletter writers at the end of March, bulls have again surged back into a wide lead.  The bull-to-bear ratio only got as low as 1.55-1 before returning to over 3-1.  The 13-week ratio has been above 2-1 since June 18, 2003 and is evidence of tremendous complacency, if not outright pigheadedness amongst investment advisors.  In the July 2nd issue of The Elliott Wave Forecast, Steve Hochberg recently noted "From the first quarter of 1994, there were 46 straight weeks of more bears than bulls, providing a long foundation of bearish psychology that acted as the springboard for the market's next six years of advance. The latest figure reveals that bullish advisors have outpaced the bears for 89 straight weeks, double the polar opposite of the 1994 period. The 26-week average of bulls minus bears, moreover, is higher than it was any point in the 1990s mania for equities!"   Why the incredibly tight trading range this year?  The S&P 500 index is down less than 1% for the year and has spent the entire year between 1076 and 1163, a range of just 8%.  According to Mike Santoli in this week’s Barron’s, “The stretch of 128 trading days spent in a range of 8% or less ranks among the longest in recent market history.”  Santoli also confides that, “The market has hit a lull of at least 80 days' duration about once every two years since 1979. But only three times has such a tight range persisted for longer than this year's. If history is any guide, stocks are likely to break out above or below the current boundaries within a matter of months.”  We would demur and cut the waiting period to very early September at the latest—and at that point, the downside finally unfolds.  In the interim, the lack of volatility acts to further coil the spring.   Finally, after weeks of a frustrating sideways funk, the U.S. stock market seems to have reached a tradable oversold position.  Trouble is, none of our work suggests or implies a stance, let alone a compelling stance.  Simply put, we do not yet have any reason to assume anything other than more boredom—just with an upside bias for a while.  Our Intermediate Cycle indicator has fallen to modestly oversold levels yet the downside has developed no momentum at all.  Our read of the environment is that there is too little downside potential to get excited about at this juncture.  If a modest rally now intervened, that might be an entirely different story.  INTERESTED IN PERSPECTIVES YOU'LL FIND NOWHERE ELSE? ENROLL IN OUR FREE TRIAL IF YOU HAVE NOT ALREADY DONE SO BEFORE. - SUMMER SCHEDULE NOW IN EFFECT - WATCH FOR OUR NEXT REPORT IN ONE MONTH ON AUGUST 19th.  DON'T WAIT! ASK FOR YOUR FREE TRIAL NOW! ABOUT ALAN M. NEWMAN Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S. The newsletter is published 22 times per year and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation.  Broad samples of our work can be viewed at http://www.cross-currents.net/.  Subscription rates are $169 for one year and $89 for six months.  A FREE 3 issue trial subscription is available by emailing us (click the "free trial" link above).  Please note: trial requests must include name, address and phone number and must originate from the email address the trial is to be delivered.  Trials are only available by Email (.pdf files).  U.S. Mail subscriptions are available but include a nominal surcharge for postage and handling.