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Samex Capital's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
This excerpt from the February 7th issuehas been posted
to coincide with receipt by snail-mail subscribers.
The New York Stock Exchange's announcement of plans to extend thetrading day by two hours should come as no surprise. After all, it's all aboutmoney, right? And falling seat prices. It was just revealed that NYSE seatprices have fallen to their lowest level in almost ten years, clearly raising fears aboutthe future for the venerable 212-year-old institution. A seat sold for $2.65 millionin August 1999, less than seven months before the Crash of Nasdaq, and two weeks ago aseat traded hands for a mere million bucks. The Specialist system must now competewith electronic exchanges and members face a vast increase in competition from otherproducts, such as Exchange Traded Funds, most of which trade on the American StockExchange. But the NYSE has run with their only advantage, encouraging programtrading of every kind and description. Programs now account for the lion's share ofactivity on the most senior of U.S. stock exchanges. Program activity is stillrapidly on the rise after accounting for more than half of all volume last year. Program volume has more than quadrupled in five years, even as non-program volume hasdeclined. At the current rate, for every share of non-program activity transacted onthe NYSE, there will be at least 1-1/3 shares of programs.
So, once again, we consider whether the U.S. stock market is a buyor a sell. One method of determining the answer is to consider thealternatives. The Fed giveth, the Fed taketh away. Not only are stocks notmore attractive as interest rates rise, but banks are more readily able to compete for theattention of investors. Although the mania's echo is convincing many participants tostay the course and invest or speculate at valuation measure still way in excess of whathistory has shown to be sustainable, many others are sure to begin taking advantage of therecent rise in short term rates posted by the nations banks. Your Editor's checkingaccount now pays 2-1/2%, quite attractive under the circumstances. With another hikealready a certainty and at least two more favored, the competition for stocks canonly increase along with rates.
According to Thomson Financial, insiders sold $41 billion of stocklast year, versus $1.45 billion on the buy side. Sales were up 40% from the prioryear and purchases were the second lowest since 1996. The 28 to 1 ratio of sales tobuys was the worst Thomson has recorded since they began tallying insider activity in1990. Last year ended poorly as the last three months of the year witnessed a 37 to1 sale/buy ratio. To boot, 2005 has not started out well, either.
We haven't shown this particular perspective ofsentiment in quite awhile, but the right time certainly appears to have arrived. Simply put, when folks are at their most bullish, they cannot resist going out on alimb. When the mania surged to its most lunatic levels in March 2000, speculatorslevered themselves like never before. Margin debt levels increased to a hair shy of$300 billion, equivalent to roughly 3.1% of Gross Domestic Product and 1.7% of totalmarket capitalization. The former was the highest since the Roaring Twenties slammedhead-on into a collision with reality. Total margin debt is now more than 1.8% ofGDP and over 1.4% of total market cap, clearly not as high as in 2000, but considering howprices collapsed after March 2000, at very worrisome levels nevertheless. Marginloans have soared by 60% since September 2002 and the additional $81.5 billion in buyingpower provided by these loans has bought a 48.7% improvement in the S&P 500. Wedo not yet have data for January but the tally visible below through December, is on anexact par with November 1999, a scant four months from the peak. We're not sure howmuch more evidence is required to prove the mania only took a time out, but it is crystalclear from what we have shown in the last few issues that participants are not concernedabout the possibility of a stiff price correction, let alone a resumption of the secularbear market. The time elapsed from the October 2002 bottom is now 2.3 years. In the twentieth century, a 15% price correction occurred on average, every 2.23years. Maybe the twenty-first century will find markets unfolding in a morefriendly manner, but we wouldn’t make book on it.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the firstissue was published in May of 1990. Mr. Newman is also a member of the Market Technician'sAssociation and has been widely quoted for years by the financialpress, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 20 times per year and focuses oneconomic and stock market commentary, often covering controversial subjects. Severalproprietary technical indicators are usually featured in every issue accompanied bycurrent interpretation. Broad samples of our work can be viewed at
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