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March 18, 2005
Samex Capital's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
This excerpt from the March 14th issue has been posted
to coincide with receipt by snail-mail subscribers.
Remember? It was just five years ago. Nasdaq rose twopoints to close at 5048, a day after first breaching 5000. The incredible influenceof the greatest stock market mania of all time pushed Nasdaq 88% in a bit more thanfour-and-a-half months and a 15% rocket in only a dozen trading sessions before 5000fell. Our headline in the February 28th issue began, "The "NewEconomy" Rationale Is Bogus," underlined for emphasis. We added thatprices were unsustainable and that Nasdaq was facing a crash. In fact, in our"Two Weeks Ahead" feature, we went on record with one of the most sensationalcalls we made in our 15 year publishing career, calling for a target of “...under3000 for Nasdaq, possibly as soon as mid-April” [italics added], which would be a 33%decline only six weeks in the future. And indeed, Nasdaq collapsed 33% fromthe March 10th high, down to 3351 by April 14th.
And now? Amazingly, investment advisors are equallybullish and even less bearish than they were on March 10, 2000. Mutual funds havevirtually the same absolute cash levels and cash-to-assets ratio. But prices aresignificantly lower and the odds for a crash from these levels are probably zero. However, the odds for a return to 5000 is also probably zero for a long time tocome. It took 26 years for the Dow to surpass its 1929 high. It took 16 yearsfor the Dow to finally break convincingly above 1000 from its first foray into hallowedground. More than 15 years later, Japan's Nikkei index is still down close to 70%from its peak. Bubbles always burst and when they do, they remain deflated for manyyears to come. And now? The cyclical bull market underway has persuaded toomany to forget about the past. History is a great teacher, but only if you listen.
John Dorfman recently penned a piece for bloomberg.com on"Little Gems on Stocks From Graham and Bernstein," the original purveyors ofideas on what constitutes value. Dorfman reiterated his annual exercise of assessing"the fate of the four stocks that analysts loved 12 months earlier -- those with themost unanimous chorus of 'buy' recommendations -- and the four that they hated the most --those that garnered the most 'sell' ratings," adding that "Over seven years, onaverage the most-hated stocks have outperformed the most-loved." We're notsurprised.
The Dogs of the Dow have had a fairly stellar track record over theyears and as pointed out by Gerald & Dr. Marvin Appel in Systems & Forecasts (
We have compared Wall Street's analyst ratings for the Dogs of theDow versus the top 10 constituents of the QQQQs. Bear in mind, in our last issue, weshowed how insiders were still overwhelmingly selling the ten popular Nasdaq issues evenas analysts continued to rack up "Buys" to the tune of 61.1% of allrecommendations offered. On the other hand, only 48.8% of all recommendations of theDogs were "Buys." Similarly, Nasdaq's heavy hitters only struck out with"Sells" 4.4% of the time versus 6.7% for the Dogs. Although insiders seemto be selling everywhere we look, the Sale/Buy ratio for the Dogs came in at a relativelyokay 4.25 to 1 against 11.63 to 1 for Nasdaq's top ten.
Frankly, we're perplexed that the Cube Qs still retain the mantle ofleadership in terms of coverage, transactional velocity and excitement. After all,other than the sizzle, what do you get? Overpriced merchandise should never be thisattractive. Also, using Dorfman’s criteria, we’d probably be a lot betteroff with the group analysts disdain. It's not an epiphany, just a hunch; we suspectthe Dogs will outperform the Cube Qs on a total return basis over the remainder of theyear. We'll definitely check back at the end of the year and just for entertainmentvalue, we’ll see how the two groups stand a couple of times along the way.
As stock prices fell 2.5% in January, total margin debt unexpectedlyrose another $2.5 billion to $220.1 billion, nominally higher than the $218.3 billionregistered in November 1999, only three months and ten days before the greatest stockmarket bubble of all time finally burst. Why unexpected? Margin debt has risenin only 16 of 57 prior months (28%) that stock prices have declined.
It is not likely that the record level of nearly $300 billion inmargin debt established in March 2000 will be seen for a very long time to come. TheFed had already recognized the possibility of a mania as early as December 1996 and wasconsidering methods to deal with the bubble right up to the end. Although they satand watched last time around, dealing with the fallout meant forcibly pulling short ratesto negative, which only accentuated the public’s desire to take on debt. Given that the current level of margin debt versus total stock market capitalization isactually higher than it was in November 1999, we believe the Fed is monitoring thesituation far more closely now. If margin debt continues to rise as it did in thelast few months before the bubble burst, the Fed will have a compelling reason to finallyincrease margin requirements. We would expect Wall St. to fight such a movetooth-and-nail.
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