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[TTHQ Staff]

The top 10 constituents of the QQQQ’s as listed on etfconnect.com no longer includeComcast and Oracle, somewhat confusing since they are quite a bit larger than theirreplacements of Apple Corp. and Starbucks, but no matter.  Sentiment amongstinsiders, while a bit better than the last time we examined [Crosscurrents,September 7, 2004], still shows a marked propensity towards selling holdings inmassive quantities - as if possession of their companies common shares were associatedwith the plague.

Of the 16 purchases over the last three months, only 4 represented open market buys,clearly not a confidence builder.  The 186 sales afforded a sell/buy ratio of 11.63to 1.  Should we be bullish about these results?  We don’t think so. There were still a net of 44.9 million shares sold and we believe it’s a fairassumption that the proceeds were not invested in any of the other top 10 QQQQconstituents.  That just wouldn’t make any sense at all!
 
For starters, the average P/E for the group stands at 32.8 and the average yield is aninfinitesimal 0.3%.  Worse yet, the average Price/Sales ratio is 5.6. Valuations are at the very least, ridiculously high.  Given that these ten issues(MSFT, QCOM, EBAY, INTC, CSCO, NEXTL, DELL, AMGN, AAPL, SBUX) account for an amazing $1 ofevery $17 invested in the U.S. stock market, it is not difficult to extrapolaterisk.  Why else would insiders run from their own shares in such huge number?

Remember, there are 610 million shares of the Quad Qs outstanding and the establishment ofthe trust and the subsequent creation of additional shares could only come as a result ofdemand for the constituents.  How else can one explain the mania that followed thetrust’s inception on March 10, 1999?  Nine months later, the Nasdaq Compositehad surged 50% and a year after the trust began trading, Nasdaq had doubled.  Allalong, insiders sold.  They continue to sell now.

Since Intel is included in the picture for the Quad Qs, we’re only showing thepicture for the top nine Semiconductor issues, as ranked in the Semiconductors HOLDRsTrust (SMH).  Given a lower overall P/E for the group, we are not surprised thatinsider activity is less negative for the SMH, but the reason is obvious; TexasInstruments (TXN).  Take out TXN and add INTC and the ratio of sellers to buyers isclose to 15 to 1 and worse than that of the Quad Qs.
Our view is very simple to understand; if insiders do not want to buy their shares,neither do we.  Case in point, Apple Computer.  In the last six months, therehave been zero buyers and 51 sellers of 4.34 million shares.  Now that“IPOD” is on everybody’s lips, it’s time to moveon.

While idly leafing through some spreadsheets last week, we came upon the limited data wekeep for the Investor’s Intelligence ratio of newsletter bulls to bears.  Afterrealizing that the two-year moving average of bulls to bears had surged to 2.5 to 1, weimmediately wondered about the last time that had occurred.  We asked our colleague,Ian McAvity, the editor of Deliberations (http://www.topline-charts.com/Deliberations.htm),one of the most comprehensive journals relating to the markets that we have ever had thepleasure of reading. The answer was an eye opener, occurring back in August of1987, right around the highs and less than two months before the crash.  There weretwo other huge bulges in Ian’s charts.  One was at the start of 1973 at roughly2.8, coinciding with the all-time low in the mutual fund cash-to-assets ratio andaccompanied by the mentality that the “nifty-fifty” were one decision stocks,just buy and buy some more.  From that point, stock averages gave up 50% in the nexttwo years and the “nifty fifty” declined by about 85%.  The only otheroccasion was in the summer of 1977, when newsletter writer sentiment went completelybonkers, soaring to 4.8 bulls for every bear.  The Dow topped the week of July 2ndand plunged nearly 20% by the following March.  The July 1977 peak was not exceededuntil August 1980.  It would seem we are again in the stratosphere. 


The picture for 20-year annualized returns is absolutely jawdropping.  The period from the mid-90s has turned out to be the Mother of all manias,yet is still largely ignored for its potential significance to the future.  Simplyput, stocks cannot return 11% annually forever because other investments would falltotally out of favor.  On the other hand, if yields for other asset groups expandedto compete, then stock returns would suffer.  If the Dow remained level at 10841, wewould not return to “normal” (5%) until March 2015.  Even at Dow 8500,“normal” would not be achieved until December2011.  





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